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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

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

For the Fiscal Year Ended: November 30, 2002

or

|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

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

Delaware(State or other jurisdiction of
organization or incorporation)

04-2532613(I.R.S. Employer Identification Number)450 Donald Lynch Boulevard
Marlborough, Massachusetts 01752-4748(Address of principal executive offices, including zip code)


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

Securities registered pursuant to Section 12(b) of the Act:
(none)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value

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

The
aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on January 31, 2003 as reported on the Nasdaq
National Market System, was approximately $7,659,322. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded
in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 17, 2003 registrant had
13,083,019 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required in response to certain portions of Part III of Form 10-K is hereby incorporated by reference from the specified portions of
the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held in April 2003.

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PART I

This
Report includes a number of forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including those discussed in "Item 7, Management's Discussion and Analysis of Financial Condition and Results of
OperationsCautionary Statements" and elsewhere in this Report that could cause actual results to differ materially from historical results of those currently anticipated. In this Report,
the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned not to place undo reliance on these
forward-looking statements, which speak only as of the date hereof.

Item 1.    Business

Company Overview

We design and sell advanced media systems for content design. In the case of our newest and most advanced development, 844/X, we have integrated the
previously separate workflows of real-time video editing and the compositing of layers of video, computer graphics, audio, and metadata. We believe this workflow integration is a technical
breakthrough that over time will attract existing and new video editing users who wish to be able to design more complex content that comprises dozens, even hundreds of distinct content layers. Our
Company has developed new technologyintegrated software and hardware, including Application-Specific Integrated Circuits ("ASICs")to perform compositing in real time or at
high speed to allow compositing operations to be performed within an editing environment and execute at high speed without host-based rendering, which is slow and impedes productivity.

Our
products are personal computer-based workstations configured with proprietary software and hardware that we engineer and manufacture. In some cases, particularly with 844/X, we sell
our products as "turnkey" systems, meaning we configure and ship the system to an end user, or reseller, with a host personal computer, our software and hardware, and disk storage; in other cases, we
deliver only our software and hardware ("unbundled"), typically to an independent value-added reseller that configures the turnkey system themselves on behalf of an end user.

The
paramount characteristic that makes our media systems "advanced" is real-time performance. Our systems can perform many video, audio, graphics, and metadata processing
functions in real time. We believe software operating alone on personal computers cannot match this performance. Our experience is that even software operating on costly higher performance computing
platforms, such as Unix®, often cannot match the real-time performance of our systems. A second characteristic also makes our systems advanced: support for very high image and
audio output qualityin conjunction withreal-time throughout. Other currently available products reduce picture quality to support
real-time functions, or they maintain picture quality but render operationsrendering is an offline host processing activity that routinely takes minutes, even hours. Rendering
interrupts workflow and hinders productivity. In contrast, our systems, especially our newest development, 844/X, perform concurrent video, audio, graphics, and metadata operations in real time, and
in the case of 844/X, at a quality level we believe is currently unmatched in the industry, even where price is no object. The result is that our systems provide our customers a workflow experience
that is fast, fluid, and interactive. Using our products, they can exercise better creative judgment and get jobs done more quickly. Subsequently, creative aspiration and the potential for economic
advantage lead prospects to consider adopting our products.

The
customers for our products are media professionals. They fall into several segments. Many are full-time broadcast designers, visual effects artists, and video editors
operating as employees of professional television and post-production establishments, such as major networks, cable networks, independent post-production facilities, and small
creative boutiques. Others are full-time or part-time video editors operating at businesses, schools, government offices, hospitals, or non-profit institutions. In

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some cases, our customers are "independent"; they are self-employed and operate on their own, independently, typically on behalf of both broadcast-related and non-broadcast or
industrial clients.

All
our customers have in common the need to create compelling and useful video programs. Their applications range from teaching, training, and basic communication to
high-profile entertainment, such as a television show or a segment like a commercial, promotional spot, or opening to a major program like the Super Bowl. The content that our customers
create, whether for industrial or broadcast use, is important and valuable. Therefore, our customers value ease of use, speed, and quality. They seek products that help them develop compelling
creative ideas that they can incorporate into video programs with fast turn-around.

Market

Our first shipments in April 2002 of 844/X marked a new stage in our Company's development. We began to increase our focus on advanced users and
applications in the content design market; and in 2003 we expect to continue further strengthening this focus.

We
are evolving our focus on content design from our original mission of selling nonlinear or "disk-based" systems for video editing. In our original mission, which began
with our first product shipments in 1993, we designed and sold nonlinear editing systems mainly to non-broadcast segments of the video industrybusinesses, schools, and other
institutions using audio/video equipment typically to teach, train, and communicate. In addition, we sold our products to some broadcast-related segments, particularly cable networks and smaller
post-production operations. This latter focus accounted for a lower percentage of total revenues, reflecting a conscious effort on our part to de-emphasize targeting
traditional customers, like the major networks or film studios, which were served well already by traditional equipment suppliers, like Sony® Corporation, and earlier developers of
disk-based systems, like Avid® Technology.

Today,
the broadcast and non-broadcast markets for nonlinear editing systems, now more than 12 years old, are fraught with the business challenges that might be
expected from a maturing market: there are many products from many vendors; increased competition is driving down selling prices and gross margins; and in the past two years, Apple Computer has
introduced and marketed aggressively its own proprietary solutions for basic video editing, effects processing, and DVD production on the Macintosh, reducing third-party market opportunity in the
portion of the digital media market that is Macintosh based.

We
believe 844/X and the related products we have developed incorporate superior media processing capabilities to enable content design as a new application.

Content
design is the assembly or arrangement by an editor or artist of highly creative audio-visual content. The content design workflow encompasses video editing along with the
compositing of (processing to blend) layers. Editing references our original business, nonlinear editing, or disk-based editing that allows users to perform video-editing operations in
real time. The compositing of layers refers to the arrangement and processing of many overlaid video and graphic pictures, where some or all of them may be in motion, to create visual effects.

Editing
and the compositing of layers are difficult to bring together successfully in a single workflow. A significant reason is that editing, using today's personal computers, typically
takes place in real time while compositing is mathematically complex and therefore slow to compute. A personal computer will often stop accepting user input to the editing function for minutes, even
hours, in order to render or compute the blending (compositing) of layers. This delay leaves users unproductive and interrupts their creative thinking and workflow. They cannot interact quickly and
easily to view results and make changes; also,
often it is impractical to have clients present while working on content to give quick feedback or further direction since they would be frustrated waiting most of the time. As a result, designing
content

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beautiful evocative images or pictures with greater utilitarian valueis difficult technically, time consuming, and expensive.

At
the Company we are seeking to revolutionize the content design market by making this workflow easier, faster, and less expensive, allowing more media professionals to design
higher-quality, higher-impact video. We believe demand for content design will increase as cable and satellite content grows, and as cable and satellite content providers increase their competition
with traditional media outlets to attract and retain viewers in the increasingly competitive global media market place.

During
fiscal 2002, media-related adopters of 844/X included broadcast television stations, design boutiques, smaller post-production facilities, creative agencies, and
independent producers; non-media adopters of 844/X included large corporations and institutions of higher education. These users employed 844/X to design highly creative,
effects-intensive, high-layer-count television spots and video programs.

Strategy

Our strategy is to attract experienced video editors to content design through the continuing development and marketing of our 844/X media systems. 844/X provides
high-speed compositing seamlessly combined with the real-time video editing that users know already. The Company supports the stringent performance demands of the new
integrated workflow by combining our own unique software and hardware technology with widely-available personal computers and standard disk storage. This approach obviates the need for more expensive
and harder to maintain operating systems and proprietary hardware. Consequently, 844/X users can design video programs using layers easily with fast turn-around, providing to their clients
state-of-the-art audio-visual sophistication and quality while generating higher margins for themselves.

Our
mission centers on the technical achievement of bringing to the content design workflow the proven appeal of nonlinear performancespeed. We give our users editing and
compositing speed, often results that can be produced, viewed, and further manipulated in real time, without requiring them to trade down picture and sound quality. Indeed part of our strategy is to
establish a new digital standard for quality, higher than any other disk-based system, rivaling even advanced digital videotape formats like D1® (Sony) and
D5® (Panasonic®).

We
believe our customers will pay for real-time speed and superior quality in support of content design because these features translate directly to greater creative
flexibility and improved throughput and productivitybenefits that increase the value of our users to their clients.

Products

Our Company develops and sells three major product lines: 844/X, our systems for content design, which began shipping in April 2002; Media 100 i, our
original family of dual-stream video editing systems that use Macintosh; and iFinish, our family of dual-stream video editing systems that use Windows®. In
addition, we sell technical support, software upgrades, and maintenance contracts, which we market under the brand name, Platinum.

844/X

844/X is a new fully-digital system for content design that we began to deliver in April 2002. 844/X results from years of research involving technical and
market experts. We believe 844/X represents a new generation of technology and a new equipment categoryreal-time content design on the desktop.

844/X
is for media professionals who need to design highly creative content by editing video and compositing layers. 844/X performs image, graphics, and audio operations concurrently in
real time at high quality. From the start, our research to produce this product involved Media 100 customers as well as users of other renowned industry products, including Adobe After
Effects®, Avid Media Composer®, and

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Discreet Flame®. These customers included broadcast designers, visual effects artists, and online video editors.

We
sell 844/X in two configurations: 844/Xe and 844/Xi. The two configurations operate identically except 844/Xe is approximately three times faster than 844/Xi. Compared to 844/Xi,
844/Xe can process more real-time data streams, including effects, simultaneously and recursively process large layer counts more quickly. From April 2002, when the product first
shipped, through January 2003 we have shipped approximately 165 844/X systems. As of February 2003, 844/Xi is lower priced at $24,995 for our proprietary software and hardware versus
$44,995 for 844/Xe. Purchasing third-party components such as a disk drive and a computer would increase the prices to approximately $40,000 for 844/Xi and $60,000 for 844/Xe.

In
addition, in January 2003, we announced three subsequent developments: HDX Technology, new technology that expands the GenesisEngine, a PCI-standard subsystem that
installs in the backplane of a personal computer and provides physical cable connections for video, audio, and facility integration signals through an external junction box, to support
high-definition (HD) applications in addition to standard-definition (SD) applications, which the Company expects to ship as a product or product option in the second half of 2003; the
Version 2 software release, which we call "The Finishing Release" and expect to ship in the first half of 2003, providing a significant expansion of the 844/X user
interface and toolsets; and XBLUR, a new product option that expands the GenesisEngine providing real-time true Gaussian Blur effects on up to four video streams simultaneously. We
currently plan to sell XBLUR as an option, $9,995 for 844/Xe and $7,995 for 844/Xi, with first shipments in the summer of 2003.

We
believe the speed, quality, workflow integration, and desktop simplicity and affordability of 844/X, along with the future potential of the product as we further develop it, will
attract current and new content designers to consider purchasing the product.

Media 100 i Product Line

Media 100 i is our dual-stream product line that uses Macintosh as a host computer. We shipped Media 100 i Version 8 (V8) in August 2002. V8 is
a powerful OS X-native version of the Media 100 i product line that replaces Media 100 i version 7.5. OS X is the new operating system from Apple Computer that has been introduced
ultimately to replace the original Macintosh operating system, called Version 9. In addition to using OS X, V8 introduces a fresh new user interface for Media 100 i based on Apple's new Aqua
interface. V8 also provides expanded effects and sound design functions.

We
designed V8 with a new driver (software), new middleware software, and modernized interface architecture to take advantage of OS X® and Aqua® usability
improvements. The new effects design functions allow users to draft composites directly in the Media 100 i timeline, using newly expanded graphics tracks. Users can then export composites to Adobe
After Effects or other third-party applications for further finishing, returning the composites back to Media 100 i using our InstantMedia technology. Sound design enhancements in V8 include the
expansion of audio track mixing and processing to 24 simultaneous real-time tracks. V8 audio also features a new master audio track as well as support for audio reverb and other audio
effects. V8 also provides support for a wide range of analog and digital input and output interface standards for compatibility with most video equipment formats.

iFinish Product Line

iFinish is our dual-stream product line that uses Windows and Intel-standard personal computers as a host.

Functionally
similar to the Media 100 i products, the iFinish products provide video editors real-time functions supporting video editing, effects creation, graphics, and
sound mixing. The iFinish systems are designed to allow editors and artists to assemble video programs using source material from virtually

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anywhere, analog or digital, then output their finished productions anywhereto the Web, to DVD, to tape, to cable, or to air. This workflow flexibility means iFinish users can create
valuable content once, then deliver it in many different forms as traditional or new media. The iFinish products give media professionals advanced performance, including real-time editing,
effects design and processing in real time, and real-time sound mixing of numerous, CD-quality audio tracks.

As
"dual-stream" systems, the Media 100 i and iFinish products operate by moving two or "dual" video streams in real time to and from disk. Like other dual-stream
systems, the Media 100 i and iFinish products use 8-bit quantization, compress video to simplify internal data transfers and conserve disk storage, and process layers (greater than the
dual video streams) by rendering them. We developed these dual-stream products in the 1990s to replace A/B roll videotape editing systems, which are videotape deck-based, not
disk-based, and employ two streams (transferred in a forward or backwardor "linear"direction off videotape). Media 100 i and iFinish thus target mainstream
professional video editors. To support content design, Media 100 i and iFinish products can be used in conjunction with third-party applications like Adobe After Effects. This approach to content
design requires switching between applications to perform virtually all content design functions other than editing, then rendering image operations. The rendering always takes extra time, but it is
less onerous if the number of layers is small; the rendering can be quite time consuming, taking minutes, even hours, for programs incorporating more layers. Historically, this fact has led many
content designers to opt for costly non-personal computer solutions, such as ones from Discreet (a division of Autodesk®, Inc.), and Quantel® Ltd.,
which use Unix workstations from Silicon Graphics®, Inc., or entirely proprietary platforms, to achieve faster rendering throughput.

Platinum Services

Our Platinum Services comprise technical support and service packages that we offer to our customers for a fee. Customers purchase our Platinum packages with
options such as: toll-free telephone technical support (either during business hours, five days a week, or 24 hours per day, seven days a week); free software updates; advance
replacement hardware; and extended warranty. In addition, we have from time to time offered hardware upgrades, replacement hardware, and new products to our Platinum subscribers at preferred prices.
We have also introduced the Platinum One-Stop service, in which subscribers can obtain telephone technical support for compatible third-party products integrated with their media system.

Technology

Our 844/X, Media 100 i, and iFinish systems all comprise software and hardware that we design and integrate to operate with personal computers.

844/X

The engineering of 844/X was a "green field" endeavor meaning the 844/X development team designed virtually all the software code and hardware of the product from
the ground up. This approach allowed us to eschew aging components and software code, outdated architectures, and waning analog standards.

The
original 844/X development featured the design of ASICs (application specific integrated circuits), a PCI-standard media processor that we call the GenesisEngine, which
houses the ASICs for physical incorporation into a personal computer, and a new software architecture and Windows-based user interface. In addition, in January 2003, we announced three
subsequent developments: HDX Technology, new technology that expands the GenesisEngine to support high-definition (HD) applications in addition to standard-definition (SD) applications,
which the Company expects to ship as a product or product option in the second half of 2003; the Version 2 software release, which we call "The Finishing Release" and expect to ship in the first half
of 2003, providing a significant expansion of the 844/X user interface and

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toolsets; and XBLUR, a new product option that expands the GenesisEngine providing real-time true Gaussian Blur effects on up to four video streams simultaneously, which we expect to ship
to users in the summer of 2003.

Our
ASICs comprise custom silicon integrated circuits (chips) that we have designed and own. The ASICs incorporate numerous editing, compositing, and related image processing algorithms
that can execute in real time, even on four, eight, or more video and key data streams simultaneously. Thus the ASICs are key to enabling the speed and audio-visual quality of 844/X content results.
Also, the ASICs are highly integrated, so they are physically small and draw relatively little power, facilitating integration with personal computers; and they are much less expensive to manufacture
and more reliable than the stand-alone hardware composed of many separate (discrete) components that one would otherwise have to conceive for equivalent functionality and performance, assuming that
technically this was possible.

The
ASICs reside physically on the GenesisEngine, a PCI-standard subsystem that installs in the backplane of a personal computer and provides physical cable connections for
video, audio, and facility integration signals through an external junction box. The GenesisEngine is a media processor that supports concurrent image, audio, and signal processing operations with
real-time throughput and high-precision throughout. The Company believes this speed along with the 10-bit quantization and 31-bit mathematical precision
of the GenesisEngine are significant technical breakthroughs enabling real-time, broadcast-quality, PC-based content design.

We
designed our software architecture, comprising millions of lines of code, to permit optimum use of the processing power of the ASIC-powered GenesisEngine while also
providing our user interface software designers an interim-level or abstraction layer of software that gives them unbridled access to the power of the hardware without having to control directly its
complex real-time board-level, even
chip-level, hardware activities. The software architecture incorporates a simplifying, modular, and extensible API-based (application programming interface-based) structure
that we believe will facilitate productive continuing development of 844/X, and other related products, for many years. A major innovation of the architecture is the Intelligent Layering Architecture
(ILA) which permits the recursive processing of layers, allowing users to quickly manipulate, if not manipulate literally in real time, very large numbers of layers, such as hundreds of layers. The
ILA is key to allowing users to work in real time on relatively low layer counts while still working fast on an unlimited number of layers. Also, the ILA permits users to perform Visual Voicing in
which they may always view and change a limited number of layers in their program real time, regardless of where the layers are, where they are in relation to each other, or how many layers exist in
the program. The result of the software architecture is that regardless of layer count, the workflow appears to the user to be fast, fluid, and interactive.

The
844/X user interface is the principal means by which the user operates 844/X. We have designed it to be familiar while incorporating many workflow innovations that make content
design fast and easy. The user interface integrates time-based nonlinear video editing and the compositing of unlimited-layer-based visual effects; also, it integrates controls for
designing and processing computer graphics and mixing sixteen tracks of real-time studio-quality 20- and 24-bit audio. The original conception and design of the
user interface involved several years of research; we interviewed and observed at length experienced users in the field, including users of other renowned industry products, including Adobe After
Effects®, Avid Media Composer®, and Discreet Flame®, in addition to our own.

Media 100 i and iFinish

Like 844/X, our dual-stream products comprise software and hardware that we design and integrate for use with personal computersMedia 100
i with Macintosh and iFinish with Windows.

The
software includes a user interface application level of software and embedded system software. The user interface provides the operator with controls for performing video editing; it
also provides access to other applications for bringing computer graphics and specialized video and audio effects processing

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into the hub-editing environment. The embedded system software controls real-time data movement in concert with the host computer operating system; it also serves to control
hardware functions, acting as an intermediary between the application and the hardware circuits.

Media
100 i and iFinish incorporate a media processing engine, called P6000 (formerly called "Vincent" and "Vincent 601"), which we have designed and manufacture. The P6000
supports essential video and audio processing functions and comprises one or two PCI cards that fit into the backplane of either a Windows or Macintosh computer. The P6000 includes broadcast-quality
video input and output decoder/encoder subsystems, a proprietary, dynamically-variable compression subsystem, a 16-bit multi-track compact disc-quality digital audio subsystem,
and two high-speed 32-bit microprocessors responsible for transferring digital audio and video data, at throughput rates of up to 30 megabytes per second,
inside the host computer's central processing unit ("CPU"). The P6000 engine is the primary technical facilitator of real-time, nonlinear video editing performance with output that
provides broadcast-quality video and compact disc-quality audio. An available auxiliary-processing card, when used in conjunction with the P6000 engine, enables the processing of a second
stream of video of similar quality. The output video is 30 frames per second, 60 fields per second (NTSC), or 25 frames per second, 50 fields per second (PAL), and synchronized with multiple tracks of
16-bit audio.

Sales and Distribution

We market and sell our products to end users through a worldwide channel of specialized value-added resellers ("VARs"), distributors, and direct to end users
through our internal telemarketing group and Web site. VARs and distributors account for the majority of our sales. Further, we expect to increase our focus on our VAR channel in the coming year as we
continue shipments of 844/X.

VARs
typically sell, assemble, and install turnkey systems using personal computers, disk drives, and ancillary video equipment. For a further discussion of the risks and uncertainties
associated with our dependence on an indirect sales channel of independent VARs, see "Cautionary Statements" included in Part II, Item 7, of this Annual Report on Form 10-K.

Internationally,
we have adopted similar sales channels. In the United Kingdom, France, and Germany, our subsidiaries manage Web site sales, VAR networks, and contract with distributors
who may sell directly to end users or through VAR networks of their own. Elsewhere, we sell through distributors, which may sell directly to end users, or act as VARs, or manage VAR networks in their
respective territories. Sales of our products outside of the North America represented approximately 46.9%, 34.5% and 37.1% of our net sales for fiscal years 2002, 2001, and 2000, respectively. No
single customer, including resellers or direct end users, accounted for more than 10% of the Company's net sales during the years ended November 30, 2002, 2001 or 2000. For additional
information as to revenue by geographic location, see Note 12 in the Notes to Consolidated Financial Statements. For a further discussion of the risks and uncertainties associated with
international operations, see "Cautionary Statements" included in Part II, Item 7 of this Annual Report on Form 10-K.

Competition

The digital media market is highly competitive. A large number of suppliers provide different types of products and services. In the market, there is continuous
pressure to reduce prices, incorporate new features, and improve functionality.

We
encounter competition primarily from Accom®, Inc., Adobe Systems Inc., Apple Computer, Inc., Avid Technology, Inc., Discreet (a division of
Autodesk, Inc.), Leitch®, Inc., Matrox® Electronic Systems Ltd., Pinnacle® Systems, Inc., and Quantel Ltd. Competition also comes
from Matsushita® Electric Industrial
Company Ltd. ("Matsushita") and Sony Corporation ("Sony"), which have either introduced or announced plans to introduce disk-based systems. Because the market is constantly
changing, it is difficult to predict future sources of competition; however, competitors are likely to continue

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to include larger vendors, such as Apple Computer, Matsushita, and Sony. Many of these competitors have substantially greater financial, technical, and marketing resources than Media 100 Inc.
For a further discussion of the risks and uncertainties associated with the competitive landscape for our products, see "Cautionary Statements" included in Part II, Item 7 of this Annual Report
on Form 10-K.

Research and Development

We invest in research and development for new products and for enhancements to our existing products. As of January 31, 2003, we employed 52
full-time employees whose primary duties relate to product development and research on potential new products and technologies. Outside firms and consultants are selectively engaged to
develop or assist with development of products when favorable opportunities exist. In order to compete successfully, we believe we must attract and retain qualified personnel and maintain a program of
improvement for existing products, as well as the research and development of new products. For a further discussion of the risks and uncertainties associated with new product development, see
"Cautionary Statements" included in Part II, Item 7 of this Annual Report on Form 10-K.

For
the fiscal years ended November 30, 2002, 2001 and 2000, we invested approximately $9.0 million, $10.5 million and $11.0 million, respectively, on the
development of enhancements to our existing products and for the research and development of new products and technologies.

Manufacturing

Our manufacturing operations consist primarily of advanced surface-mount manufacturing and testing of printed circuit assemblies, final product assembly, quality
assurance and shipping. We have developed the operation specifically to address the business and technical challenge of building assemblies that are highly complex, yet relatively low in volume. The
surface-mount operation can mount fine 676-pin, 0.050" BGA (ball grid array), and 0.040" fine pitch BGA integrated circuits and ASIC devices, which is required for
assembling the GenesisEngine. We perform manufacturing functions at our facility located in Marlborough, Massachusetts.

We
believe that our control of manufacturing contributes significantly to hardware design improvements, allows for quicker development of products for shipment to market, results in
superior product quality, and lowers the total cost of goods (COGs) of our products. We periodically assess our production efficiencies against the benefits of out-sourcing certain
hardware production and have, on
occasion, out-sourced certain products to third parties when we determined that out-sourcing was more cost effective than internally manufacturing the product.

The
components we use in the assembly of our hardware products are generally available from several distributors and manufacturers. However, we are dependent on single or limited source
suppliers for several key components used in our products that have no ready substitutes, including,but limited to, various audio and video signal processing integrated circuits manufactured in each
case only by Crystal Semiconductor® Corp., Fairchild Semiconductor® Corp., Gennum® Corporation, Toshiba, Kawasaki LSI USA® Inc.,
Philips® Semiconductors, Silicon Optix, Faraday Technology, Scientific Conversion, Xilinx®, Altera®, Lattice®, Agere®,
Marvel®, and IDT®. 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 upon which we depend have been subject to industry-wide shortages and the continued viability of these suppliers and product lines. For a further discussion of the risks and
uncertainties associated with our dependence on single or limited source suppliers, see "Cautionary Statements" included in Part II, Item 7 of this Annual Report on
Form 10-K.

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Proprietary Rights

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. We rely on a combination of patent, copyright, trademark and trade secret laws and other intellectual property protection methods to protect our proprietary
technology. In addition, we generally enter into confidentiality agreements with our employees and with third parties with whom we share our proprietary information, and limit access to and
distribution of such information. We own 17 United States patents, beginning to expire in 2012, and have seven pending patent applications in the United States, none of which we believe is material.
Although we pursue a policy of obtaining patents for appropriate inventions, we believe that our success depends primarily on the proprietary know-how, innovative skills, technical
competence and marketing abilities of our employees, rather than upon the ownership of patents.

Certain
technology that we use in our products is licensed from third parties on a royalty-bearing basis. Generally, such agreements grant to us non-exclusive, worldwide
rights to the subject technology and are either renewable on a periodic basis or provide for fully paid-up non-cancellable rights upon the receipt of certain aggregate
payments. In certain cases the licensor may terminate the license for convenience, although we believe that the effect of any such termination would not be material.

For
a further discussion of the risks and uncertainties associated with proprietary rights see "Cautionary Statements" included in Part II, Item 7 of this Annual Report on
Form 10-K and certain pending litigation, see Item 3, Legal Proceedings.

Backlog

Most customers (VARs) order products on an as-needed basis relying, in the case of most products, on the Company's five-day delivery
capability. As a result, the Company believes that its backlog at any point in time is not indicative of its future sales.

Employees

As of January 31, 2003, we employed approximately 130 persons worldwide. None of the employees is represented by a labor union and we believe we have good
relations with our employees.

Competition
for employees with the skills required by the Company is high in the geographic areas in which the Company's operations are located. We believe that our future success will
depend on our continued ability to attract and retain qualified employees, especially in research and development.

Other

844/X, Visual Voicing, Foss ASIC, Holmes ASIC, Hatalsky ASIC, GenesisEngine, Intelligent Layering Architecture (ILA), XBLUR, HDX Technology, Hatalsky PEP, Media
100, Media 100 i, iFinish, P6000, and Platinum are trademarks of Media 100 Inc. and may be registered in certain jurisdictions. All other trademarks and registered trademarks are the property
of their respective holders, and are hereby acknowledged.

Item 2.    Properties

In January 2002, the Company signed an amendment to its lease allowing the Company to occupy approximately 45,534 square feet in a new facility in
Marlborough, Massachusetts owned by the same landlord. Under the amendment, the Company occupied its former space through March 31, 2002. The lease for the new facility is for a term of forty
(40) months with an annual base rent of approximately $444,000. Total rent expense including operating expenses pursuant to the lease agreement charged to operations related to the Company's
new Marlborough facility for fiscal year 2002 was $302,000. The Company's former principal executive, engineering, manufacturing and sales operations occupied

10

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approximately 56,500 square feet in a leased facility located in Marlborough, Massachusetts. The lease for this facility terminated on March 31, 2002. Total rent expense including operating
expenses pursuant to the lease agreement charged to operations with respect to the Company's former Marlborough facility for fiscal years 2002, 2001 and 2000 was $550,000, $1,049,000 and $1,034,000.
Rent expense including operating expenses pursuant to all lease agreements charged to operations for fiscal years 2002, 2001 and 2000 was $1,082,000, $1,321,000 and $1,283,000, respectively.

In
addition, in connection with the signing of the lease amendment, the Company revised the estimated useful life of leasehold improvements and certain furniture and fixtures that would
not be moved to the new facility. The remaining net book value of the leasehold improvements and furniture and fixtures of approximately $1,288,000 was depreciated during the first two quarters of
fiscal 2002.

As
part of the acquisition of Terran in June 1999, the Company occupied additional office space located at 15951 Los Gatos Boulevard, Los Gatos, California. All of the Company's
operations relating to the streaming media software product line division occupied this space. Effective October 28, 2002, the Company entered into an agreement with the landlord to terminate
the remaining term of the lease for one payment in the amount of approximately $120,000. The Company had recorded a charge to discontinued operations, net of estimated sublease income, of $348,000 for
this lease during the year ended November 30, 2001. The Company recorded $80,000 as income from discontinued operations during the year ended November 30, 2002 reflecting the savings
resulting from the termination of the lease.

As
part of the shutdown of Streamriver during the year ended November 30, 2001, the Company recorded, as a restructuring charge, a lease loss, net of estimated sublease income, of
$230,000 associated with the lease for the facility in North Hollywood, California. Effective October 1, 2002, the Company entered into an agreement with the landlord to terminate the remaining
term of the lease for one payment in the amount of approximately $47,000. The Company has recorded an adjustment of $49,000 to the restructuring charge during the year ended November 30, 2002
reflecting the savings resulting from the termination of the lease.

The
Company also occupies sales and customer support facilities in or near Paris, France; Bracknell, England; and Munich, Germany.

Item 3.    Legal Proceedings

(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 is vigorously defending this 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. That appeal has now been fully

11

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briefed and is awaiting argument and decision. The litigation remains dismissed pending the outcome of the consolidated reissue/reexamination proceedings, and there can be no assurance that the
Company will prevail in the appeal by Avid or that the expense or other effects of the appeal, whether or not the Company prevails, will not have a material adverse effect on the Company's business,
operating results and financial condition.

(iii)
On January 13, 1999 and January 28, 1999, Digital Origin, a subsidiary of the Company, 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 lawsuits were
consolidated and the consolidated action was dismissed by the Federal District Court for the Northern District of California without leave to amend. Plaintiffs appealed that ruling to the Ninth
Circuit Court of Appeals. In January 2003, the Ninth Circuit Court of Appeals dismissed plaintiffs' claims with predjudice.

(iv)
On October 12, 1999, a lawsuit was filed against the Company by McRoberts Software, Inc. ("MSI") in the United States District Court for the Southern District of
Indiana. The complaint alleges copyright infringement, breach of contract, and trade secret misappropriation. The complaint includes requests for unspecified monetary damages and enhanced damages,
interest, costs and fees. An unfavorable verdict was filed on February 25, 2002 against the Company in the amount of $2.5 million. The Company and MSI filed post-trial
motions. Those motions were ruled upon with the trial court reducing the total amount awarded by the jury but assessing prejudgment interest and attorney's fees. The Company appealed the entire
judgment, which approximates $2.8 million, and a hearing before the United States Court of Appeals for the Seventh Circuit occurred on December 12, 2002. The appeal remains outstanding
and the Company is awaiting the verdict. The entire amount of the award has been placed in an escrow account pending judgment from the appellate court and approximately $2.8 million is included
as restricted cash in the accompanying balance sheet at November 20, 2002.

The
Company had recorded a liability in the amount of $2.6 million that included estimated legal fees associated with the litigation at November 30, 2001 and the entire
amount was expensed in the three months ended November 30, 2001. During the year ended November 30, 2002, the Company recorded an additional liability and expense of $397,000 for the
adjusted judgment which included prejudgment interest and attorney's fees as well as estimated legal fees associated with the appeal.

(v)
On May 9, 2001, a lawsuit was filed against the Company by the former shareholders of Wired, a company acquired by the Company in December 1999. The complaint alleged
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 included requests for compensatory and punitive damages, injunctive relief, and fees. No specific amount or
punitive damages were alleged, other than compensatory damages in an amount to be proven at trial, but not less than $25,000, the jurisdictional minimum for the court. The Company filed a demurrer
challenging the legal sufficiency of the causes of action alleged. A hearing on that demurrer occurred on November 6, 2001 and the Court sustained the demurrer to one cause of action, for
negligent false promise.

During
the year ended November 30, 2002, the Company settled the Wired litigation. As part of the settlement, the Company assigned all rights to the Wired product line,
intellectual property relating to Wired products and on-hand inventory related to the Wired product line to the former shareholders. Wired agreed that no further action will be taken
related to the lawsuit previously filed against the Company. Wired granted the Company an irrevocable license to use the source code, technology, know how and intellectual property; provided, however,
the license does not include the right to sell Wired products or any equivalent products incorporating the source code, technology, know how and intellectual property. In addition, Wired promised to
pay the Company a royalty of 5% of adjusted gross sales of the assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. Litigation settlement

12

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of $724,000 included in the Consolidated Statements of Operations for fiscal year 2002 represents the cost of inventory transferred, the net book value of remaining intangible assets associated with
the acquisition, legal fees associated with the settlement, less a reimbursement related to the litigation from the Company's insurance carrier.

(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.

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

There were no matters submitted to a vote of stockholders during the fourth quarter of fiscal year 2002.

PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters

The common stock of the Company trades on the National Market tier of The NASDAQ Stock Market under the symbol "MDEA." The following table sets forth, for the
periods indicated, the high and low sales prices per share of the Company's common stock as reported on the NASDAQ National Market:

Fiscal year ended November 30,

High

Low2001:First Quarter

$
3.81

2.06Second Quarter

$
2.64

1.59Third Quarter

$
2.06

0.88Fourth Quarter

$
1.40

0.812002:First Quarter

$
3.75

1.10Second Quarter

$
3.30

2.01Third Quarter

$
2.70

0.71Fourth Quarter

$
1.70

0.35


The
last reported sale price per share of the Company's common stock as reported on the NASDAQ National Market on January 31, 2003 was $0.78. As of January 31, 2003, there
were 1,758 stockholders of record based upon information provided by the Company's transfer agent. The Company has never paid a cash dividend on its common stock, and the Board of Directors does not
anticipate paying cash dividends in the foreseeable future.

Information
related to securities authorized for issuance under equity compensation plans is set forth under Item 12 of this report on Form 10-K.

13

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Item 6.    Selected Financial Data

The selected financial data should be read in conjunction with, and are qualified in their entirety by, the Company's consolidated financial statements, related
notes and other financial information included herein.

CONSOLIDATED STATEMENTS OF OPERATIONS DATA

|                                                          |                                                               | Fiscal Years Ended November 30, |        
|--------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------- | -------
|
|
|Net sales:                                                |                                                               |                                 |        
|                                                          | Products                                                      |                                 | $      
|                                                          | Services                                                      |                                 |        
|                                                          |                                                               |                                 |        
|Total net sales                                           |                                                               |                                 | 19,081 
|Cost of sales                                             |                                                               |                                 | 9,763  
|Accelerated depreciation and amortization of fixed assets |                                                               |                                 | 331    
|                                                          |                                                               |                                 |        
|                                                          | Gross profit                                                  |                                 |        
|Operating expenses:                                       |                                                               |                                 |        
|                                                          | Research and development                                      |                                 |        
|                                                          | Selling and marketing                                         |                                 |        
|                                                          | General and administrative                                    |                                 |        
|                                                          | Amortization and write-off of intangible assets               |                                 |        
|                                                          | Accelerated depreciation and amortization of fixed assets     |                                 |        
|                                                          | Settlement of litigation                                      |                                 |        
|                                                          | Acquired in-process research and development                  |                                 |        
|                                                          | Restructuring charge                                          |                                 |        
|                                                          |                                                               |                                 |        
|                                                          |                                                               | Total operating expenses        |        
|                                                          |                                                               |                                 |        
|                                                          |                                                               | Operating loss                  |        
|Interest income, net                                      |                                                               |                                 | 204    
|Other income (expense), net                               |                                                               |                                 | 591    
|                                                          |                                                               |                                 |        
|                                                          | Income (loss) from continuing operations before tax benefit   |                                 |        
|Benefit from income taxes                                 |                                                               |                                 | (261   
|                                                          |                                                               |                                 |        
|Income (loss) from continuing operations                  |                                                               |                                 | (13,667
|Discontinued operations:                                  |                                                               |                                 |        
|                                                          | Income (loss) from discontinued operations, net of tax effect |                                 |        
|                                                          |                                                               |                                 |        
|                                                          |                                                               | Net income (loss)               |        
|                                                          |                                                               |                                 |        
|Basic income (loss) per share:                            |                                                               |                                 |        
|                                                          | Continuing operations                                         |                                 | $      
|                                                          | Discontinued operations                                       |                                 |        
|                                                          |                                                               |                                 |        
|Basic income (loss) per share                             |                                                               | $                               | (1.05  
|                                                          |                                                               |                                 |        
|Diluted income (loss) per share:                          |                                                               |                                 |        
|                                                          | Continuing operations                                         |                                 | $      
|                                                          | Discontinued operations                                       |                                 |        
|                                                          |                                                               |                                 |        
|Diluted income (loss) per share:                          |                                                               | $                               | (1.05  
|                                                          |                                                               |                                 |        
|Weighted average common shares outstanding:               |                                                               |                                 |        
|                                                          | Basic                                                         |                                 |        
|                                                          |                                                               |                                 |        
|                                                          | Diluted                                                       |                                 |        
|                                                          |                                                               |                                 |        

CONSOLIDATED BALANCE SHEET DATA

|                                                 |  | As of November 30,
|------------------------------------------------ |  | ------------------
|
|
|Cash, cash equivalents and marketable securities |  | $                 
|Working capital                                  |  |                   
|Total assets                                     |  |                   
|Stockholders' equity                             |  |                   

14

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

The following discussion includes forward-looking statements, including, but not limited to, statements with respect to the Company's future financial
performance, operating results, plans and objectives, and actual results may differ materially from those currently anticipated depending upon a variety of factors, including those described below.
See "Cautionary Statements" herein.

Overview

Media 100 Inc. and subsidiaries (the Company) designs and sell advanced media systems for content design. The Company's products are personal
computer-based workstations configured with proprietary software and hardware that we engineer and manufacture. In some cases, particularly with our
product844/Xthe Company sells its products as "turnkey" systems, meaning the Company configures and ships the system to an end user, or reseller, with a host
personal computer, our software and hardware, and disk storage; in other cases, the Company delivers only our software and hardware ("unbundled"), typically to an independent value-added reseller that
configures the turnkey system themselves on behalf of an end user.

On
October 5, 2001, the Company sold its streaming media software product line to Autodesk, Inc. for $16.0 million in cash of which $2.0 million was deposited
into an escrow account for a period of one year in case indemnification issues arise. These escrow funds were received on October 15, 2002. The net income (loss) from these operations is
included in the accompanying statements of operations under "discontinued operations" (see Note 13 of the Consolidated Financial Statements). The disposal date was October 5, 2001, the
date the sale was completed. The Company's streaming media software product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin (see Note 3 of the
Consolidated Financial Statements).

The
Company recognizes revenue in accordance with Statement of Position 97-2, Software Revenue Recognitionas 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 or 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. The Company provides for estimated returns 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.

Digital Origin Merger and Other Acquisitions

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

The
Company also acquired Terran in fiscal 1999 and Wired, J2 Digital Media, 21st Century Media and certain assets of Integrated Computing Engines, Inc. 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. With the sale of the streaming media software product line on October 5, 2001, the results from Terran have now been classified as
discontinued operations in the accompanying statements of operations. For a further discussion of the Company's business combinations, see Note 3 in the accompanying consolidated financial
statements.

15

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Critical Accounting Policies and Estimates

This management's discussions and analysis of financial condition and results of operations discuss our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the 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. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventories, the impairment of long lived assets,
legal contingencies and discontinued operations. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.

We
believe the following critical accounting policies most significantly affect the portrayal of our financial condition and require management's most difficult and subjective judgments.

Revenue Recognition and Allowance for Doubtful Accounts

We recognize revenue in accordance with Statement of Position 97-2, Software Revenue Recognitionas
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 or 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. The Company provides for estimated returns 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. We maintain allowances for estimated losses
resulting from the inability of our customers to make required payments, however, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required.

Inventories

Inventories are stated at the lower of first-in, first-out (FIFO) cost or market. 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. Our reserve for
excess and obsolete inventory is primarily based upon forecasted demand for our products and any change to the reserve arising from forecast revisions is reflected in cost of sales in the period the
revision is made. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be
required.

Long-lived Assets

Property and equipment, including leasehold improvements and intangible assets, are depreciated and amortized over their useful lives. Useful lives are based on
management's estimates of the period that the Company will realize the benefit of these assets.

Legal Contingencies

We are currently involved in legal proceedings. As discussed in Note 7 of the consolidated financial statements, as of November 30, 2002, we have
provided accruals for all direct costs associated with the

16

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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. This litigation could take several years to complete. Accordingly, actual legal fees, damages, awards or settlements, could differ significantly from our estimates. It is
possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions, or the effectiveness of our strategies, related to
these proceedings.

Restructuring Charge

Severance-based restructuring charges are recorded based on specific plans for cost reduction that are established by management prior to the end of a quarter.
The severance amounts are based on plans that are generally specific by person or position that will be eliminated. Restructuring charges for estimated lease loss are recorded net of estimated
sublease income associated with the facility. Estimated amounts may be higher or lower than actual costs incurred, which would result in an adjustment to restructuring charges. At this time, we do not
expect any additional adjustment to the current accrual to be material to the Company's operating results.

Discontinued Operations

Our financial statements are prepared using discontinued operations accounting for our streaming media software product line. The Company's streaming media
software product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin. Under discontinued operations accounting, we accrued estimates of our expected
liabilities related to the discontinued operations through their eventual discharge, which in many cases, was expected to be several years in the future. Actual results of discontinued operations may
be different as the Company may settle certain obligations in amounts different from estimates due to changes in assumptions or settlement strategies.

17

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Results of Operations

The following table sets forth for the years indicated certain consolidated statements of operations data as a percentage of net sales.

|                                                              |                                                           | Fiscal Years Ended November 30, |     
|------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------- | ----
|
|Net sales:                                                    |                                                           |                                 |     
|                                                              | Products                                                  |                                 | 69.1
|                                                              | Services                                                  |                                 | 30.9
|                                                              |                                                           |                                 |     
|Total net sales                                               |                                                           | 100.0                           |     
|Cost of sales                                                 |                                                           | 51.2                            |     
|Accelerated depreciation and amortization of fixed assets     |                                                           | 1.7                             |     
|                                                              |                                                           |                                 |     
|                                                              | Gross profit                                              |                                 | 47.1
|                                                              |                                                           |                                 |     
|Operating expenses:                                           |                                                           |                                 |     
|                                                              | Research and development                                  |                                 | 47.0
|                                                              | Selling and marketing                                     |                                 | 42.0
|                                                              | General and administrative                                |                                 | 20.6
|                                                              | Amortization and write-off of intangible assets           |                                 | 5.5 
|                                                              | Accelerated depreciation and amortization of fixed assets |                                 | 4.4 
|                                                              | Settlement of litigation                                  |                                 | 3.8 
|                                                              | Acquired in-process research and development              |                                 |     
|                                                              | Restructuring charge                                      |                                 | 1.0 
|                                                              |                                                           |                                 |     
|                                                              |                                                           | Total operating expenses        |     
|                                                              |                                                           |                                 |     
|Operating loss                                                |                                                           | (77.2                           | )   
|Interest income, net                                          |                                                           | 1.1                             |     
|Other income (expense), net                                   |                                                           | 3.1                             |     
|                                                              |                                                           |                                 |     
|Loss from continuing operations before tax benefit            |                                                           | (73.0                           | )   
|Benefit from income taxes                                     |                                                           | (1.4                            | )   
|                                                              |                                                           |                                 |     
|Loss from continuing operations                               |                                                           | (71.6                           | )   
|Income (loss) from discontinued operations, net of tax effect |                                                           | 0.9                             |     
|                                                              |                                                           |                                 |     
|Net loss                                                      |                                                           | (70.7                           | )%  
|                                                              |                                                           |                                 |     

Comparison of fiscal 2002 to fiscal 2001

Net sales.We derive our sales from the licensing of our software for advanced media systems for content design, from the
sale of our advanced media systems for content design, and from services in the form of annual contracts supporting our software and systems. In the case of software and systems, we recognize revenue
upon shipment or distribution over the Internet to a customer provided there exists persuasive evidence of an arrangement, the license fee is fixed or determinable, a determination has been made by
management that the collection is probable and the Company has no remaining obligations. In the case of services that support our software and systems products, called Platinum Services, we recognize
revenue ratably over the life of the service contract.

Our
total net sales for fiscal 2002 decreased 38.5% to $19.1 million from $31.0 million for fiscal 2001. Net sales from products for fiscal 2002 decreased 40.8% to
$13.2 million from $22.3 million for fiscal 2001 The decrease in net sales from products is due to a number of factors including increased competition for our digital video systems
resulting in lower unit sales and average selling prices (decrease of $12.0 million), and lower sales of the MPEG-based products acquired in the acquisition of Wired, Inc.
("Wired")

18

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(decrease of $1.4 million). These decreases were partially offset by sales of our new content design system, 844/X (increase of $4.3 million), which began shipping in April 2002.
We deferred approximately $1.8 million of 844/X revenue during fiscal 2002 for various reasons including an undelivered upgrade, which we announced in the fourth quarter of fiscal 2002 and
expect to ship in the first quarter of fiscal 2003. Upon shipment of the upgrade we will recognize previously deferred revenue that is associated with the upgrade. However, we anticipate this trend of
lower year-over-year sales of our digital video systems to continue in fiscal 2003, offset by sales from 844/X. In addition, as part of the settlement of litigation with the
former shareholders of Wired, we no longer sell the Wired MPEG-based products. Net sales from services for fiscal 2002 decreased 32.7% to $5.9 million from $8.8 million for
fiscal 2001. The decrease in net sales from services is the result of lower sales of service contracts due to lower unit sales of our advanced media systems for content design and the elimination of
encoding and hosting services. No customer accounted for more than 10% of the Company's net sales in fiscal 2002 or fiscal 2001.

Net
sales from customers outside of North America accounted for approximately 46.9% and 34.5% of net sales in fiscal 2002 and fiscal 2001, respectively. With the introduction of 844/X,
we are continuing to develop our indirect distribution channels in North America, Europe, Asia and Latin America and currently anticipate that customers outside North America will continue to account
for a substantial portion of our net sales, and as a percentage of net sales, to range between 35% and 45%.

Cost of sales.Cost of sales for products consists of the cost of manufacturing PCI hardware boards for our advanced media
systems for content design and royalties paid to third parties for their software that has been integrated into our systems. Cost of sales also includes the cost of manuals and other product
documentation, related labor and, in the case of 844/X, may include third-party components
such as disk drives, personal computers and other third-party hardware components. Cost of sales for our service offerings consists of salaries and related expenses for service personnel delivering
the service to the customer and warranty costs.

Total
cost of sales decreased 38.1% to $10.1 million in fiscal 2002 from $16.3 million in fiscal 2001. The decrease in cost of sales is directly related to the lower unit
sales of our advanced media systems for content design, partially offset by an increase in cost of sales due to initial shipments of 844/X.

Gross profit.Our gross profit decreased 38.9% to $9.0 million in fiscal 2002 from $14.7 million in fiscal
2001. Overall gross profit as a percentage of net sales decreased to 47.1% in fiscal 2002 from 47.4% in fiscal 2001. Gross profit as a percentage of net sales of products decreased to 31.3% in fiscal
2002 from 35.2% in fiscal 2001, while gross profit as a percentage of net sales of services increased to 82.5% in fiscal 2002 from 78.4% in fiscal 2001. The decrease in gross profit for products in
fiscal 2002 over fiscal 2001 was the result of the reduction in unit sales and average selling prices of our advanced media systems for content design. In addition, gross profit was negatively
impacted by an expense of $331,000 for accelerated depreciation and amortization of leasehold improvements and other fixed assets located in our former facility and not moved to our new facility. The
increase in gross profit for services in fiscal 2002 over fiscal 2001 was the result of the elimination of encoding and hosting services during fiscal 2001, which carry a lower gross profit than our
Platinum Services.

Research and development.Research and development expenses include costs incurred to develop and improve our existing
intellectual property and develop new intellectual property and are charged to expense as incurred. To date, development costs for our systems have been charged to expense as incurred because the
costs incurred from the attainment of technological feasibility to general product release have not been significant. Our research and development costs may fluctuate from quarter to quarter due to
the nature of the products under development. Some of our systems have PCI hardware included in the product and the costs associated with designing and developing this type of hardware can be
expensive. In addition, our software developers require this hardware in order to integrate the software code they develop with the hardware to create a fully integrated advanced media system for
content design.

19

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Research
and development expenses decreased 14.5% to $9.0 million in fiscal 2002 from $10.5 million in fiscal 2001. The majority of the decrease in research and development
expenses represented lower development costs associated with 844/X, which shipped in April 2002. We currently anticipate our research and development expenses will decrease in absolute dollars
in fiscal 2003 versus fiscal 2002 because we believe that ongoing maintenance costs and costs of improvements to 844/X will not be as high in fiscal 2003 as the development costs to create the first
version of the product.

Selling and marketing.Selling and marketing expenses consist primarily of salaries and related benefits, travel, commissions
and marketing costs such as advertising, trade shows, marketing materials, lead generation activities and public relations. Our selling and marketing expenses may fluctuate from
quarter to quarter based on the timing of trade shows and sales commissions, which vary based on sales.

Selling
and marketing expenses decreased 30.5% to $8.0 million in fiscal 2002 from $11.5 million in fiscal 2001. As a result of lower sales of our advanced media systems
for content design, we reduced our expenses for salaries, employee-related costs, trade shows, outside services, sales literature and direct mail. We currently anticipate that our selling and
marketing expenses will decrease in absolute dollars in fiscal 2003 versus fiscal 2002 as we execute our strategy of leveraging the indirect channel of resellers we developed in fiscal 2002 to sell
844/X. Also, in the first half of fiscal 2002, we incurred significant marketing expenses related to the introduction of 844/X and, while we plan to continue aggressively marketing 844/X, we believe
our marketing costs in fiscal 2003 will be less than fiscal 2002.

General and administrative.General and administrative expenses consist primarily of salaries and related benefits, travel
and outside services for human resources, finance, information technology, legal, and other administrative functions. General and administrative expenses decreased 53.8% to $3.9 million in
fiscal 2002 from $8.5 million in fiscal 2001. The decrease in general and administrative expenses resulted primarily from a legal accrual established in fiscal 2001 for an unfavorable verdict
in a lawsuit against the Company and estimated legal fees in the amount of $2.6 million, and decreased expenses for legal, salaries and employee-related costs. We currently anticipate that our
general and administrative expenses will decrease in fiscal 2003 compared to fiscal 2002 as we align our expense structure with anticipated revenue levels.

Amortization of intangible assets.We recorded amortization expense of $1.0 million in fiscal 2002 related to the
acquisitions of Wired, Inc. and certain assets of Integrated Computing Engines, Inc. In fiscal 2001, we recorded expense for the amortization and write-off of intangible
assets of $2.9 million related to the acquisitions of Wired, Inc., 21st Century Media, J2 Digital Media and certain assets of Integrated Computing Engines, Inc. As
of November 30, 2002, intangible assets related to these acquisitions are fully amoritzed and we will not incur any additional amortization expense from these acquisitions in the future.

Accelerated depreciation and amortization of fixed assets.We recorded a charge of $849,000 in fiscal 2002 related primarily
to leasehold improvements at our previous facility in Marlborough, Massachusetts. During the second quarter of fiscal 2002 we completed our relocation from this facility to a new facility, also
located in Marlborough, Massachusetts, better suited to meet our needs. As a result of this decision and the signing of a lease for the new facility we amortized the remaining book value as of the
beginning of fiscal 2002 of all leasehold improvements, furniture and fixtures over the remaining months in fiscal 2002 (four) that we occupied our previous facility.

Settlement of litigation.We agreed to settle litigation brought against us by the former shareholders of Wired, Inc.,
a company we acquired in December 1999. As part of the settlement, we assigned all rights to the Wired product line, intellectual property relating to Wired products and on-hand
inventory related to the Wired product line to the former shareholders. Wired agreed that no further action will be taken related to the lawsuit previously filed against us as noted in Note 7
to the Consolidated Financial Statements. Wired granted us an irrevocable license to use the source code, technology, know how and
intellectual property; provided, however, the license does not include the right to sell Wired products or any equivalent products incorporating the source code, technology, know how and intellectual
property. In

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addition, we agreed to provide limited manufacturing and marketing support to the former shareholders. In exchange for all these items, we will receive a royalty of 5% of adjusted gross sales of the
assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. This agreement resulted in a write-off of the remaining goodwill created through the
acquisition of Wired. There was no similar expense recorded in fiscal 2001. Litigation settlement of $724,000 included in the Consolidated Statements of Operations for the fiscal year 2002 represents
the cost of inventory transferred, the net book value of remaining intangible assets associated with the acquisition, legal fees associated with the settlement, less a reimbursement related to the
litigation from the Company's insurance carrier.

Restructuring.In fiscal 2002, the Company implemented a restructuring plan to better align its operating costs with its
anticipated future revenue stream. The net restructuring charge of $191,000 related to the elimination of approximately 43 employees across the following functions: operations (7), technical support
(6), research and development (19), selling and marketing (6), and general and administrative (5) offset by savings resulting from the termination of a lease associated with Streamriver of
$49,000 and other costs associated with the fourth quarter of fiscal 2001 restructuring charge which were less than anticipated by $58,000. At November 30, 2002, approximately $14,000 of the
accrued restructuring charge remained. The total cash impact of the restructuring was approximately $191,000 all of which will be paid by the end of the first quarter of fiscal 2003.

We
recorded $1.5 million of restructuring expense in fiscal 2001 to reduce operating expenses in the organization. The major component of the restructuring charge relates to the
termination of employment of personnel. At November 30, 2001, approximately $527,000 of the accrued restructuring charge remained to be paid, composed of severance-related costs associated with
the termination of employment of personnel and rent expense, net of sublease income, associated with Streamriver of approximately $230,000. The total cash impact of the restructuring amounted to
approximately $1.2 million, of which approximately $673,000 was paid in 2001 and the remaining amount paid in fiscal 2002.

Interest income, net.Interest income, net, decreased 29.4% to $204,000 in fiscal 2002 from $289,000 in fiscal 2001. The
decrease in interest income, net, resulted from lower cash and cash equivalents due primarily to the net loss incurred in fiscal 2002. We currently anticipate that interest income will decline in
fiscal 2003 versus 2002 due to lower cash levels.

Other income (expense), net.Other income, net was $591,000 for fiscal 2002 compared to other expense, net of $866,000 for
fiscal 2001. In fiscal 2002, other income, net primarily consisted of foreign exchange gains on intercompany transactions with our foreign subsidiaries. During the fourth quarter of fiscal 2001, we
wrote off our investment of $1.0 million in Beatnik, an early stage company that develops audio software solutions for mobile devices, after management made a determination that this asset was
no longer realizable. This determination was made due to a weakening market as well as weakened
prospects for a liquidity event. This expense was partially offset by foreign exchange gains on intercompany transactions with our foreign subsidiaries.

Tax benefit.We recorded a tax benefit in fiscal 2002 of $261,000 versus a tax benefit of $4.7 million for fiscal
2001. In fiscal 2001, the tax benefit was offset by a net tax provision of $4.7 million on the gain from the sale of our streaming media software product line and the operating results of the
discontinued operations.

Net loss.As a result of the above factors, we recorded a net loss from continuing operations in fiscal 2002 in the amount of
$13.7 million, or $1.07 per share, compared to a net loss of $16.1 million, or $1.31 per share, in fiscal 2001. We recorded income from discontinued operations, net of taxes, of
$184,000, or $0.01 per share, in fiscal 2002 versus income from discontinued operations, net of taxes of $4.7 million, or $0.38 per share, in fiscal 2001. Income from discontinued operations
for fiscal 2002 resulted from the reduction of estimated accruals and the settlement of certain obligations related to the Company's streaming media software product line in amounts different from
original estimates. Income from discontinued operations of $4.7 million in fiscal 2001 consisted of our streaming media software product

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line and the income related to a gain on its sale of $8.2 million, offset by a loss from discontinued operations of $3.5 million. In fiscal 2002, we recorded a net loss of
$13.5 million, or $1.05 per share, compared to a net loss of $11.5 million, or $0.93 per share, for fiscal 2001.

Comparison of fiscal 2001 to fiscal 2000

Net sales.We derive our sales from the licensing of our software for advanced media systems for content design, from the
sale of our advanced media systems for content design, and from services in the form of annual contracts supporting our software and systems. In the case of software and systems, we recognize revenue
upon shipment or distribution over the Internet to a customer provided there exists persuasive evidence of an arrangement, the license fee is fixed or determinable, a determination has been made by
management that the collection is probable and the Company has no remaining obligations. In the case of services that support our software and systems products, called Platinum Services, we recognize
revenue ratably over the life of the service contract.

Our
total net sales from continuing operations for fiscal 2001 decreased 34.2% to $31.0 million from $47.1 million for fiscal 2000. Net sales from products for fiscal 2001
decreased 40.3% to $22.3 million from $37.3 million for fiscal 2000. The decrease in net sales from products is due to a number of factors including lower unit sales of both the
Macintosh and Windows operating platforms and lower average selling prices for our advanced media systems for content design (decrease of $12.0 million) and lower sales of our
MPEG-based products (decrease of $1.6 million). We attribute the decrease in sales of our advanced media systems for content design to increased competition and lower demand. Net
sales from
services for fiscal 2001 decreased 11.2% to $8.8 million from $9.9 million for fiscal 2000. The decrease in net sales from services is the result of lower sales of service contracts due
to lower unit sales of our advanced media systems for content design and the elimination of encoding and hosting services. Net sales from customers outside of North America accounted for approximately
34.5% and 37.1% of net sales in fiscal 2001 and fiscal 2000.

Cost of sales.Cost of sales for products consists of the cost of manufacturing PCI hardware boards for our advanced media
systems for content design and royalties paid to third parties for their software that has been integrated into our systems. Cost of sales also includes the cost of manuals and other product
documentation, and related labor.

Cost
of sales for our service offerings consists of salaries and related expenses for service personnel delivering the service to the customer and warranty costs. Total cost of sales
decreased 25.8% to $16.3 million in fiscal 2001 from $22.0 million in fiscal 2000. The decrease in cost of sales is directly related to the lower unit sales of our advanced media systems
for content design.

Gross profit.Our gross profit from continuing operations decreased 41.5% to $14.7 million in fiscal 2001 from
$25.2 million in fiscal 2000. Overall gross profit as a percentage of net sales decreased to 47.4% in fiscal 2001 from 53.4% in fiscal 2000. Gross profit as a percentage of net sales of
products decreased to 35.2% in fiscal 2001 from 45.7% in fiscal 2000, while gross profit as a percentage of net sales of services decreased to 78.4% in fiscal 2001 from 82.5% in fiscal 2000. The
decrease in gross profit for products in fiscal 2001 over fiscal 2000 was the result of the reduction in average selling prices of our advanced media systems for content design as well as a decrease
in overall unit sales. The decrease in gross profit for services in fiscal 2001 over fiscal 2000 was the result of encoding and hosting services, which carry a lower gross profit than our Platinum
Services. The Company no longer provides encoding and hosting services.

Research and development.Research and development expenses include costs incurred to develop and improve our existing
intellectual property and develop new intellectual property and are charged to expense as incurred. To date, development costs for our systems have been charged to expense as incurred because the
costs incurred from the attainment of technological feasibility to general product release have not been significant. Our research and development costs may fluctuate from quarter to quarter due to
the nature of the products under development. Some of our systems have PCI hardware included in the product and the costs associated with designing and developing this type of hardware can be
expensive. In

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addition, our software developers require this hardware in order to integrate the software code they develop with the hardware to create a fully integrated advanced media system for content design.

Research
and development expenses decreased 4.5% to $10.5 million in fiscal 2001 from $11.0 million in fiscal 2000. The majority of the decrease in research and development
expenses represented lower development costs associated with our existing advanced media systems for content design, Media 100 i and iFinish.

Selling and marketing.Selling and marketing expenses consist primarily of salaries and related benefits, travel, commissions
and marketing costs such as advertising, trade shows, marketing materials, lead generation activities and public relations. Our selling and marketing expenses may fluctuate from quarter to quarter
based on the timing of trade shows and sales commissions, which vary based on sales.

Selling
and marketing expenses decreased 13.7% to $11.5 million in fiscal 2001 from $13.4 million in fiscal 2000. As a result of lower sales of our advanced media systems
for content design, we reduced our expenses for salaries, employee-related costs, tradeshows, outside services, sales literature and direct mail. The decrease in selling and marketing expenses
resulted primarily from lower sales of our advanced media systems for content design as discussed above.

General and administrative.General and administrative expenses consist primarily of salaries and related benefits, travel
and outside services for human resources, finance, information technology, legal, and other administrative functions.

General
and administrative expenses increased 81.3% to $8.5 million in fiscal 2001 from $4.7 million in fiscal 2000. The increase in general and administrative expenses
resulted primarily from a legal accrual established for an unfavorable verdict in a lawsuit against the Company and estimated legal fees in the amount of $2.6 million, and increased expenses
for legal, audit, salaries and employee-related costs.

Amortization of intangible assets.We recorded expense for the amortization and write-off of intangible assets of
$2.9 million in fiscal 2001 related to the acquisitions of Wired, 21st Century Media, J2 Digital Media and certain assets of Integrated Computing Engines, Inc. In
fiscal 2000, we recorded amortization expense of $1.2 million related to the acquisitions mentioned above.

Acquired in-process research and development.In connection with the acquisition of Wired, we allocated $470,000
of the purchase price to in-process research and development projects in fiscal 2000. This allocation represented the estimated fair value based on risk-adjusted cash flows
related to incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. We did not incur any expense for acquired in-process research and development in
fiscal 2001.

Restructuring charge.In fiscal 2001, we implemented a restructuring plan to better align our organization with our corporate
strategy and to reflect the consolidation of several companies we acquired in the past two years. We recorded $1.5 million of restructuring expense in fiscal 2001 to reduce operating expenses
in the organization. The major component of the restructuring charge relates to the termination of employment of personnel. At November 30, 2001, approximately $527,000 of the accrued
restructuring charge remained to be paid, composed of severance-related costs associated with the
termination of employment of personnel and rent expense, net of sublease income, associated with Streamriver of approximately $230,000. The total cash impact of the restructuring amounted to
approximately $1.2 million, of which approximately $673,000 was paid in 2001. In fiscal 2000, we implemented a restructuring plan to reduce operating expenses and incurred a restructuring
expense of $236,000. The major component of this restructuring charge related to the termination of employment of personnel in the selling and marketing and general and administrative functions. At
November 30, 2001, there was no remaining obligation under the fiscal 2000 restructuring plan.

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Interest income, net.Interest income, net, decreased 69.6% to $289,000 in fiscal 2001 from $951,000 in fiscal 2000. The
decrease in interest income, net, resulted from lower cash and cash equivalents due primarily to the net loss incurred in fiscal 2001, the use of cash for the acquisitions of Terran, Wired,
21st Century Media, J2 Digital Media, substantially all of the assets of Integrated Computing Engines, Inc., the merger with Digital Origin and lower interest rates
available on the financial instruments we have chosen for investment.

Other expense, net.Other expense, net increased 29.6% to $866,000 for fiscal 2001 compared to $668,000 for fiscal 2000.
During the fourth quarter of fiscal 2001, we wrote off our investment of $1.0 million in Beatnik, an early stage company that was developing audio software solutions for mobile devices, after
management made a determination that this asset was no longer realizable. This determination was made due to a weakening market as well as weakened prospects for a liquidity event. The remaining
expense for fiscal 2001 and 2000 was primarily due to foreign currency transaction losses of $69,000 and $649,000, respectively, related to our four European subsidiaries. The increase in 2001 over
2000 was primarily related to exchange fluctuations.

Tax benefit.We recorded a tax benefit in fiscal 2001 of $4.7 million on our loss from continuing operations. This was
offset by a net tax provision of $4.7 million on the gain from the sale of our streaming media software product line and the operating results of the discontinued operations. We did not require
a tax provision in fiscal 2000 due to the net loss recorded during the fiscal year ended November 30, 2001.

Net loss.As a result of the above factors, we recorded a net loss from continuing operations in fiscal 2001 in the amount of
$16.1 million, or $1.31 per share, compared to a net loss of $5.5 million, or $0.46 per share, in fiscal 2000. We recorded income from discontinued operations, net of taxes of
$4.7 million, or $0.38 per share, consisting of a gain on the sale of the streaming media software product line of $8.2 million, offset by a loss from discontinued operations of
$3.5 million. In 2000, the net loss from discontinued operations was $4.8 million, or $0.40 per share. In fiscal 2001, we recorded a net loss of $11.5 million, or $0.93 per share,
compared to a net loss of $10.4 million, or $0.87 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 well as the sale of our streaming
media software product line to Autodesk. As of November 30, 2002, our principal sources of liquidity included cash, cash equivalents and marketable securities totaling approximately
$4.7 million. This was a decrease of approximately $12.9 million of cash, cash equivalents and marketable securities since the end of our previous fiscal year, which ended
November 30, 2001. Approximately $2.8 million of the $12.9 was placed in an escrow account while the McRoberts litigation is under appeal. This amount is classified as restricted cash at
November 30, 2002. In addition, the Company has restricted cash of approximately $388,000 relating to several letters of credit.

During
fiscal 2002, cash used in operating activities from continuing operations was approximately $12.4 million compared to cash used in operating activities from continuing
operations of approximately $7.7 million for fiscal 2001. Cash provided by discontinued operations for fiscal 2002 totaled $184,000 versus $8.3 million for fiscal 2001. Cash used in
continuing operations during fiscal 2002 included a loss of $13.7 million from continuing operations including depreciation and amortization of $3.2 million, amortization and
write-off of intangible assets of $1.0 million and a settlement of litigation of $724,000. Cash used in continuing operations was affected by changes in assets and liabilities
including an increase in restricted cash of $3.2 million relating to the McRoberts litigation and several letters of credit, a decrease in accrued expenses of $2.5 million, an increase
in inventories of $1.2 million relating primarily to a buildup of inventory for 844/X and an increase in inventory for our digital video systems and a decrease in accounts payable of $195,000.
Cash provided by continuing operations included a decrease in accounts receivable of $2.5 million including $2.0 million that was previously due from escrow, an increase in deferred
revenue of $692,000 due to the deferral of 844/X sales in the fourth quarter of fiscal 2002 and a

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decrease of $190,000 for prepaid expenses and other current assets. The Company ended fiscal 2002 with days sales outstanding (DSO) of 84 due to 844/X deferred revenue, which is included in accounts
receivable but excluded from net sales. At the end of fiscal 2001, DSOs were 46 as there was no 844/X deferred revenue in this period. Net cash provided by discontinued operations was $184,000 in
fiscal 2002 versus $8.3 million in fiscal 2001 due to the sale of our streaming media software in October 2001. Net cash used in investing activities for continuing operations was
approximately $1.1 million for fiscal 2002 compared to cash provided by investing activities of approximately $5.8 million for fiscal 2001. Cash used in investing activities for
continuing operations during fiscal 2002 was primarily for purchases of capital equipment of $1.1 million and purchases of intangible assets of $94,000, partially offset by net proceeds from
sales of marketable securities of $115,000. Cash provided by financing activities from continuing operations during fiscal 2002 was approximately $640,000 compared to cash used in financing activities
from continuing operations of $1.1 million for fiscal 2001. In fiscal 2002, cash provided by financing activities from continuing operations came from proceeds from the issuance of common stock
pursuant to stock plans of $640,000.

At
November 30, 2002, our contractual cash obligations were as follows:

|                      |  | Total |           | Less than 1 year |   | 13 years
|--------------------- |  | ----- | --------- | ---------------- | - | ---------
|Lease commitments     |  | $     | 1,555,000 |                  | $ | 680,000  
|Inventory commitments |  | $     | 446,000   |                  | $ | 446,000  

In
addition to the above contractual obligations, the Company has other contractual obligations. The Company has entered into indemnification agreements with the non-employee
members of the Board of Directors. Additionally, the Company has from time to time entered into employment and executive retention agreements with certain employees and executive officers which, among
other things, include certain severance and change of control provisions. Under the terms of the Company's standard product license and sale contracts, the Company indemnifies its customers for the
potential liability associated with the infringement of other parties' technology based upon the Company's products. There is a possibility that the Company may be liable to one of its customers in
the event that there is infringement occurring. The Company is not aware of any infringement related to the Company's technology, and therefore has not accrued any amounts for the replacement or
refund of any software products sold through November 30, 2002.

We
have already taken a series of actions to reduce the negative cash flow we experienced in the past fiscal year including the termination of employees, reductions in the salaries paid
to executives and certain other employees, relocation of our facility to lower cost office space and a reduction in the marketing expenses for existing products. However, these expense reductions will
not be enough to return us to profitability without revenue growth. Our current operating plan and cash flow projections assume a certain level of revenue growth and operating expenses. If we fail to
achieve our revenue plan then we will realign our operating expenses consistent with the revised revenue expectations at that time in order to conserve cash. Our current cash flow projections also
assume we will not require substantial cash for capital purchases or to fund substantial increases in inventory, accounts receivable or other assets and the projections assume we will be able to
continue to collect our accounts receivables and will not incur substantial bad debts as a result of the failure of our customers to pay us.

We
may need to raise additional capital within the next twelve months through the sale of debt or equity securities to fund future operations, develop new and enhance existing products
and services, or acquire complementary products, businesses or technologies. At this time, we are in the process of seeking additional capital. If additional funds are raised through the issuance of
equity or convertible debt securities, the percentage ownership of our existing stockholders may be reduced, our stockholders may experience additional dilution, and such securities may have rights,
preferences or privileges senior to
those of our existing stockholders (see Cautionary Statements for additional details). Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not
available or are not

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available on acceptable terms our ability to fund existing operations and expansion, take advantage of unanticipated opportunities or develop or enhance our products or services would be
significantly limited and we may need to revise our operating plan to reduce operating expenses further. At this time, we believe that we will be able to operate our business as a going concern for at
least the next twelve months based upon the amount of our existing available capital, our current operating plan and our commitment to reduce operating expenses further if we do not achieve the
revenues anticipated in our current operating plan.

Should
we require additional capital to fund our operations and are unable to obtain capital, then we will examine our alternatives, including the sale or liquidation of part or all of
our business.

Cautionary Statements

This Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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.

History of Losses and Negative Cash Flows, Expect to Incur Losses in the Future and May Not Achieve or Maintain
Profitability.We have incurred substantial operating losses during the current year and in four of the past five fiscal years, have experienced negative cash flow
from ongoing operations during fiscal 2002, and we expect to incur operating losses and negative cash flows for at least the first half of fiscal 2003. We incurred a loss from continuing operations of
approximately $13.7 million for the year ended November 30, 2002 and as of November 30, 2002, we had an accumulated deficit of approximately $214.3 million.

Over
the past four years we have significantly increased our research and development expenses as a percentage of total sales and we plan to continue to invest in new technology, and as
a result, we will incur operating losses in future periods. We will need to generate increases in our current sales levels to achieve and maintain profitability and we may not be able to do so. Our
current operating plan and cash flow projections assume a certain level of revenue growth and operating expenses. If we fail to achieve our revenue plan then we will realign our operating expenses
consistent with the revised revenue expectations at that time in order to conserve cash. 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. Although we implemented a restructuring program in July 2002 to better align our
operations and cost structure with current and
anticipated market conditions, this program will not be sufficient for us to achieve profitability in any future period without revenue growth. Even if we achieve profitability in the future on a
quarterly or annual basis, we may not be able to sustain or increase profitability. Our failure to achieve profitability, achieve the level of profitability, or sustain the level of profitability
expected by investors and securities analysts may adversely affect the market price of our common stock.

In
addition, we expect that we will continue to experience negative operating cash flows for at least the first half of fiscal 2003. Depending on future cash flow, we may need to raise
additional capital in the future to meet our cash requirements and we may not be able to find additional financing, if required, on favorable terms or at all. If adequate funds are not available or
are not available on acceptable terms, our ability to fund existing operations and expansion, take advantage of unanticipated opportunities or develop or enhance our products or services would be
significantly limited and we may need to revise our operating plan to reduce operating expenses further.

If We Are Unable to Obtain Additional Capital as Needed in the Future, Our Business May be Adversely Affected and the Market Price for Our Common Stock Could
Decline Significantly.We have been unable to

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fund our operations using cash generated from our business operations and have financed our operations principally through the sale of securities and from existing cash on our balance sheet. We may
need to raise additional debt or equity capital to fund our existing operations, expand operations, maintain and enhance existing products and services or acquire or invest in complementary products,
services, businesses or technologies. At this time, we are in the process of seeking additional capital. If we raise additional funds through further issuance of equity or convertible debt securities,
our existing stockholders could suffer significant dilution, and any new equity or debt securities we issue may have rights, preferences, or privileges superior to those of holders of our common
stock. If we do raise capital through the issuance of equity or convertible debt the amount of dilution will depend upon several factors including, but not necessarily limited to, the amount of
capital raised, the security or securities issued, the terms of the security and the market price of the company's common stock. Additionally, the terms of the equity or debt securities we may issue
to the investor(s) may have rights, preferences or privileges superior to those of holders of our common stock including, but not limited to, liquidation preferences, anti-dilution
provisions, dividends, voting rights, protective provisions, right of first refusal on certain future financing transactions and consent provisions for certain transactions. The effect of some of
these new terms may be to provide what is perceived as a disproportionate return to the new investor. For example, a new investor might obtain an equity stake based on current market values, but with
the right to some multiple of the investment being required to be returned to the new investor before any return is made to existing shareholders. Even after offering these terms we may not be able to
obtain additional financing. If adequate funds are not available to us on terms favorable to us, our business may be adversely affected and the market price for our common stock could decline
significantly. If adequate funds are not available or are not available on acceptable terms, our ability to fund existing operations and expansion, take advantage of unanticipated opportunities or
develop or enhance our products or services would be significantly limited and we may need to revise our operating plan to reduce operating expenses further. At this time we believe that we will be
able to continue to operate our business as a going concern for at least the next twelve months based upon the amount of our existing capital, our current operating plan and our commitment to reduce
operating expenses further if we do not achieve the revenues anticipated in our current operating plan.

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. In addition, we typically realize a significant percentage of our
sales for a fiscal quarter in the second half of the third month of the quarter. As a result, our quarterly results may be difficult or impossible to predict. If quarterly revenue or earnings levels
fail to meet internal or external expectations, the market price of our common stock may decline significantly.

Dependence on Key Personnel.We believe that our future success will depend on our continued ability to attract and retain
qualified employees, especially in research and development. Our inability to attract and retain qualified personnel on a timely basis, or the departure of key employees could have a material adverse
affect on our business and operating results and negatively affect the price of our common stock. In addition, if we are unable to maintain existing sales levels or achieve internal sales projections
we may implement an employee reduction program, which may result in the termination of key

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personnel necessary to maintain certain functions or operations for the Company. The loss of key personnel will have a negative effect on our future results and reduce our ability to achieve
projected sales levels and profitability.

Possibility of NASDAQ Delisting.By letter dated October 2, 2002, we received notification from the Listing
Qualifications Department of The NASDAQ Stock Market, Inc., indicating that our common stock had not maintained the required minimum bid price for continued quotation on the NASDAQ National
Market and, therefore, is subject to delisting.NASD Rule 4450(a)(5) requires that, for continued quotation on the NASDAQ National Market, a
company must maintain a minimum bid price of $1.00 for at least one day during any period of thirty consecutive business days. NASDAQ rules provide that a listed company is given a period of ninety
calendar days to achieve compliance with the minimum bid requirement in order to maintain its listing on the NASDAQ National Market. During the ninety day period, a company would be considered to be
in compliance with NASDAQ's minimum bid price requirements if its minimum bid is $1 or greater for any ten consecutive business days. On December 2, 2002, we received notification from the
Listing Qualifications Department of The NASDAQ Stock Market, Inc., indicating that our common stock had regained compliance due to our stock closing at $1.00 per share or greater for at least
ten consecutive days. There can be no assurance that we will be able to take actions sufficient to maintain compliance with the NASDAQ National Market continued listing criteria. As of
February 24, 2003, the market price of our common stock has traded below the $1.00 per share price minimum requirement for 21 consecutive days and, therefore, we face the possibility of
receiving another notification from the Listing Qualifications Department of The NASDAQ Stock Market, Inc. indicating that our common stock has not maintained the required minimum bid price for
continued quotation on the NASDAQ National Market and is subject to delisting. If we are unable to maintain our listing on the NASDAQ National Market, the price and
liquidity of our common stock could be adversely affected, our ability to access the capital markets would likely be more limited, and it may adversely affect our ability to generate new sales of our
software product and may cause existing customers and vendors to question our viability. Additionally, our stock may be subject to "penny stock" regulations.

Weak Worldwide Economic Conditions and Advertising Market May Result in Decreased Sales and Continued Operating
Losses.Growth in sales and a return to profitability for our company depends on the overall demand for television advertising, which is driven by economic
conditions in the markets in which we compete. A substantial portion of our sales is to companies providing their services for the creation of television advertisement and demand for our customers'
services is affected by general economic and business conditions. During the past two years, due to weak economic conditions, television advertisers have spent less money advertising their products
and services and, as a result, demand for the services our customers provide has decreased. In this weak economic environment, we may not be able to effectively promote future growth or maintain
existing sales levels or achieve the sales levels expected by investors and securities analysts in any given period, or achieve profitability and, as a result, our business and operating results could
be materially and adversely affected and our stock price could decline.

Our Lengthy and Variable Sales Cycle Makes it Difficult for Us to Predict When or if Sales Will Occur and Therefore We May Experience an Unplanned Shortfall in
our Anticipated Sales Levels.844/X has a lengthy and unpredictable sales cycle that contributes to the uncertainty of our operating results. Our prospects view
the purchase of 844/X as a significant and strategic decision for their company. As a result, prospects generally evaluate 844/X and determine its impact on existing infrastructure and workflow. The
purchase of 844/X may be delayed if the prospect has lengthy internal budgeting, approval or evaluation processes. We may incur significant selling and marketing expenses during a prospect's
evaluation period before the customer places an order with us. Some prospects may purchase 844/X as part of multiple simultaneous purchasing decisions, which may result in unanticipated delayed in
receiving an order from the customer. If sales forecasted from specific customers are delayed to future quarters, we may experience an unplanned shortfall in sales, which could significantly and
adversely affect our operating results and stock price.

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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 April 2002, we shipped 844/X, and currently anticipate this new product will generate greater than 50% of
the revenue from product sales beginning in fiscal 2003. If the adoption of 844/X is slower than we anticipate or if there are delays in releasing subsequent versions of 844/X, our
current revenue expectations may be too high and our operating results may be negatively affected. In addition, new product announcements by our competitors and other new product announcements 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.

Dependence on and competition with Apple Computer, Inc.As a competitor, Apple Computer, Inc. ("Apple") could,
in the future, inhibit 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.

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

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

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description of certain pending litigation instituted against us, see Item 3, Legal Proceedings of Part I, and Note 7 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, and require us to seek licenses from third parties or prevent us from manufacturing or selling our
products, any of which could adversely affect our business and operating results and our financial condition.

Weak Economic Conditions May Cause our Customers to Experience Financial Difficulties and May Represent a Credit Risk.Due to
the weak global economy and uncertainties relating to the prospects for near-term global economic growth, some of our customers may experience financial difficulties and may represent a
credit risk to us. If these customers experience financial difficulties or fail to experience commercial success, we may have difficulty collecting our accounts receivable.

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.), Leitch, Inc., Matrox Electronic Systems Ltd., Pinnacle
Systems, Inc. and Quantel Ltd. 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 we
have, 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 performance systems. We have historically realized higher gross profit on the sale of these
high performance 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 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.

Dependence on Single or Limited Source Suppliers.We are 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., Fairchild Semiconductor® Corp., Gennum® Corporation, Toshiba, Kawasaki LSI

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USA® Inc., Philips® Semiconductors, Silicon Optix, Faraday Technology, Scientific Conversion, Xilinx®, Altera®,
Lattice®, Agere®, Marvel®, and IDT®. 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 and the continued viability of these suppliers and
product line. 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 Distributors and Resellers.We rely primarily on our worldwide network of independent distributors and
value-added resellers ("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 of 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.

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

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business, operating results, and financial condition and, as a result, may negatively affect the market price of our common stock.

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

Stock Price Volatility.The trading price of our common stock has been highly volatile and has fluctuated significantly in
the past. During the year ended November 30, 2002 our stock price fluctuated between a low of $0.35 per share and a high of $3.75 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, has 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.

Item 7A.    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 would be required under Statement of Financial Accounting Standards No. 107 Derivative Financial Instruments, Other Financial
Instruments and Derivative Commodity Instruments (SFAS No. 107). All of 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.

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New Accounting Standards.

Emerging Issues Task Force (EITF) Issue No. 01-09 ("Issue"), "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products,"issued during November 2001, codifies previously issued EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products."EITF Issue No. 00-25
addresses various aspects of the accounting for consideration given by a vendor to a customer or a reseller of the vendor's products. Consideration includes sales incentives such as discounts,
coupons, rebates, free products or services, slotting fees, coop advertising and buydowns. Pursuant to EITF 00-25, such consideration is presumed to be a reduction of revenue unless
certain criteria are met. The Issue should be applied no later than in annual or interim financial statements for periods beginning after December 15, 2001 and requires retroactive restatement.
The Company previously recorded coop advertising expenses and other sales incentives to resellers within selling and marketing expense in the statement of operations. The Company adopted EITF Issue
No. 01-09 in the first quarter ended February 28, 2002.As a result, the Company has recorded $26,000 as a reduction to
product sales for the year ended November 30, 2002. Additionally, the Company reclassified $351,000 and $261,000 as reductions of product sales that were previously classified as selling and
marketing expenses for the years ended November 30, 2001 and 2000, respectively.

In
September 2000, the EITF issued 00-10"Accounting for Shipping and Handling Fees and Costs,"relating to the
accounting for reimbursement for shipping and handling fees and related costs by customers. In accordance with EITF 00-10, reimbursements received for shipping and handling fees and costs
incurred should be characterized as revenue in the statement of operations. The Company has historically accounted for reimbursement received for shipping and handling fees as a reduction of cost of
sales in the statement of operations to offset the costs incurred. The Company adopted EITF 00-10 in the first quarter ended February 28,
2002.As a result, the Company has reclassified $36,000 as product sales for the year ended November 30, 2002. Additionally, the Company
reclassified $118,000 and $171,000 as product sales that were previously classified as reductions to cost of sales for the years ended November 30, 2001and 2000, respectively.

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 indefinite 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. The Company does not believe that the
adoption of this standard will have a material impact on the Company's financial statements.

In
June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain
obligation of lessees. This statement amends FASB Statement No. 19 and is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not
believe that the adoption of this standard will have a material impact on the Company's financial statements.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 further refines the requirements of SFAS No. 121 that companies
(1) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows and (2) measure an
impairment loss as the difference between the carrying amount and fair value of the asset. In addition, SFAS No. 144 provides guidance on accounting and disclosure issues surrounding
long-lived assets to be disposed of by sale. The

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Company will be required to adopt SFAS 144 no later than the fiscal year beginning on December 1, 2002. The Company does not believe that the adoption of this standard will have a
material impact on the Company's financial statements.

In
July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the accounting for costs associated with restructuring
activities and other disposal activities. This statement supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity. This statement will be effective for disposal activities initiated after December 31, 2002, and the Company will adopt this statement for any
costs relating to restructuring or disposal activities initiated after the effective date.

On
December 31, 2002, SFAS No. 148,Accounting for Stock-Based CompensationTransition and Disclosurewas
issued. SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition to the
fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim
financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to account for their employee stock-based awards using the fair value method. However, the disclosure
provisions are required for all companies with stock-based employee compensation, regardless of whether they utilize the fair method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25,Accounting for Stock Issued to Employees. SFAS No. 148's amendment of the transition and
annual disclosure provisions of SFAS No. 123 are effective for fiscal years ending after December 15, 2002. The Company has adopted the annual disclosure provisions of SFAS
No. 123. The Company does not believe that the adoption of this standard will have a material impact on the Company's financial statements.

Item 8.    Financial Statements and Supplementary Data

The Company's financial statements, together with the auditors' report thereon, appear on pages F-1 through F-37 of this Annual Report on
Form 10-K.

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

On June 24, 2002, we filed a current report on Form 8-KItem 4, Changes to Registrant's Certifying Accountant disclosing a
change in our independent accountants from Arthur Andersen LLP to Ernst & Young LLP. A letter from Arthur Andersen LLP to the Securities and Exchange Commission dated June 24, 2002 was
filed under Item 7.

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PART III

Item 10.    Directors and Officers of the Registrant

The Company will furnish to the Securities and Exchange Commission not later than 120 days after the close of its fiscal year ended November 30,
2002 a definitive Proxy Statement (the "Proxy Statement") for the Annual Meeting of Stockholders to be held in April 2003. The information required by this Item is incorporated herein by
reference to "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.

Item 11.    Executive Compensation

The information required by this Item is incorporated herein by reference to "Election of Directors" and "Executive Compensation" in the Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is incorporated herein by reference to "Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement.

Information
related to securities authorized for issuance under equity compensation plans as of November 30, 2002 is as follows:

Equity Compensation Plan Information

|Plan category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a) |  | Weighted-average exercise price of outstanding options, warrants and rights
(b) |      | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |  | 2,744,493                                                                                       |  | $                                                                               | 2.39 |                                                                                                                                                
|Equity compensation plans not approved by security holders |  | 161,095                                                                                         |  |                                                                                 | 2.38 |                                                                                                                                                
|                                                           |  |                                                                                                 |  |                                                                                 |      |                                                                                                                                                
|Total                                                      |  | 2,905,588                                                                                       |  | $                                                                               | 2.39 |                                                                                                                                                
|                                                           |  |                                                                                                 |  |                                                                                 |      |                                                                                                                                                

The
Company has one equity compensation plan, the 2000 Stock Option Plan, for which the approval of shareholders is not required. Executive officers and members of the Board of Directors
are not eligible for awards under the 2000 Stock Option Plan. No awards other than nonqualified stock options have been granted under the 2000 Stock Option Plan. A total of 500,000 shares are issuable
under the plan.

Item 13.    Certain Relationships and Related Transactions

The information required by this Item is incorporated herein by reference to "Certain Relationships and Related Transactions" in the Proxy Statement.

Item 14.    Controls and Procedures

As
required by the new rule 13a-15 under the Securities Exchange Act of 1934, within 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial

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Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its reports it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the new rules, the Company
currently is in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to
time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

None.

Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 10-K

The following documents are filed as part of this report:

| |                                             | Page
| | ------------------------------------------- | ----
| | (a)  (1) Consolidated Financial Statements. |     
| |                                             |     
| |                                             |     
| |                                             |     
| |                                             |     
| |                                             |     
| |                                             |     
| |                                             |     
| |                                             |     





|2.09 |  | Agreement and Plan of Reorganization dated December 28, 1999 between Digital Origin, Inc. and Media 100 Inc.                                                                                                                                                                                                                                
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 29, 2001 (filed as
exhibit 2.10 of the Company's Quarterly Report of Form 10-Q for the fiscal quarter ended August 31, 2001 and incorporated by reference herein).
|3.1  |  | Restated Certificate of Incorporation of Media 100 Inc. (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference
herein).                                                                                                                                
|3.2  |  | By-laws of Media 100 Inc., as amended through June 17, 1998 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1998 and incorporated by
reference herein).                                                                                                                           

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|4      |  | Specimen Certificate representing the Company's Common Stock (filed as Exhibit 4 to the Company's Registration Statement on Form S-1, File No. 2-94121 and incorporated by reference herein).                                                                          
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2*  |  | 1986 Employee Stock Purchase Plan, as amended through June 12, 2001 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2001 and incorporated
by reference herein).                                          
|10.3*  |  | Key Employee Incentive Plan (1992), as amended through June 12, 2001 (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2001 and incorporated
by reference herein).                                         
|10.4*  |  | Media 100 Inc. 401(k) Savings Plan (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein).                                                                               
|10.5.1 |  | Lease dated January 31, 1997 relating to 290 Donald Lynch Boulevard, Marlborough, Massachusetts (filed as Exhibit 10.5.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996 and incorporated by reference herein).                
|10.5.2 |  | Lease Agreement dated as of January 31, 1997 relating to 290 Donald Lynch Boulevard, Marlborough, Massachusetts (filed as Exhibit 10.5.2 to the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996 and incorporated by reference herein).
|10.5.3 |  | Amendment to Lease dated January 8, 2002 relating to 290 Donald Lynch Blvd, Marlborough, Massachusetts and 450 Donald Lynch Blvd, Marlborough, Massachusetts.                                                                                                          
|10.6.2 |  | Intellectual Property Agreement dated as of December 2, 1996 with DTI (filed as Exhibit 10.6.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated
by reference herein).                                          
|10.10  |  | Agreement and Plan of Merger and Reorganization, dated May 6, 1999 with Terran Interactive, Inc. (filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
May 31, 1999 and incorporated by reference herein).               
|10.11  |  | Asset Purchase Agreement, dated December 17, 1999 with Wired, Inc. (filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended November 30, 1999 and incorporated by
reference herein).                                                     
|10.12  |  | A    *Digital Origin Inc.'s 401(k) Savings and Investment Plan. (6)                                                                                                                                                                                                    
|       |  | B    *Amendment to Digital Origin Inc.'s 401(k) Savings and Investment Plan. (1)                                                                                                                                                                                       
|       |  | C    *Digital Origin Inc.'s 401(k) Savings and Investment Plan Loan Policy. (1)                                                                                                                                                                                        
|10.13* |  | Digital Origin Inc.'s 1995 Stock Option Plan. (1)                                                                                                                                                                                                                      
|10.14* |  | Form of Stock Option Agreement and Exercise Request as currently in effect under 1995 Stock Option Plan. (1)                                                                                                                                                           
|10.16  |  | Form of Indemnity Agreement with Directors. (5)                                                                                                                                                                                                                        
|10.22  |  | Asset Sale Agreement dated as of December 4, 1998 between Splash Technology Holdings, Inc. and Digital Origin Inc. (12)                                                                                                                                                
|10.26  |  | Settlement agreement (filed as exhibit 10.26 of the Company's Quarterly Report of Form 10-Q for the fiscal quarter ended February 28, 2002 and incorporated by reference herein)                                                                                       
|21     |  | Subsidiaries of Media 100 Inc. (filed as Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein).                                                                                     
|23     |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                                    
|23.2   |  | Information Regarding Consent of Arthur Andersen LLP.                                                                                                                                                                                                                  
|24     |  | Power of Attorney (included in the signature page of this Annual Report on Form 10-K).                                                                                                                                                                                 

37

---





38

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Media 100 Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on February 28, 2003.

| |  | MEDIA 100 INC.
| |  | --------------
| |  | By:           

39

---

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and directors of Media 100 Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints John A. Molinari and Steven D. Shea, and each of them, with full power to act without the other, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 2002, and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and
necessary to be done, as fully for all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or
either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|Signature                                     |  | Title                                                                              |  | Date             
|--------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | -----------------
|                                              |  |                                                                                    |  |                  
|JOHN A. MOLINARIJohn A. Molinari              |  | Chief Executive Officer, President and Director
(Principal Executive Officer)      |  | February 28, 2003
|/s/STEVEN D. SHEASteven D. Shea               |  | Chief Financial Officer and
Treasurer (Principal
Financial and Accounting Officer) |  | February 28, 2003
|/s/MAURICE L. CASTONGUAYMaurice L. Castonguay |  | Director                                                                           |  | February 28, 2003
|/s/PAUL J. SEVERINOPaul J. Severino           |  | Director                                                                           |  | February 28, 2003
|/s/ROGER REDMONDRoger Redmond                 |  | Director                                                                           |  | February 28, 2003

40

---



CERTIFICATIONS

I,
John A. Molinari, certify that:





Date:
February 28, 2003

| | /s/JOHN A. MOLINARIJohn A. Molinari Chief Executive
Officer
| | -----------------------------------------------------------

41

---



CERTIFICATIONS

I,
Steven D. Shea, certify that:





Date:
February 28, 2003

| | /s/STEVEN D. SHEASteven D. Shea Chief Financial Officer
and Treasurer
(Principal Financial Officer)
| | ---------------------------------------------------------------------------------------------------

42

---



INDEX TO FINANCIAL STATEMENTS

|                                |                                                                                                            | Page
|------------------------------- | ---------------------------------------------------------------------------------------------------------- | ----
|Media 100 Inc. and Subsidiaries |                                                                                                            |     
|                                | Report of Independent Auditors                                                                             |     
|                                | Report of Independent Public Accountants.                                                                  |     
|                                | Consolidated Balance Sheets as of November 30, 2002 and 2001                                               |     
|                                | Consolidated Statements of Operations
for the Fiscal Years Ended November 30, 2002, 2001 and 2000          |     
|                                | Consolidated Statement of Stockholders' Equity
for the Fiscal Years Ended November 30, 2002, 2001 and 2000 |     
|                                | Consolidated Statements of Cash Flows
for the Fiscal Years Ended November 30, 2002, 2001 and 2000          |     
|                                | Notes to Consolidated Financial Statements                                                                 |     

F-1

---



REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Media 100 Inc.:

We
have audited the accompanying consolidated balance sheet of Media 100 Inc. (a Delaware corporation) and subsidiaries as of November 30, 2002 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated financial statements of Media 100 Inc. and subsidiaries as of November 30, 2001 and November 30,
2000, and for the two years then ended, were audited by other auditors who have ceased operations and whose report dated January 7, 2002, expressed an unqualified opinion on those statements.

We
conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In
our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Media 100 Inc. and subsidiaries at
November 30, 2002 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

As
discussed above, the financial statements of Media 100 Inc. as of November 30, 2001 and 2000 and for the years then ended were audited by other auditors who have ceased
operations. As described in Note 2(p), in 2002 the Company adopted the accounting required pursuant to Emerging Issues Task Force (EITF) Issue No. 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products" and EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs". The 2001 and 2000 consolidated financial statements have been adjusted to reclassify certain amounts between product sales, cost of sales and selling and marketing
expenses as required by EITF Issue No. 01-09 and EITF Issue No. 00-10. We audited the adjustments disclosed in Note 2(p) that were applied to reclassify
certain amounts between product sales, cost of sales, and selling and marketing expenses in the 2001 and 2000 consolidated financial statements. Our procedures included: (i) agreeing the
adjusted amounts of products sales, cost of sales and selling and marketing expenses to the Company's underlying accounting records obtained from management, and (ii) testing the mathematical
accuracy of the adjusted amounts of products sales, cost of sales and selling and marketing expenses. In our opinion, such adjustments are appropriate and have been properly applied. However, we were
not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of the Company other than with respect to such adjustments and, accordingly, we do not
express an opinion or any other form of assurance on the consolidated financial statements as of November 30, 2001 and 2000 and for the years then ended, taken as a whole.



Boston,
Massachusetts
February 25, 2003

F-2

---



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Media 100 Inc.:

We
have audited the accompanying consolidated balance sheets of Media 100 Inc. (a Delaware corporation) and subsidiaries as of November 30, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended November 30, 2001. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. As discussed in Note 3, on May 9, 2000, Media 100 Inc.
merged with Digital Origin, Inc. in a transaction that has been accounted for as a pooling-of-interests in the accompanying consolidated financial statements. We did not
audit the financial statements of Digital Origin, Inc. as of or for the year ended September 30, 1999. Such statements are included in the consolidated financial statements of Media
100 Inc. and reflect total revenues of $13,353,000 and net income of $5,849,000, and such amounts are included in income from discontinued operations for the year ended November 30,
1999. The financial statements of Digital Origin, Inc. were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for
Digital Origin, Inc., is based solely upon the report of the other auditors.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe
that our audits and the report of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audit and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of
Media 100 Inc. and subsidiaries as of November 30, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended
November 30, 2001, in conformity with accounting principles generally accepted in the United States.



Boston,
Massachusetts
January 7, 2002
(except with respect to the matter discussed in Note 7(b)(v),
as to which the date is February 25, 2002)

Note:

This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Media 100 Inc.'s filing on Form 10-K for
the year ended November 30, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. See exhibit 23.2 for
further discussion.

F-3

---



MEDIA 100 INC.    CONSOLIDATED BALANCE SHEETS        (in thousands, except share and per share amounts)

|                                       |                                                                                              | November 30,                                                                                                        |      
|-------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | -----
|
|ASSETS                                 |                                                                                              |                                                                                                                     |      
|Current assets:                        |                                                                                              |                                                                                                                     |      
|                                       | Cash and cash equivalents                                                                    |                                                                                                                     | $    
|                                       | Available for sale securities, at fair value                                                 |                                                                                                                     |      
|                                       | Restricted Cash (Notes 2(a) and 6)                                                           |                                                                                                                     |      
|                                       | Due from escrow (Note 13)                                                                    |                                                                                                                     |      
|                                       | Accounts receivable, net of allowance for doubtful accounts of $409 in 2002 and $512 in 2001 |                                                                                                                     |      
|                                       | Inventories, net                                                                             |                                                                                                                     |      
|                                       | Prepaid expenses and other current assets                                                    |                                                                                                                     |      
|                                       |                                                                                              |                                                                                                                     |      
|                                       |                                                                                              | Total current assets                                                                                                |      
|Property and equipment, net            |                                                                                              |                                                                                                                     | 1,870
|Intangible assets, net                 |                                                                                              |                                                                                                                     | 145  
|                                       |                                                                                              |                                                                                                                     |      
|                                       | Total assets                                                                                 |                                                                                                                     | $    
|                                       |                                                                                              |                                                                                                                     |      
|LIABILITIES AND STOCKHOLDERS' EQUITY   |                                                                                              |                                                                                                                     |      
|Current liabilities:                   |                                                                                              |                                                                                                                     |      
|                                       | Accounts payable                                                                             |                                                                                                                     | $    
|                                       | Accrued expenses                                                                             |                                                                                                                     |      
|                                       | Deferred revenues                                                                            |                                                                                                                     |      
|                                       |                                                                                              |                                                                                                                     |      
|                                       |                                                                                              | Total current liabilities                                                                                           |      
|                                       |                                                                                              |                                                                                                                     |      
|Commitments and contingencies (Note 7) |                                                                                              |                                                                                                                     |      
|Stockholders' equity:                  |                                                                                              |                                                                                                                     |      
|                                       | Preferred stock, $0.01 par value,                                                            |                                                                                                                     |      
|                                       |                                                                                              | Authorized1,000 shares, none issued                                                                                |      
|                                       | Common stock, $0.01 par value,                                                               |                                                                                                                     |      
|                                       |                                                                                              | Authorized25,000 shares                                                                                            |      
|                                       |                                                                                              | 12,977 and 12,575 issued and 12,947 and 12,545 outstanding at November 30, 2002 and November 30, 2001, respectively |      
|                                       | Capital in excess of par value                                                               |                                                                                                                     |      
|                                       | Accumulated deficit                                                                          |                                                                                                                     |      
|                                       | Treasury stock, 30 shares at cost                                                            |                                                                                                                     |      
|                                       | Accumulated other comprehensive loss                                                         |                                                                                                                     |      
|                                       |                                                                                              |                                                                                                                     |      
|                                       | Total stockholders' equity                                                                   |                                                                                                                     |      
|                                       |                                                                                              |                                                                                                                     |      
|                                       | Total liabilities and stockholders' equity                                                   |                                                                                                                     | $    
|                                       |                                                                                              |                                                                                                                     |      

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

F-4

---



MEDIA 100 INC.    CONSOLIDATED STATEMENTS OF OPERATIONS    (in thousands, except share and per share amounts)

|                                                                                                                   |                                                                       | Fiscal Years Ended November 30, |        
|------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------- | ------------------------------- | -------
|
|Net sales:                                                                                                         |                                                                       |                                 |        
|                                                                                                                   | Products                                                              |                                 | $      
|                                                                                                                   | Services                                                              |                                 |        
|                                                                                                                   |                                                                       |                                 |        
|Total net sales                                                                                                    |                                                                       |                                 | 19,081 
|Cost of sales                                                                                                      |                                                                       |                                 | 9,763  
|Accelerated depreciation and amortization of fixed assets (Note 2(e))                                              |                                                                       |                                 | 331    
|                                                                                                                   |                                                                       |                                 |        
|                                                                                                                   | Gross profit                                                          |                                 |        
|                                                                                                                   |                                                                       |                                 |        
|Operating expenses:                                                                                                |                                                                       |                                 |        
|                                                                                                                   | Research and development                                              |                                 |        
|                                                                                                                   | Selling and marketing                                                 |                                 |        
|                                                                                                                   | General and administrative                                            |                                 |        
|                                                                                                                   | Amortization and write-off of intangible assets                       |                                 |        
|                                                                                                                   | Acquired in-process research and development                          |                                 |        
|                                                                                                                   | Restructuring charge                                                  |                                 |        
|                                                                                                                   | Accelerated depreciation and amortization of fixed assets (Note 2(e)) |                                 |        
|                                                                                                                   | Settlement of litigation (Note 2(f))                                  |                                 |        
|                                                                                                                   |                                                                       |                                 |        
|                                                                                                                   |                                                                       | Total operating expenses        |        
|                                                                                                                   |                                                                       |                                 |        
|                                                                                                                   |                                                                       | Operating loss                  |        
|Interest income, net                                                                                               |                                                                       |                                 | 204    
|Other income (expense), net                                                                                        |                                                                       |                                 | 591    
|                                                                                                                   |                                                                       |                                 |        
|Loss from continuing operations before tax benefit                                                                 |                                                                       |                                 | (13,928
|Benefit from income taxes                                                                                          |                                                                       |                                 | (261   
|                                                                                                                   |                                                                       |                                 |        
|Loss from continuing operations                                                                                    |                                                                       |                                 | (13,667
|Income (loss) from discontinued operations, net of tax provision of $123 and $4,700 in 2002 and 2001, respectively |                                                                       |                                 | 184    
|                                                                                                                   |                                                                       |                                 |        
|Net loss                                                                                                           |                                                                       | $                               | (13,483
|                                                                                                                   |                                                                       |                                 |        
|Income (loss) per share (Note 2j):                                                                                 |                                                                       |                                 |        
|Basic                                                                                                              |                                                                       |                                 |        
|Continuing operations                                                                                              |                                                                       | $                               | (1.07  
|                                                                                                                   |                                                                       |                                 |        
|Discontinued operations                                                                                            |                                                                       | $                               | 0.01   
|                                                                                                                   |                                                                       |                                 |        
|Total                                                                                                              |                                                                       | $                               | (1.05  
|                                                                                                                   |                                                                       |                                 |        
|Diluted                                                                                                            |                                                                       |                                 |        
|Continuing operations                                                                                              |                                                                       | $                               | (1.07  
|                                                                                                                   |                                                                       |                                 |        
|Discontinued operations                                                                                            |                                                                       | $                               | 0.01   
|                                                                                                                   |                                                                       |                                 |        
|Total                                                                                                              |                                                                       | $                               | (1.05  
|                                                                                                                   |                                                                       |                                 |        
|Weighted average common shares outstanding:                                                                        |                                                                       |                                 |        
|Basic                                                                                                              |                                                                       |                                 | 12,819 
|                                                                                                                   |                                                                       |                                 |        
|Diluted                                                                                                            |                                                                       |                                 | 12,819 
|                                                                                                                   |                                                                       |                                 |        

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

F-5

---



MEDIA 100 INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                                                       |                                                  |   |         | Common Stock
$.01 Par Value |        |   |   |     |   |   |         |   |  
|-------------------------------------------------------------------------------------- | ------------------------------------------------ | - | ------- | --------------------------- | ------ | - | - | --- | - | - | ------- | - | -
|
|
|
|
|Balance, November 30, 1999                                                             |                                                  |   |         |                             | 11,477 |   |   | 115 |   |   | 210,839 |   |  
|Issuance of common stock under stock plans                                             |                                                  |   |         |                             | 686    |   |   | 7   |   |   | 4,661   |   |  
|Exercise of warrants for common stock                                                  |                                                  |   |         |                             | 10     |   |   |    |   |   | 28      |   |  
|Issuance of common stock for acquisitions                                              |                                                  |   |         |                             | 92     |   |   | 1   |   |   | 1,614   |   |  
|Digital Origin Inc. share issuance for the two months ended November 30, 1999 (Note 3) |                                                  |   |         |                             |       |   |   |    |   |   | 40      |   |  
|Digital Origin loss for the two months ended November 30, 1999 (Note 3)                |                                                  |   |         |                             |       |   |   |    |   |   |        |   |  
|Comprehensive loss:                                                                    |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  
|Net loss                                                                               |                                                  |   | (10,381 | )                           |       |   |   |    |   |   |        |   |  
|                                                                                       | Unrealized loss on available for sale securities |   |         | 167                         |        |  |   |     |  |   |         |  |  
|                                                                                       | Translation adjustment                           |   |         | (51                         | )      |  |   |     |  |   |         |  |  
|                                                                                       |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  
|Comprehensive income                                                                   |                                                  | $ | (10,265 | )                           |       |   |   |    |   |   |        |   |  
|                                                                                       |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  
|Balance, November 30, 2000                                                             |                                                  |   |         |                             | 12,265 |   |   | 123 |   |   | 217,182 |   |  
|Issuance of common stock under stock plans                                             |                                                  |   |         |                             | 310    |   |   | 3   |   |   | 501     |   |  
|Purchase of treasury stock, cost                                                       |                                                  |   |         |                             |       |   |   |    |   |   |        |   |  
|Comprehensive loss:                                                                    |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  
|Net loss                                                                               |                                                  |   | (11,456 | )                           |       |   |   |    |   |   |        |   |  
|                                                                                       | Unrealized gain on available for sale securities |   |         | 44                          |        |  |   |     |  |   |         |  |  
|                                                                                       | Translation adjustment                           |   |         | 15                          |        |  |   |     |  |   |         |  |  
|                                                                                       |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  
|Comprehensive loss                                                                     |                                                  | $ | (11,397 | )                           |       |   |   |    |   |   |        |   |  
|                                                                                       |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  
|Balance, November 30, 2001                                                             |                                                  |   |         |                             | 12,575 |   |   | 126 |   |   | 217,683 |   |  
|Issuance of common stock under stock plans                                             |                                                  |   |         |                             | 402    |   |   | 4   |   |   | 636     |   |  
|Comprehensive loss:                                                                    |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  
|Net loss                                                                               |                                                  |   | (13,483 | )                           |       |   |   |    |   |   |        |   |  
|                                                                                       | Unrealized gain on available for sale securities |   |         | 10                          |        |  |   |     |  |   |         |  |  
|                                                                                       | Translation adjustment                           |   |         | (122                        | )      |  |   |     |  |   |         |  |  
|                                                                                       |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  
|Comprehensive loss                                                                     |                                                  | $ | (13,595 | )                           |       |   |   |    |   |   |        |   |  
|                                                                                       |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  
|Balance, November 30, 2002                                                             |                                                  |   |         |                             | 12,977 |   | $ | 130 |   | $ | 218,319 |   | $
|                                                                                       |                                                  |   |         |                             |        |   |   |     |   |   |         |   |  

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

F-6

---



MEDIA 100 INC.    CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                       |                                                                       | Fiscal Years Ended November 30, |        
|------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------- | ------------------------------- | -------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                  |                                                                       |                                 |        
|Net loss                                                                                               |                                                                       | $                               | (13,483
|Net (income) loss from discontinued operations                                                         |                                                                       |                                 | (184   
|                                                                                                       |                                                                       |                                 |        
|Loss from continuing operations                                                                        |                                                                       |                                 | (13,667
|Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: |                                                                       |                                 |        
|                                                                                                       | Depreciation and amortization                                         |                                 |        
|                                                                                                       | Settlement of litigation                                              |                                 |        
|                                                                                                       | Noncash interest expense                                              |                                 |        
|                                                                                                       | Acquired in-process research and development                          |                                 |        
|                                                                                                       | Amortization and write-off of intangible assets                       |                                 |        
|                                                                                                       | Loss on sale of marketable securities                                 |                                 |        
|                                                                                                       | Changes in assets and liabilities, excluding effects of acquisitions: |                                 |        
|                                                                                                       | Restricted cash                                                       |                                 |        
|                                                                                                       | Accounts receivable                                                   |                                 |        
|                                                                                                       | Inventories, net                                                      |                                 |        
|                                                                                                       | Prepaid expenses and other current assets                             |                                 |        
|                                                                                                       | Accounts payable                                                      |                                 |        
|                                                                                                       | Accrued expenses                                                      |                                 |        
|                                                                                                       | Deferred revenue                                                      |                                 |        
|                                                                                                       |                                                                       |                                 |        
|Net cash used in operating activities                                                                  |                                                                       |                                 | (12,448
|                                                                                                       |                                                                       |                                 |        
|Net cash provided by (used in) discontinued operations                                                 |                                                                       |                                 | 184    
|                                                                                                       |                                                                       |                                 |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                  |                                                                       |                                 |        
|Acquisition of Wired, Inc., net of cash acquired                                                       |                                                                       |                                 |       
|Acquisition of 21st Century Media, LLC, net of cash acquired                                           |                                                                       |                                 |       
|Acquisition of J2 Digital Media, Inc., net of cash acquired                                            |                                                                       |                                 |       
|Acquisition of certain assets of Integrated Computing Engines, Inc.                                    |                                                                       |                                 |       
|Net purchases of equipment                                                                             |                                                                       |                                 | (1,081 
|Purchases of intangible assets                                                                         |                                                                       |                                 | (94    
|Decrease (increase) in other assets                                                                    |                                                                       |                                 |       
|Net proceeds from sales of marketable securities                                                       |                                                                       |                                 | 115    
|                                                                                                       |                                                                       |                                 |        
|Net cash (used in) provided by investing activities                                                    |                                                                       |                                 | (1,060 
|                                                                                                       |                                                                       |                                 |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                  |                                                                       |                                 |        
|Proceeds from issuance of common stock and warrants                                                    |                                                                       |                                 | 640    
|Payment on note payable                                                                                |                                                                       |                                 |       
|Purchase of treasury stock                                                                             |                                                                       |                                 |       
|                                                                                                       |                                                                       |                                 |        
|Net cash provided by (used in) financing activities                                                    |                                                                       |                                 | 640    
|                                                                                                       |                                                                       |                                 |        
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                |                                                                       |                                 | (112   
|                                                                                                       |                                                                       |                                 |        
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                       |                                                                       |                                 | (12,796
|CASH AND CASH EQUIVALENTS, beginning of period                                                         |                                                                       |                                 | 17,369 
|                                                                                                       |                                                                       |                                 |        
|CASH AND CASH EQUIVALENTS, end of period                                                               |                                                                       | $                               | 4,573  
|                                                                                                       |                                                                       |                                 |        

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

F-7

---

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

|                                                                                                                                        |  | Fiscal Years Ended November 30, |     
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----
|
|Cash received for income taxes                                                                                                          |  | $                               | (118
|                                                                                                                                        |  |                                 |     
|OTHER TRANSACTIONS NOT PROVIDING (USING) CASH:                                                                                          |  |                                 |     
|Change in value of available for sale securities                                                                                        |  | $                               | 10  
|                                                                                                                                        |  |                                 |     
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:                                                                                |  |                                 |     
|In connection with the acquisition of Wired, Inc., the following noncash transaction occurred:                                          |  |                                 |     
|Fair value of assets acquired                                                                                                           |  | $                               |    
|Cash paid for acquisition and acquisition costs                                                                                         |  |                                 |    
|                                                                                                                                        |  |                                 |     
|Note payable and liabilities assumed                                                                                                    |  | $                               |    
|                                                                                                                                        |  |                                 |     
|In connection with the acquisition of 21st Century Media, LLC, the following noncash transaction occurred:                              |  |                                 |     
|Fair value of assets acquired                                                                                                           |  | $                               |    
|Cash paid for acquisition and acquisition costs                                                                                         |  |                                 |    
|                                                                                                                                        |  |                                 |     
|Common stock issued and liabilities assumed                                                                                             |  | $                               |    
|                                                                                                                                        |  |                                 |     
|In connection with the acquisition of J2 Digital Media, Inc., the following noncash transaction occurred:                               |  |                                 |     
|Fair value of assets acquired                                                                                                           |  | $                               |    
|Cash paid for acquisition and acquisition costs                                                                                         |  |                                 |    
|                                                                                                                                        |  |                                 |     
|Liabilities assumed                                                                                                                     |  | $                               |    
|                                                                                                                                        |  |                                 |     
|In connection with the acquisition of certain assets of Integrated Computing Engines, Inc., the following noncash transaction occurred: |  |                                 |     
|Fair value of assets acquired                                                                                                           |  | $                               |    
|Cash paid for acquisition and acquisition costs                                                                                         |  |                                 |    
|                                                                                                                                        |  |                                 |     
|Common stock issued                                                                                                                     |  | $                               |    
|                                                                                                                                        |  |                                 |     

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

F-8

---



MEDIA 100 INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        NOVEMBER 30, 2002

1.    OPERATIONS

Media
100 Inc., and subsidiaries (the Company) design and sell advanced media systems for content design. In the case of the Company's newest and most advanced development,
844/X, we have integrated the previously separate workflows of real-time video editing and the compositing of layers of video, computer graphics, audio, and metadata. We
believe this workflow integration is a technical breakthrough that over time will attract existing and new video editing users who wish to be able to design more complex content that comprises dozens,
even hundreds of distinct content layers. The Company has developed new technologyintegrated software and hardware, including Application-Specific Integrated Circuits
("ASICs")to perform compositing in real time or at high speed to allow compositing operations to be performed within an editing environment and execute at high speed without
host-based rendering, which is slow and impedes productivity.

The
Company's products are personal computer-based workstations configured with proprietary software and hardware that we engineer and manufacture. In some cases, particularly with
844/X, we sell our products as "turnkey" systems, meaning we configure and ship the system to an end user, or reseller, with a host personal computer, our software and hardware, and disk storage; in
other cases, we deliver only our software and hardware ("unbundled"), typically to an independent value-added reseller that configures the turnkey system themselves on behalf of an end user.

On
October 5, 2001, the Company sold its streaming media software product line to Autodesk, Inc. for $16.0 million in cash of which $2.0 million was deposited
into an escrow account for a period of one year in case indemnification issues arise. These escrow funds were received by the Company on October 15, 2002. The net income (loss) from these
operations is included in the accompanying statements of operations under "discontinued operations" (see Note 13 of the Consolidated Financial Statements). The Company's streaming media
software product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin (see Note 3 of the Consolidated Financial Statements).

The
Company has incurred substantial operating losses during the current year and in four of the past five fiscal years, has experienced negative cash flow from ongoing operations during
fiscal 2002, and expects to incur operating losses and negative cash flows for at least the first half of fiscal 2003. The Company incurred a loss from continuing operations of approximately
$13.7 million for the year ended November 30, 2002 and as of November 30, 2002, the Company had an accumulated deficit of approximately $214.3 million.

The
Company has already taken a series of actions to reduce the negative cash flow it experienced in the past fiscal year including the termination of employees, reductions in the
salaries paid to executives and certain other employees, relocation of its facility to lower cost space and a reduction in the marketing expenses for existing products. However, these expense
reductions will not be enough to return the Company to profitability without revenue growth. The Company's current operating plan and cash flow projections assume a certain level of revenue growth and
operating expenses. If the Company fails to achieve its revenue plan then management will realign operating expenses consistent with the revised revenue expectations at that time in order to conserve
cash. The current cash flow projections also assume the Company will not require substantial cash for capital purchases or to fund substantial increases in inventory, accounts receivable or other
assets and the projections assume the Company will be able to continue to collect accounts receivables and will not incur substantial bad debts as a result of the failure of customers to pay.

F-9

---

The
Company may need to raise additional capital within the next twelve months through the sale of debt or equity securities to fund future operations, develop new and enhance existing
products and services, or acquire complementary products, businesses or technologies. At this time, the Company is in the process of seeking additional capital. However, additional capital may not be
available on terms favorable to the Company, or at all.

At
this time, management believes that the Company will be able to operate as a going concern for at least the next twelve months based upon the amount of its existing available capital,
its current operating plan and management's commitment to reduce operating expenses further if the Company does not achieve the revenues anticipated in its current operating plan.

2.    SUMMARY OF CRITICAL AND SIGNIFICANT ACCOUNTING POLICIES

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.

The
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
financial statements are prepared using discontinued operations accounting for the streaming media software product line. The Company's streaming media software product line
consisted of products acquired in the Terran acquisition and the merger with Digital Origin. Under discontinued operations accounting, the Company accrued estimates of expected liabilities related to
the discontinued operations through their eventual discharge, which in many cases, was expected to be several years in the future. Actual results of discontinued operations may be different as the
Company may settle certain obligations in amounts different from estimates due to changes in assumptions or settlement strategies.

(a)  Cash, Cash Equivalents and Available for Sale Securities

Cash equivalents are carried at cost, which approximates fair market value, and have original maturities of less than 90 days. Cash equivalents include
money market accounts and repurchase agreements with overnight maturities.

As
part of the McRoberts litigation discussed in Note 7, the Company has placed approximately $2.8 million in an escrow account while the case is on appeal. This amount is
included as restricted cash in the accompanying balance sheet at November 30, 2002. Approximately $388,000 of additional cash and cash equivalents was restricted under various letters of credit
at November 30, 2002.

On
October 5, 2001, the Company sold its streaming media software product line to Autodesk, Inc. for $16.0 million in cash, of which $2.0 million was
deposited into an escrow account for a period of one year in case indemnification issues arise. The amount is classified as due from escrow on the accompanying balance sheet at November 30,
2001. The escrow funds were received by the Company on October 15, 2002.

F-10

---

The
Company accounts for 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 securities are classified as available for sale.

Securities
held at November 30, 2002 and 2001 consist of the following (in thousands):

Maturity

2002

2001Investments available for sale:Equity Securities



$
44

$
Corporate Obligations

less than 1 year


82


Corporate Obligations

15 years





241Total Corporate Obligations




82


241Total marketable securities



$
126

$
241


Marketable
securities had a cost of $116 and $241 at November 30, 2002 and 2001, respectively, and a fair market value of $126 and $241 respectively. To adjust the carrying amount
of the November 30, 2002 marketable securities portfolio to market value, unrealized gains have been reflected as a component of accumulated other comprehensive income in the statement of
stockholders' equity pursuant to the provisions of SFAS No. 115.

(b)  Accumulated Other Comprehensive Income (Loss)

The Company records items of comprehensive income (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 income (loss) are as follows (in thousands):

Cumulative
Translation
Adjustment
(Note 2(h))

Unrealized
Gain (Loss) on
Available for
Sale Securities
(Note 2(a))

Accumulated
Other
Comprehensive
Income (Loss)November 30, 1999

$
5

$
(211
)
$
(206
)Current period change


(51
)

167


116November 30, 2000


(46
)

(44
)

(90
)Current period change


15


44


59November 30, 2001


(31
)




(31
)Current period change


(122
)

10


(112
)November 30, 2002

$
(153
)
$
10

$
(143
)


F-11

---

(c)  Inventories, net

Inventories, net at November 30, 2002 and 2001 are stated at the lower of first-in, first-out (FIFO) cost or market and consist of
the following (in thousands):

2002

2001Raw materials

$
846

$
811Work-in-process


403


161Finished goods


1,198


248$
2,447

$
1,220


Work-in-process
and finished goods inventories include material, labor and manufacturing overhead. Management performs periodic reviews of inventory and disposes
of items not required by their manufacturing plan. Our reserve for excess and obsolete inventory is primarily based upon forecasted demand for our products. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

(d)  Depreciation and Amortization

The Company provides for depreciation and amortization, using the straight-line method by charges to operating expenses in amounts that allocate the
cost of the property and equipment over the following estimated useful lives:

Description

Useful LivesMachinery and equipment

2 to 5 yearsPurchased software

2 to 5 yearsFurniture and fixtures

3 to 7 yearsLeasehold improvements

Estimated life of lease


(e)  Property and equipment, net

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

2002

2001Machinery and equipment

$
4,445

$
4,169Purchased software


1,677


1,666Furniture and fixtures


59


908Leasehold improvements


653


1,728$
6,834

$
8,471Accumulated depreciation and amortization


(4,964
)

(4,628
)$
1,870

$
3,843


F-12

---

In
connection with the signing of the lease amendment for the Company's principal facility in January 2002, the Company revised the estimated useful life of leasehold improvements
and certain furniture and fixtures that would not be moved to the new facility. The charge has been reflected as accelerated depreciation and amortization of fixed assets in the accompanying
Consolidated Statements of Operations for the year ended November 30, 2002. Amounts classified as leasehold improvements are additions related to the Company's new principal facility.

(f)    Intangible Assets

Intangible assets, net at November 30, 2002 and 2001 consist of the following (in thousands):

2002

2001Patents and trademarks

$
548

$
454Developed technology





1,900Goodwill





2,757$
548

$
5,111Accumulated amortization


(403
)

(3,231
)$
145

$
1,880


Patents
and trademarks are being amortized over 3 years. 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 lives. As of November 30, 2002, acquired technology and goodwill resulting from these
acquisitions have been fully amortized.

During
the fiscal year ended November 30, 2001, the Company recorded a write-off of $880,000 related to the acquisitions of 21st 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 year 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 Streamriver in the second quarter of fiscal 2001 and wrote off the remaining assets (see Note 2 (l) and Note 3 of the Consolidated Financial Statements).

During
the year ended November 30, 2002, the Company settled litigation brought against it by the former shareholders of Wired, Inc. ("Wired"), a Company acquired by the
Company in December 1999 (See Note 7 Contingencies). As part of the settlement, the Company assigned all rights to the Wired product line, intellectual property relating to Wired
products and on-hand inventory related to the Wired product line to the former shareholders. Wired agreed that no further action will be taken related to the lawsuit previously filed
against the Company as noted in Note 7 Contingencies. Wired granted the Company an irrevocable license to use the source code, technology, know how and intellectual property; provided, however,
the license does not include the right to sell Wired products or any equivalent products incorporating the source code, technology, know how and intellectual property. In addition, Wired agreed to pay
the Company a royalty of 5% of adjusted gross sales of the assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. Litigation settlement of $724,000 included in
the Consolidated Statements of Operations for the year ended November 30, 2002 represents the cost of inventory transferred, the net book value of remaining intangible assets associated with
the acquisition, legal fees
associated with the settlement, less a reimbursement related to the litigation from the Company's insurance carrier.

F-13

---

(g)  Long-Lived Assets

The Company follows the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of, and Accounting Principles Board (APB) Opinion No. 17,Intangible Assets.
SFAS No. 121 and APB Opinion No. 17 require that long-lived and intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Any write-downs are to be treated as permanent reductions in the carrying amount of the assets and are determined based on the fair value of the
assets. During the fourth quarter of fiscal 2001, we wrote off our investment of $1.0 million in Beatnik, an early stage company that was developing audio software solutions for mobile devices,
after management made a determination that this asset was no longer realizable. This determination was made due to a weakening market as well as weakened prospects for a liquidity event. The Company
believes that the carrying values of its long-lived and intangible assets are realizable as of November 30, 2002.

(h)  Foreign Currency

The financial statements of the Company's subsidiaries are translated from their functional currency into U.S. dollars using the current rate method in accordance
with SFAS No. 52,Foreign Currency Translation. Accordingly, assets and liabilities of the Company's foreign subsidiaries are translated at the
rates of exchange in effect at year-end. Revenues and expenses are translated using exchange rates in effect during the year. Gains and losses from foreign currency translation are
credited or charged to "Translation adjustment" included as a component of accumulated other comprehensive income in the statements of stockholders' equity. In connection with the implementation of
the fourth quarter restructuring plan in fiscal year 2001 (Note 2 (l)), the Company wrote off the remaining cumulative translation adjustment of $35,000 related to its subsidiary in Italy in
accordance with Emerging Issues Task Force (EITF) Issue No. 01-05,Application of FASB Statement No. 52 to an Investment Being Evaluated for
Impairment That Will Be Disposed Of. The Company recognized net foreign currency transaction gains (losses) of $482,000, ($69,000) and ($649,000) in 2002, 2001 and 2000,
respectively. Such amounts are included in other income (expense), net in the accompanying consolidated statements of operations.

(i)    Revenue Recognition and Allowance for Doubtful Accounts

The Company recognizes revenue in accordance with Statement of Position 97-2, 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 (SOP 98-9). Net sales are recognized following establishment of persuasive evidence of an arrangement, provided that the license fee is
fixed or 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. The Company provides for estimated returns 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. The Company maintains allowances for estimated losses resulting from the inability of our customers to make required payments, however, if the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

F-14

---

(j)    Net Income (Loss) Per Common Share

The Company computes net loss per share pursuant to SFAS No. 128,Earnings Per Share. In accordance with
SFAS No. 128, basic net loss per share is computed by dividing net income (loss) available for common shareholders by the weighted-average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed dividing the net income (loss) available for common stockholders by the weighted-average number of common shares outstanding, including potential common
shares from the assumed exercise of stock options and warrants outstanding during the period, so long as they are not antidilutive, using the treasury stock method.

F-15

---



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

Fiscal Years Ended
November 30,2002

2001

2000Basic weighted average shares of common stock outstanding

12,819

12,330

11,998Effect of potential common sharesstock options and warrants outstanding (unless antidilutive)





Diluted weighted average shares outstanding

12,819

12,330

11,998


Options
to purchase approximately 2,906,000, 3,110,000, and 3,885,000 weighted average shares of common stock have been excluded from the computation of diluted average shares
outstanding at November 30, 2002, 2001 and 2000, respectively, as the effect of their inclusion would have been antidilutive.

(k)    Capitalized Software Development Costs

The Company capitalizes certain computer software development costs. Capitalization of costs commences upon establishing technological feasibility. There were no
capitalized software development costs at November 30, 2002 and 2001. These costs are amortized on a straight-line basis over two years, which approximates the economic life of the
product. Amortization expense, included in cost of sales in the accompanying consolidated statements of operations, was approximately $29,000 for the year ended November 30, 2001.

(l)    Restructuring Expense

Severance-based restructuring charges are accrued based on specific plans for cost reduction that are established by management prior to the end of a quarter. The
severance accrual is tied to a plan that is generally specific by person or position that will be eliminated. Restructuring charges for estimated lease loss is recorded net of estimated sublease
income associated with the facility. These accruals may be higher or lower than actual costs incurred, which would result in an adjustment to restructuring charges. At this time, we do not expect any
additional adjustment to the current accrual to be material to the Company's operating results.

In
the fourth quarter of fiscal 2002, the Company recorded a credit to the restructuring charge in the amount of $107,000. The Company entered into an agreement to terminate a lease
associated with Streamriver resulting in savings of approximately $49,000 in lease expense. In addition, other costs associated with the fourth quarter of fiscal 2001 restructuring charge were less
than anticipated by $58,000.

In
the third quarter of fiscal 2002, the Company implemented a restructuring plan to better align its operating costs with our anticipated future revenue stream. The restructuring charge
of $298,000 related to the elimination of approximately 43 employees across the following functions: operations (7), technical support (6), research and development (19), selling and marketing (6),
and general and administrative (5). The total cash impact of the restructuring was approximately $298,000 all of which was paid by November 30, 2002.

F-15

---

In
the fourth 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 $662,000 related to the elimination of approximately 11 employees across the following functions: operations (2), selling and marketing (7), general and administrative (2). The charge also
includes estimated lease losses, net of sublease income, associated with Streamriver of approximately $230,000 and professional fees relating to the restructuring. At November 30, 2001,
$527,000 of the accrued restructuring charge
remained, of which approximately $218,000 was severance-related costs that were paid in fiscal 2002. The Company has recorded an adjustment of $49,000 to the restructuring charge during the year ended
November 30, 2002 reflecting the savings resulting from the termination of the lease. The total cash impact of the restructuring was approximately $613,000. At November 30, 2002,
approximately $14,000 of the restructuring charge remained and will be paid in the first fiscal quarter of 2003.

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), research and development (4), selling and marketing (16), and general and administrative
(8). The total cash impact of the restructuring was approximately $310,000, all of which was paid in 2001.

In
the second quarter of fiscal 2001, the Company implemented a restructuring plan to reorganize the organization and shutdown Streamriver. The restructuring charge of $568,000 related
to the elimination of approximately 17 employees across the following functions: research and development (5), selling and marketing (4), and Streamriver (8) and the write-off of
certain assets associated with Streamriver. The total cash impact of the restructuring was approximately $240,000, all of which was paid in 2001.

In
the fourth quarter of fiscal 2000, the Company implemented a restructuring plan to better align its organization with its corporate strategy and to reflect the consolidation of
several companies acquired in the past fiscal year. The restructuring charge for continuing operations of $236,000 related to the elimination of 3 employees across the following functions: selling and
marketing (2) and general and administrative (1). The balance of accrued restructuring at November 30, 2000 of $528,000 consisted of $236,000 for continuing operations and $292,000 for
discontinued operations. The severance related costs included in the restructuring were $236,000 for continuing operations and $237,000 for discontinued operations. The total cash impact of the
restructuring was approximately $528,000, all of which was paid by the end of the first quarter in fiscal 2001.

(m)    Financial Instruments and Concentration of Credit Risk and Significant Customers

SFAS No. 107,Disclosures about Fair Value of Financial Instruments, requires disclosure of the fair value
of financial instruments. The Company has estimated the fair value of instruments using available market information and appropriate valuation methodologies. The carrying value of cash, cash
equivalents, marketable securities, accounts receivable, and accounts payable approximate fair market value due to the short-term nature of these financial instruments. Securities
available for sale are recorded at fair value. The Company maintains its cash, cash equivalents and marketable securities with established financial institutions. The Company does not believe it has
accounts receivable collection risk in excess of existing reserves and no customer balance accounted for more than 10% of total accounts receivable at either November 30, 2002 or 2001. No
customer accounted for more than 10% of the Company's net sales for the fiscal years 2002, 2001 or 2000.

F-16

---

(n)    Single or Limited Source Suppliers

The Company currently 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. These components are purchased through purchase orders from time to time. The Company generally does not carry significant inventories of
these single or limited source components and has no guaranteed supply arrangements for them. Although there are a limited number of manufacturers of the key components, management believes that other
suppliers could provide similar components on comparable terms. An extended interruption in its source of supply, however, could cause a delay in manufacturing and a possible loss of sales, which
would adversely affect operating results.

(o)    Reclassifications

Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation.

(p)    New Accounting Standards Adopted During the Fiscal Year Ended November 30, 2002

Emerging Issues Task Force (EITF) Issue No. 01-09 ("Issue"), "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products,"issued during November 2001, codifies previously issued EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products."EITF Issue No. 01-09
addresses various aspects of the accounting for consideration given by a vendor to a customer or a reseller of the vendor's products. Consideration includes sales incentives such as discounts,
coupons, rebates, free products or services, slotting fees, coop advertising and buydowns. Pursuant to EITF 01-09, such consideration is presumed to be a reduction of revenue unless
certain criteria are met. The Issue should be applied no later than in annual or interim financial statements for periods beginning after December 15, 2001 and requires retroactive restatement.
The Company previously recorded coop advertising expenses and other sales incentives to resellers within selling and marketing expense in the statement of operations. The Company adopted EITF Issue
No. 01-09 in the first quarter ended February 28, 2002.As a result, the Company has reclassified $26,000 as a reduction to
product sales for the year ended November 30, 2002. Additionally, the Company reclassified $351,000 and $261,000 as reductions of product sales that were previously classified as selling and
marketing expenses for the years ended November 30, 2001 and 2000, respectively.

In
September 2000, the EITF issued 00-10"Accounting for Shipping and Handling Fees and Costs,"relating to the
accounting for reimbursement for shipping and handling fees and related costs by customers. In accordance with EITF 00-10, reimbursements received for shipping and handling fees and costs
incurred should be characterized as revenue in the statement of operations. The Company has
historically accounted for reimbursement received for shipping and handling fees as a reduction of cost of sales in the statement of operations to offset the costs incurred. The Company adopted EITF
00-10 in the first quarter ended February 28, 2002.As a result, the Company has recorded $36,000 as product sales for the year ended
November 30, 2002. Additionally, the Company reclassified $118,000 and $171,000 as product sales that were previously classified as reductions to cost of sales for the years ended
November 30, 2001and 2000, respectively.

(q)    Other New Accounting Standards

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

F-17

---

assets previously acquired. Under this statement goodwill as well as certain other intangible assets, determined to have an indefinite 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. The Company does not believe that the adoption of this standard will have a
material impact on the Company's financial statements.

In
June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain
obligation of lessees. This statement amends FASB Statement No. 19 and is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not
believe that the adoption of this standard will have a material impact on the Company's financial statements.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 further refines the requirements of SFAS No. 121 that companies
(1) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows and (2) measure an
impairment loss as the difference between the carrying amount and fair value of the asset. In addition, SFAS No. 144 provides guidance on accounting and disclosure issues surrounding
long-lived assets to be disposed of by sale. The Company will be required to adopt SFAS 144 no later than the fiscal year beginning on December 1, 2002. The Company does not
believe that the adoption of this standard will have a material impact on the Company's financial statements.

In
July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the accounting for costs associated with restructuring
activities and other disposal activities. This statement supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and
Activity. This statement will be effective for disposal activities
initiated after December 31, 2002, and the Company will adopt this statement for any costs relating to restructuring or disposal activities initiated after the effective date.

On
December 31, 2002, SFAS No. 148,Accounting for Stock-Based CompensationTransition and Disclosurewas
issued. SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition to the
fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim
financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to account for their employee stock-based awards using the fair value method. However, the disclosure
provisions are required for all companies with stock-based employee compensation, regardless of whether they utilize the fair method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25,Accounting for Stock Issued to Employees. SFAS No. 148's amendment of the transition and
annual disclosure provisions of SFAS No. 123 are effective for fiscal years ending after December 15, 2002. The Company does not believe that the adoption of this standard will have a
material impact on the Company's financial statements.

F-18

---

3.    ACQUISITIONS

Wired, Inc.

In December 1999, the Company acquired Wired, Inc. (Wired). In connection with the acquisition, the Company paid $3,000,000 in cash for all
outstanding shares of Wired common stock. The first payment in the amount of $1,454,000 was paid upon completion of the acquisition and the remaining $1,487,000 was paid in December 2000.
Pursuant to an earn-out provision, the purchase price could increase depending on Wired's net sales and operating income over the next two years. Any contingent payments based on meeting
the earn-out conditions would be considered additional goodwill. The Company has treated the acquisition as a purchase for accounting purposes; accordingly, the Company has recorded the
results of Wired's operations since the acquisition date. The Company has not included pro forma results, as they are deemed to be immaterial.

The
aggregate price consisted of the following (in thousands):

Description

AmountCash

$
1,454Liabilities assumed


298Note payable


1,395Acquisition costs


33Total purchase prices

$
3,180


The
purchase price has been allocated to the acquired assets as follows (in thousands):

Current assets

$
239Equipment and other assets


38Developed technology


900In-process research and development


470Goodwill


1,533$
3,180


Amounts
allocated to tangible and intangible assets, including acquired in-process research and development, were based on the results of an independent appraisal. The amount
allocated to developed technology is being amortized on a straight-line basis over an expected useful life of three years. In connection with the acquisition, the Company allocated
$470,000 of the purchase price to in-process research and development projects. These allocations represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and
the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date.

The
Company allocated values to the in-process research and development (R&D) based on an in-depth assessment of the R&D projects. The value assigned to these
assets was limited to significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the
introduction of the acquired next-generation technologies.

F-19

---

The
value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially
viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process
research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the
Company and its competitors.

On
May 9, 2001 a lawsuit was filed against the Company by the former shareholders of Wired Inc. During the year ended November 30, 2002, the Company settled the
Wired litigation. As part of the settlement, the Company assigned all rights to the Wired product line, intellectual property relating to Wired products and on-hand inventory related to
the Wired product line to the former shareholders. Wired agreed that no further action will be taken related to the lawsuit previously filed against the Company. Wired granted the Company an
irrevocable license to use the source code, technology, know how and intellectual property; provided, however, the license does not include the right to sell Wired products or any equivalent products
incorporating the source code, technology, know how and intellectual property. In addition, Wired promised to pay the Company a royalty of 5% of adjusted gross sales of the assigned products, not to
exceed $1.2 million, plus the cost of the inventory assigned. Litigation settlement of $724,000 included in the Consolidated Statements of Operations for the year ended November 30, 2002
represents the cost of inventory transferred, the net book value of remaining intangible assets associated with the acquisition, legal fees associated with the settlement, less a reimbursement related
to the litigation from the Company's insurance carrier.

21st Century Media, LLC.

In April 2000, the Company acquired 21st Century Media, LLC (21st Century). In connection with the acquisition, the Company
paid $449,000 in cash and issued 30,000 shares of common stock for all outstanding shares of 21st Century common stock. Pursuant to an earn-out provision, the purchase price
could increase depending on 21st Century's net sales and operating income over the next two years. Any contingent payments based on meeting the earn-out conditions would be
considered additional goodwill. The Company has treated the acquisition as a purchase for accounting purposes; accordingly, the Company has recorded the results of operations of 21st
Century's operations since the acquisition date. The Company has not included pro forma results, as they are deemed to be immaterial.

The
aggregate purchase price consisted of the following (in thousands):

Description

AmountCash

$
449Liabilities assumed


11Common stock


638Acquisition costs


32Total purchase price

$
1,130


F-20

---

The
purchase price has been allocated to the acquired assets as follows (in thousands):

Current assets

$
35Equipment and other assets


100Goodwill


995$
1,130


During
the fiscal year ended November 30, 2001, the Company recorded a write-off of $719,000 related to the acquisition of 21st Century. This company,
along with J2 Digital Media, Inc., was combined to
form Streamriver, which was launched in June 2000. During the first quarter of fiscal year 2001, the goodwill from this acquisition 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 Streamriver in the second quarter of fiscal 2001 and
wrote off the remaining assets (see Note 2 (f) and (l) of the Consolidated Financial Statements).

J2 Digital Media, Inc.

In June 2000, the Company acquired substantially all of the assets of J2 Digital Media, Inc. (J2 Digital Media), a New York-based
encoding, hosting and streaming media services provider for $152,000 in cash. The Company has treated the acquisition as a purchase for accounting purposes; accordingly, the Company has recorded the
results of operations of J2's operations since the acquisition date. The Company has not included pro forma results, as they are deemed to be immaterial.

The
aggregate purchase price consisted of the following (in thousands):

Description

AmountCash

$
150Liabilities assumed


128Acquisition costs


2Total purchase price

$
280


The
purchase price has been allocated to the acquired assets as follows (in thousands):

Current assets

$
44Equipment and other assets


22Goodwill


214$
280


During
the fiscal year ended November 30, 2001, the Company recorded a write-off of $161,000 related to the acquisition of J2 Digital Media. This company, along with
21st Century Media, was combined to form Streamriver, which was launched in June 2000. During the first quarter of fiscal year 2001, the goodwill from this acquisition 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
Streamriver in the second quarter of fiscal 2001 and wrote off the remaining assets (see Note 2 (f) and (l) of the Consolidated Financial Statements).

F-21

---

Digital Origin

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 discussed in Note 1, on October 5, 2001,
the Company sold the streaming media software product line including the operations of Digital Origin. Accordingly, the operating results of Digital Origin for all periods presented are included in
discontinued operations. The results of operations for Digital Origin for the two months ended November 30, 1999 have been excluded from the statement of operations and have been recorded
directly to accumulated deficit as permitted by APB No.16. Net cash flows for Digital Origin for the two months ended November 30, 1999 have been included in the statement of cash flows in the
net cash provided by (used in) discontinued operations line item. Also, Digital Origin received proceeds of $40,000 from the exercise of stock options in the two months ended November 30, 1999,
which are presented as a separate line item in the accompanying statement of stockholders' equity.

Results
for Digital Origin for the two-month period ended November 30, 1999, which have been recorded directly to accumulated deficit, were as follows (in thousands):

Two months ended
November 30, 1999Sales

$
1,953Cost of sales


719Gross profit


1,234Operating expenses


1,695Operating loss


(461
)Other expense, net


(41
)Net loss

$
(502
)


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 have been expensed in the quarter ended May 31, 2000, upon consummation of the Digital Origin merger. These expenses are included as part of the loss on discontinued
operations for the year ended November 30, 2000.

On
October 5, 2001, the Company sold its streaming media software product line to Autodesk, Inc. for $16.0 million in cash. The net income (loss) from these
operations is included in the accompanying statements of operations under "discontinued operations" (see Note 13 of the Consolidated Financial Statements). The Company's streaming media
software product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin.

F-22

---



Integrated Computing Engines

In August 2000, the Company acquired certain strategic technology assets and intellectual properties from Integrated Computing Engines, Inc. (ICE).
ICE was a leading provider of acceleration solutions for streaming media from the desktop. In connection with the acquisition, the Company paid approximately $1,797,000 in cash and issued 61,577
shares of the Company's common stock for certain assets of ICE. The Company has treated the acquisition as a purchase for accounting purposes; accordingly, the Company has recorded the results of
operations of ICE's operations since the acquisition date. The Company has not included pro forma results, as they are deemed to be immaterial.

The
aggregate purchase price consisted of the following (in thousands):

Description

AmountCash

$
1,735Common stock


978Acquisition costs


62Total purchase price

$
2,775


The
purchase price has been allocated to the acquired assets as follows (in thousands):

Current assets

$
503Goodwill and developed technology


2,272$
2,775


Amounts
allocated to tangible and intangible assets were based on results of an independent appraisal. The amount allocated to developed technology is being amortized on a
straight-line basis over an expected useful life of two years.

Terran Interactive, Inc.

On June 28, 1999, the Company acquired Terran Interactive, Inc. (Terran) of Los Gatos, CA, a leading supplier of software tools for high quality
Internet and DVD video. In connection with the acquisition, the Company paid $1,850,000 in cash for all outstanding shares of Terran's common stock. The acquisition was accounted for under the
purchase method of accounting. Accordingly, the results of Terran's operations and the fair market value of the acquired assets and assumed liabilities have been included in the financial statements
of the Company as of the acquisition date. During fiscal 2000, the Company paid an additional $3,532,000 resulting from Terran exceeding certain financial thresholds in the purchase agreement. These
payments have been considered additional goodwill and are being amortized over the appropriate remaining useful life.

F-23

---

The
aggregate purchase price, including the earn-out payments, consisted of the following (in thousands):

Description

AmountCash

$
5,382Liabilities assumed


668Acquisition costs


40Total purchase price

$
6,090


The
purchase price has been allocated to the acquired assets and assumed liabilities as follows (in thousands):

Current assets

$
278Equipment and other assets


189Developed technology


1,560In-process research and development


430Goodwill


3,633$
6,090


Amounts
allocated to tangible and intangible assets, including acquired in-process research and development, were based on results of an independent appraisal. The amount
allocated to developed technology is being amortized on a straight-line basis over an expected useful life of three years. In connection with the acquisition, the Company allocated
$430,000 of the purchase price to in-process research and development projects. This allocation represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date.

The
Company allocated values to the in-process research and development based on an in-depth assessment of the R&D projects. The values assigned to these assets
were limited to significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction
of the acquired next-generation technologies.

The
value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially
viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process
research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the
Company and its competitors.

On
October 5, 2001, the Company sold its streaming media software product line to Autodesk, Inc. for $16.0 million in cash. The net income (loss) from these
operations is included in the accompanying statements of operations under "discontinued operations" (see Note 13 of the Consolidated Financial Statements. The Company's streaming media software
product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin.

F-24

---

4.    STOCKHOLDERS' EQUITY

In 2002, the Board of Directors of the Company adopted the 2002 Stock Option and Incentive Plan (the 2002 Plan). The number of shares of common stock reserved for
issuance under the 2002 Plan is 950,000. Options granted pursuant to the 2002 Plan may, at the discretion of the Board, be incentive stock options or non-qualified stock options as defined
by the Internal Revenue Code. Subject to the provisions of the 2002 Plan, options granted are at a price as specified by the Board. The Board has, to date, issued options under the 2002 Plan at not
less than 100% of fair market value. The options become exercisable at a rate of 25% per year beginning one year from the date of grant unless otherwise specified by the Board. The Board will
determine when the options will expire, but in no event will the option period exceed ten years. No options may be granted under the 2002 Plan on or after January 23, 2012.

In
October 2000, the Board of Directors approved a non-qualified employee stock plan for the issuance of 500,000 shares of common stock.

In
1992, the Company adopted the 1992 Key Employee Incentive Plan (the 1992 Plan). The number of shares of common stock reserved for issuance under the 1992 Plan is 4,200,000. Options
granted pursuant to the 1992 Plan may, at the discretion of the Board, be incentive stock options as defined by the Internal Revenue Code. Subject to the provisions of the 1992 Plan, options granted
are at a price as specified by the Board. The Board has, to date, issued options under the 1992 Plan at not less than 100% of fair market value. The options become exercisable at a rate of 25% per
year beginning one year from the date of grant unless otherwise specified by the Board and in no event will the option period exceed ten years. No options may be granted under the 1992 Plan on or
after February 28, 2002.

F-25

---

Information
concerning stock options for each of the three years ended November 30, 2002 follows:

|                                         |                  | Number of
Options |            | Option
Price Ranges |             | Weighted Average
Price per Share
|---------------------------------------- | ---------------- | ----------------- | ---------- | ------------------- | ----------- | --------------------------------
|Outstanding at November 30, 1999         |                  | 2,345,401         |            | $                   | 1.58203.39 |                                 
|                                         | Granted          |                   | 2,818,374  |                     |             | 8.1936.24                      
|                                         | Exercised        |                   | (600,982   | )                   |             | 1.5823.26                      
|                                         | Expired/canceled |                   | (677,802   | )                   |             | 1.58203.39                     
|                                         |                  |                   |            |                     |             |                                 
|Outstanding at November 30, 2000         |                  | 3,884,991         |            | $                   | 1.5836.00  |                                 
|                                         | Granted          |                   | 3,130,396  |                     |             | 0.8520.44                      
|                                         | Exercised        |                   | (3,300     | )                   |             | 1.454.25                       
|                                         | Expired/canceled |                   | (3,901,595 | )                   |             | 1.0736.00                      
|                                         |                  |                   |            |                     |             |                                 
|Outstanding at November 30, 2001         |                  | 3,110,492         |            | $                   | 0.8526.77  |                                 
|                                         | Granted          |                   | 1,075,780  |                     |             | 0.523.50                       
|                                         | Exercised        |                   | (183,890   | )                   |             | 1.072.25                       
|                                         | Expired/canceled |                   | (1,096,794 | )                   |             | 0.8820.44                      
|                                         |                  |                   |            |                     |             |                                 
|Outstanding at November 30, 2002         |                  | 2,905,588         |            | $                   | 0.5226.77  |                                 
|                                         |                  |                   |            |                     |             |                                 
|Exercisable at November 30, 2002         |                  | 1,209,796         |            | $                   | 0.5226.77  |                                 
|                                         |                  |                   |            |                     |             |                                 
|Exercisable at November 30, 2001         |                  | 1,566,841         |            | $                   | 0.8526.77  |                                 
|                                         |                  |                   |            |                     |             |                                 
|Exercisable at November 30, 2000         |                  | 951,458           |            | $                   | 1.5836.00  |                                 
|                                         |                  |                   |            |                     |             |                                 
|Available for grant at November 30, 2002 |                  | 934,987           |            |                     |             |                                 
|                                         |                  |                   |            |                     |             |                                 

The
weighted average fair market value of the options as of the date of grant for the periods ended November 30, 2002, 2001 and 2000 is $2.21, $1.79 and $15.83, respectively.

The
Company also issues shares of common stock to employees pursuant to the terms of the 1986 Employee Stock Purchase Plan (the Plan). The Company has reserved 1,500,000 shares of common
stock for issuance under the Plan, as amended. Effective July 1, 1995, employees who have worked for the Company for at least one month are eligible to participate in the Plan. The Plan allows
participants to purchase common stock of the Company at 85% of the fair market value as defined. Under the Plan, the Company issued 218,428, 306,957 and 71,727 shares in fiscal years 2002, 2001 and
2000, respectively. At November 30, 2002, there were 197,082 shares available for issuance under the Plan.

In
October 1995, the FASB issued SFAS No. 123,Accounting for Stock-Based Compensation, which requires the measurement of
the fair market value of stock options or warrants to be included in the statement of operations or disclosed in the notes to the financial statements. As permitted by SFAS No. 123, the Company
will continue to account for stock-based compensation for employees under APB No. 25Accounting for Stock Based Compensationand has elected the
disclosure-only alternative under SFAS No. 123 for options granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.

F-26

---

The
weighted average assumptions are as follows:

Fiscal Years Ended November 30,2002

2001

2000Risk-free interest rate

2.94%4.74%

3.91%5.17%

5.7%6.7%Expected dividend yield





Expected lives

6 years

6 years

46 yearsExpected volatility

112.1%

118.8%

156.3%


The
table below presents pro forma net loss and loss per share had compensation cost for the Company's stock-based employee compensation plans been determined using the provisions of
SFAS No. 123 (in thousands, except per share amounts).

Fiscal Years Ended November 30,2002

2001

2000Net loss:As reported

$
(13,483
)
$
(11,456
)
$
(10,381
)Pro forma


(14,903
)

(6,074
)

(20,528
)Net loss per share:Basic:As reported

$
(1.05
)
$
(0.93
)
$
(0.87
)Pro forma


(1.16
)

(0.49
)

(1.71
)Diluted:As reported

$
(1.05
)
$
(0.93
)
$
(0.87
)Pro forma


(1.16
)

(0.49
)

(1.71
)


The
following table summarizes information about options outstanding at November 30, 2002:

Options Outstanding

Options ExercisableRange of
Exercise Price

Number
Outstanding

Weighted
Average
Remaining
Contractual Life

Weighted
Average
Exercise Price
per Share

Number
Outstanding

Weighted
Average
Exercise Price
per Share$0.52$1.02

154,425

5.07

$
0.89

30,063

$
0.951.202.56

2,206,237

4.86


1.66

795,705


1.452.755.56

430,920

2.53


3.84

307,799


4.106.0810.29

64,293

2.59


7.19

48,009


7.21$16.25$26.77

49,713

3.52


20.44

28,220


20.452,905,588



$
2.39

1,209,796

$
2.79


(b)    Stock option replacement program

In January 2001, the Company offered employees the opportunity to participate in an option-replacement program, pursuant to which each employee could elect
to replace his or her then outstanding options with exercise prices ranging from $2.06 to $36.00 per share with new options on a one-for-one basis. The new options were granted
six months and one day following the cancellation of the existing options (July 2001) and the per share exercise price of the replacement options was $1.45 which was the

F-27

---

fair value of the Company's stock on the date of grant. The replacement options are exercisable as follows: 25% of the replacement options in July 2001 will be fully vested and immediately
exercisable. After July 2001, an additional 6.25% of the replacement options will vest every three months over the next three years and all replacement options expire ten years after the new
grant date. An aggregate of 2,237,973 options was cancelled in January 2001 in connection with this program. The Company issued approximately 2,189,000 options on July 20, 2001 related
to this repricing. Since the exercise price was equal to the fair market value of the Company's common stock in July 2001, and the Company met the six-month waiting period specified
in FASB Interpretation No. 44, the Company did not record any compensation cost in connection with this program.

5.    RETIREMENT PLAN

In November 1985, the Company adopted an employee savings plan (the Savings Plan) in compliance with Section 401(k) of the Internal Revenue Code.
Effective April 1, 1995, the Savings Plan provides for annual Company contributions of up to 15% of the first 6% of total compensation per participant. Effective January 1, 1998, these
contributions vest in full after a three-year period of service. Effective January 1, 1999, the Savings Plan was amended to provide for annual contributions of up to 40% of the
first 6% of total compensation, with a maximum matching contribution of $3,000 annually. The Company's contributions to the Savings Plan were $135,000, $221,000 and $231,000 in 2002, 2001 and 2000,
respectively.

As
part of the merger with Digital Origin, the Company had a separate employee savings plan, in which all eligible former Digital Origin employees could defer up to 15% of their
pre-tax compensation, but not more than statutory limits. Digital Origin, and subsequently the Company, was allowed to make contributions as defined in the 401(k) Plan and as approved by
the Board of Directors. There were no contributions to this plan in 2002 because there are no active participants due to the sale of the Company's software product line in 2001. Contributions to the
Savings Plan were $44,000 and $65,000 in 2001 and 2000, respectively. Digital Origin matched a specified portion of the employee contributions up to a maximum of $1,000 per employee per year. The
Company expects to terminate this employee savings plan sometime in fiscal 2003 because there are currently no active participants remaining in the plan due to the sale of the Company's software
product line to Autodesk on October 5, 2001.

The
Company does not provide postretirement benefits to any employees as defined under SFAS No. 106,Employers' Accounting for Postretirement Benefits
Other Than Pensions.

6.    BANK FACILITIES

The Company renewed an irrevocable standby letter of credit agreement for a sum not to exceed $137,945 effective April 8, 2002. This facility was entered
into in connection with the lease of the Company's new office and manufacturing facility (see Note 7(a) of the Consolidated Financial Statements). The letter of credit will expire
October 1, 2005.

On
April 1, 2002, the Company opened an irrevocable standby letter of credit agreement on behalf of a vendor for $250,000 with an expiration date of September 25, 2002. The
Company renewed the irrevocable standby letter of credit which now expires on March 25, 2003.

F-28

---

7.    COMMITMENTS AND CONTINGENCIES

In
January 2002, the Company signed an amendment to its lease allowing the Company to occupy approximately 45,534 square feet in a new facility in Marlborough, Massachusetts owned
by the same landlord. Under the amendment, the Company occupied its former space through March 31, 2002. The lease for the new facility is for a term of forty (40) months with an annual
base rent of approximately $444,000. Total rent expense including operating expenses pursuant to the lease agreement charged to operations related to the Company's new Marlborough facility for fiscal
year 2002 was $302,000. The Company's former principal executive, engineering, manufacturing and sales operations occupied approximately 56,500 square feet in a leased facility located in Marlborough,
Massachusetts. The lease for this facility terminated on March 31, 2002. Total rent expense including operating expenses pursuant to the lease agreement charged to operations with respect to
the Company's former Marlborough facility for fiscal years 2002, 2001 and 2000 was $550,000, $1,049,000 and $1,034,000. Rent expense including operating expenses pursuant to all lease agreements
charged to operations for fiscal years 2002, 2001 and 2000 was $1,082,000, $1,321,000 and $1,283,000, respectively.

In
addition, in connection with the signing of the lease amendment, the Company revised the estimated useful life of leasehold improvements and certain furniture and fixtures that would
not be moved to the new facility. The remaining net book value of the leasehold improvements and furniture and fixtures of approximately $1,288,000 was depreciated during the first two quarters of
fiscal 2002.

As
part of the acquisition of Terran in June 1999, the Company occupied additional office space located at 15951 Los Gatos Boulevard, Los Gatos, California. All of the Company's
operations relating to the streaming media software product line division occupied this space. Effective October 28, 2002, the Company entered into an agreement with the landlord to terminate
the remaining term of the lease for one payment in the amount of approximately $120,000. The Company had recorded a charge to discontinued operations, net of estimated sublease income, of $348,000 for
this lease during the year ended November 30, 2001. The Company recorded $80,000 as income from discontinued operations during the year ended November 30, 2002 reflecting the savings
resulting from the termination of the lease.

As
part of the shutdown of Streamriver during the year ended November 30, 2001, the Company recorded, as a restructuring charge, a lease loss, net of estimated sublease income, of
$230,000 associated with the lease for the facility in North Hollywood, California. Effective October 1, 2002, the Company entered into an agreement with the landlord to terminate the remaining
term of the lease for one payment in the amount of approximately $47,000. The Company has recorded an adjustment of $49,000 to the restructuring charge during the year ended November 30, 2002
reflecting the savings resulting from the termination of the lease.

The
Company also occupies sales and customer support facilities in or near Paris, France; Bracknell, England; and Munich, Germany.

F-29

---



Future minimum lease payments, excluding operating costs, under all operating leases are as follows (in thousands):

Fiscal Years Ending November 30,

Amount2003

$
6802004


5622005


313Total minimum lease payments

$
1,555


(b)    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 is vigorously defending this 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. That appeal has now been fully briefed and is awaiting argument and decision. The
litigation remains dismissed pending the outcome of the consolidated reissue/reexamination proceedings, and there can be no assurance that the Company will prevail in the appeal by Avid or that the
expense or other effects of the appeal, whether or not the Company prevails, will not have a material adverse effect on the Company's business, operating results and financial condition.

(iii) On
January 13, 1999 and January 28, 1999, Digital Origin, a subsidiary of the Company, 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
lawsuits were consolidated and the consolidated action was dismissed by the Federal District Court for the Northern District of California without leave to amend. Plaintiffs appealed that ruling to
the Ninth Circuit Court of Appeals. In January 2003, the Ninth Circuit Court of Appeals dismissed plaintiffs' claims with prejudice.

(iv) On
October 12, 1999, a lawsuit was filed against the Company by McRoberts Software, Inc. ("MSI") in the United States District Court for the Southern District
of Indiana. The complaint alleges

F-30

---

copyright infringement, breach of contract, and trade secret misappropriation. The complaint includes requests for unspecified monetary damages and enhanced damages, interest, costs and fees. An
unfavorable verdict was filed on February 25, 2002 against the Company in the amount of $2.5 million. The Company and MSI filed post-trial motions. Those motions have been
ruled upon with the trial court reducing the total amount awarded by the jury but assessing prejudgment interest and attorney's fees. The Company appealed the entire judgment, which approximates
$2.8 million, and a hearing before the United States Court of Appeals for the Seventh Circuit occurred on December 12, 2002. The appeal remains outstanding and the Company is awaiting
the verdict. The entire amount of the award has been placed in an escrow account pending judgment from the appellate court and approximately $2.8 million is included as restricted cash in the
accompanying balance sheet at November 20, 2002.

The
Company had recorded a liability in the amount of $2.6 million that included estimated legal fees associated with the litigation at November 30, 2001 and the entire
amount was expensed in the three months ended November 30, 2001. During the year ended November 30, 2002, the Company recorded an additional liability and expense of $397,000 for the
adjusted judgment which included prejudgment interest and attorney's fees as well as estimated legal fees associated with the appeal.

(v) On
May 9, 2001, a lawsuit was filed against the Company by the former shareholders of Wired, a company acquired by the Company in December 1999. The complaint
alleged 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 included requests for compensatory and punitive damages, injunctive relief, and fees. No specific
amount or punitive damages were alleged, other than compensatory damages in an amount to be proven at trial, but not less than $25,000, the jurisdictional minimum for the court. The Company filed a
demurrer challenging the legal sufficiency of the causes of action alleged. A hearing on that demurrer occurred on November 6, 2001 and the Court sustained the demurrer to one cause of action,
for negligent false promise.

During
the year ended November 30, 2002, the Company settled the Wired litigation. As part of the settlement, the Company assigned all rights to the Wired product line,
intellectual property relating to Wired products and on-hand inventory related to the Wired product line to the former shareholders. Wired agreed that no further action will be taken
related to the lawsuit previously filed against the Company. Wired granted the Company an irrevocable license to use the source code, technology, know how and intellectual property; provided, however,
the license does not include the right to sell Wired products or any equivalent products incorporating the source code, technology, know how and intellectual property. In addition, Wired promised to
pay the Company a royalty of 5% of adjusted gross sales of the assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. Litigation settlement of $724,000 included
in the Consolidated Statements of Operations for the fiscal year 2002 represents the cost of inventory transferred, the net book value of remaining intangible assets associated with the acquisition,
legal fees associated with the settlement, less a reimbursement related to the litigation from the Company's insurance carrier.

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

F-31

---

8.    ACCRUED EXPENSES

Accrued expenses at November 30, 2002 and 2001 consist of the following (in thousands):

2002

2001Payroll and payroll-related taxes

$
838

$
942Accrued warranty


525


561Accrued restructuring


14


527Accrued inventory


241


323Accrued selling and marketing


205


361Accrued legal


3,015


3,067Accrued other


750


2,219$
5,588

$
8,000


9.    INCOME TAXES

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109,Accounting for Income
Taxes.The components of the net deferred tax asset recognized in the accompanying consolidated balance sheets are as follows (in thousands):

As of November 30,2002

2001Net operating loss carryforwards

$
43,776

$
32,625Other temporary differences, principally nondeductible accruals


3,328


5,621Research and development credit carryforwards


6,592


6,292Subtotal


53,696


44,538Valuation allowance


(53,696
)

(44,538
)Net deferred tax assets

$


$



Due
to the uncertainty surrounding the realization of the benefits of its favorable tax attributes in future income tax returns, the Company has placed a valuation allowance against its
deferred tax assets, except for previously paid taxes that the Company believes are refundable. These deferred tax assets are included as a component of other assets, net on the accompanying
consolidated balance sheets.

Net
operating loss and tax credit carryforwards expire at various dates through 2021. The Tax Reform Act of 1986 contains provisions that may limit the net operating loss and tax credit
carryforwards available to be used in any given year in the event of significant changes in ownership, as defined.

F-32

---

The
income (loss) from continuing operations before tax provision in the accompanying consolidated statements of operations consisted of the following (in thousands):

Fiscal Years Ended November 30,2002

2001

2000United States

$
(13,822
)
$
(20,211
)
$
(7,227
)Foreign


(106
)

(625
)

1,692$
(13,928
)
$
(20,836
)
$
(5,535
)


The
income tax benefit related to continuing operations shown in the accompanying consolidated statements of operations consist of the following (in thousands):

Fiscal Years Ended November 30,2002

2001

2000Federal:Current

$


$


$
Deferred


(200
)

(4,100
)




State:Current








Deferred


(26
)

(600
)

Foreign


(35
)




$
(261
)
$
(4,700
)
$



The
effective income tax rate varies from the amount computed using the statutory U.S. income tax rate as follows:

Fiscal Years Ended November 30,2002

2001

2000Tax provision (benefit) at statutory rate

(34.0
)%
(34.0
)%
(34.0
)%State taxes

(6.0
)
(6.0
)
(6.0
)Change in valuation allowance

38.1

17.4

40.0Tax benefit

(1.9
)%
(22.6
)%

%


F-33

---



10.    VALUATION AND QUALIFYING ACCOUNTS

The following table sets forth activity in the Company's accounts receivable reserve account (in thousands):

Balance at
Beginning of
Fiscal Year

Charges to
Cost and
Expense

Deductions

Balance at
End of
Fiscal YearFor the Fiscal Year Ended November 30, 2000

$
402

$
266

$
334

$
334For the Fiscal Year Ended November 30, 2001

$
334

$
487

$
309

$
512For the Fiscal Year Ended November 30, 2002

$
512

$
219

$
322

$
409


11.    SELECTED QUARTERLY INFORMATION (UNAUDITED)

|                                           |                         | Fiscal 2002 |       
|------------------------------------------ | ----------------------- | ----------- | ------
|
|
|Net sales                                  |                         | $           | 4,498 
|                                           |                         |             |       
|Gross profit                               |                         | $           | 2,012 
|                                           |                         |             |       
|Loss from continuing operations            |                         | $           | (5,863
|                                           |                         |             |       
|Income from discontinued operations        |                         | $           |      
|                                           |                         |             |       
|Net loss                                   |                         | $           | (5,863
|                                           |                         |             |       
|Income (loss) per sharebasic              |                         |             |       
|                                           | Continuing operations   |             | $     
|                                           |                         |             |       
|                                           | Discontinued operations |             | $     
|                                           |                         |             |       
|                                           | Total                   |             | $     
|                                           |                         |             |       
|Income (loss) per sharediluted            |                         |             |       
|                                           | Continuing operations   |             | $     
|                                           |                         |             |       
|                                           | Discontinued operations |             | $     
|                                           |                         |             |       
|                                           | Total                   |             | $     
|                                           |                         |             |       
|Sharesnet income (loss) per sharebasic   |                         |             | 12,636
|                                           |                         |             |       
|Sharesnet income (loss) per sharediluted |                         |             | 12,636
|                                           |                         |             |       

F-34

---

|                                           |                         | Fiscal 2001 |       
|------------------------------------------ | ----------------------- | ----------- | ------
|
|
|Net sales                                  |                         | $           | 9,595 
|                                           |                         |             |       
|Gross profit                               |                         | $           | 5,287 
|                                           |                         |             |       
|Loss from continuing operations            |                         | $           | (3,321
|                                           |                         |             |       
|Income (loss) from discontinued operations |                         | $           | (675  
|                                           |                         |             |       
|Net income (loss)                          |                         | $           | (3,996
|                                           |                         |             |       
|Income (loss) per sharebasic              |                         |             |       
|                                           | Continuing operations   |             | $     
|                                           |                         |             |       
|                                           | Discontinued operations |             | $     
|                                           |                         |             |       
|                                           | Total                   |             | $     
|                                           |                         |             |       
|Income (loss) per sharediluted            |                         |             |       
|                                           | Continuing operations   |             | $     
|                                           |                         |             |       
|                                           | Discontinued operations |             | $     
|                                           |                         |             |       
|                                           | Total                   |             | $     
|                                           |                         |             |       
|Sharesnet income (loss) per sharebasic   |                         |             | 12,333
|                                           |                         |             |       
|Sharesnet income (loss) per sharediluted |                         |             | 12,333
|                                           |                         |             |       

F-35

---



12.  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, services and corporate.

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 years November 30, 2002, 2001 and 2000, is as follows (in thousands):

|     |                                                 | Digital
Video
Systems |   | Services |  | Corporate |       | Total
|---- | ----------------------------------------------- | --------------------- | - | -------- |  | --------- | ----- | -----
|2000 |                                                 |                       |   |          |  |           |       |      
|     | Net sales                                       |                       | $ | 37,255   |  | $         | 9,865 |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Gross profit                                    |                       | $ | 17,017   |  | $         | 8,142 |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Depreciation and amortization                   |                       | $ | 2,599    |  | $         | 110   |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Amortization and write-off of intangible assets |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Acquired in-process research and development    |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Restructuring charge                            |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Interest income, net                            |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|2001 |                                                 |                       |   |          |  |           |       |      
|     | Net sales                                       |                       | $ | 22,254   |  | $         | 8,758 |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Gross profit                                    |                       | $ | 7,843    |  | $         | 6,870 |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Depreciation and amortization                   |                       | $ | 2,540    |  | $         | 178   |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Amortization and write-off of intangible assets |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Restructuring charge                            |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Interest income, net                            |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|2002 |                                                 |                       |   |          |  |           |       |      
|     | Net sales                                       |                       | $ | 13,185   |  | $         | 5,896 |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Gross profit                                    |                       | $ | 4,122    |  | $         | 4,865 |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Depreciation and amortization                   |                       | $ | 3,144    |  | $         | 43    |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Amortization and write-off of intangible assets |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Restructuring charge                            |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Settlement of litigation                        |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      
|     | Interest income, net                            |                       | $ |         |  | $         |      |      
|     |                                                 |                       |   |          |  |           |       |      

F-36

---



Amortization and write-off of intangible assets, acquired in-process research and development, restructuring charge, settlement of litigation, and interest income, net are
considered corporate-level activities and are, therefore, not allocated to segments. Net sales by geographic area for the years ended November 30, 2002, 2001 and 2000 were as follows (in
thousands):

2002

2001

2000North America

$
10,123

$
20,318

$
29,643United Kingdom, Sweden, Denmark and Norway


2,648


3,132


4,688France, Spain, Benelux, Italy


1,515


2,691


3,942Germany, Austria and Switzerland


1,105


1,118


2,040Asia, Japan and other foreign countries


3,690


3,753


6,807$
19,081

$
31,012

$
47,120


Long-lived
tangible assets by geographic area for the years ended November 30, 2002 and 2001 were as follows (in thousands):

2002

2001United States

$
1,741

$
3,651United Kingdom


63


123Germany


19


1France


47


68$
1,870

$
3,843


13.  DISCONTINUED OPERATIONS

On October 5, 2001, the Company sold its streaming media software product line to Autodesk, Inc. for $16.0 million in cash, of which
$2 million was deposited into escrow for a period of one year in case indemnification issues arise. These escrow funds were received on October 15, 2002. The Company's streaming media
software product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin.

The
net income (loss) from these operations is included in the accompanying statements of operations under "Income (loss) from discontinued operations". Operating results of the software
product line for the fiscal years ended November 30, 2002, 2001 and 2000 are as follows (in thousands):

2002

2001

2000Net sales of discontinued operations

$


$
11,062

$
25,656Income (loss) from operations of discontinued software product line, net of income tax benefit of $123 and $400 in 2002 and 2001, respectively


184


(3,122
)

(4,846
)Gain on sale of software product line, net of income tax provision of $5,100 in 2001





7,802


Income (loss) from discontinued operations

$
184

$
4,680

$
(4,846
)


Income
from discontinued operations, net of income tax benefit, of $184 for fiscal 2002 resulted from the reduction of estimated accruals and the settlement of certain
obligations related to the Company's streaming media software product line in amounts different from original estimates.

F-37

---

EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.09           |  | Agreement and Plan of Reorganization dated December 28, 1999 between Digital Origin, Inc. and Media 100 Inc.                                                                                                                                                                                                                                
|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 29, 2001 (filed as exhibit 2.10 of the Company's
Quarterly Report of Form 10-Q for the fiscal quarter ended August 31, 2001 and incorporated by reference herein).
|3.1            |  | Restated Certificate of Incorporation of Media 100 Inc. (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference herein).                                                                                                                                
|3.2            |  | By-laws of Media 100 Inc., as amended through June 17, 1998 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1998 and incorporated by reference herein).                                                                                                                           
|4.0            |  | Specimen Certificate representing the Company's Common Stock (filed as Exhibit 4 to the Company's Registration Statement on Form S-1, File No. 2-94121 and incorporated by reference herein).                                                                                                                                               
|10.2*          |  | 1986 Employee Stock Purchase Plan, as amended through June 12, 2001 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2001 and incorporated by reference
herein).                                                                                                               
|10.3*          |  | Key Employee Incentive Plan (1992), as amended through June 12, 2001 (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2001 and incorporated by reference
herein).                                                                                                              
|10.4*          |  | Media 100 Inc. 401(k) Savings Plan (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein).                                                                                                                                                    
|10.5.1         |  | Lease dated January 31, 1997 relating to 290 Donald Lynch Boulevard, Marlborough, Massachusetts (filed as Exhibit 10.5.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by
reference herein).                                                                                     
|10.5.2         |  | Lease Agreement dated as of January 31, 1997 relating to 290 Donald Lynch Boulevard, Marlborough, Massachusetts (filed as Exhibit 10.5.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and
incorporated by reference herein).                                                                     
|10.5.3         |  | Amendment to Lease dated January 8, 2002 relating to 290 Donald Lynch Blvd, Marlborough, Massachusetts and 450 Donald Lynch Blvd, Marlboro, Massachusetts.                                                                                                                                                                                  
|10.6.2         |  | Intellectual Property Agreement dated as of December 2, 1996 with DTI (filed as Exhibit 10.6.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996 and incorporated by reference
herein).                                                                                                               
|10.10          |  | Agreement and Plan of Merger and Reorganization, dated May 6, 1999 with Terran Interactive, Inc. (filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and
incorporated by reference herein).                                                                                    
|               |  |                                                                                                                                                                                                                                                                                                                                             

---

|10.11  |  | Asset Purchase Agreement, dated December 17, 1999 with Wired, Inc. (filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended November 30, 1999 and incorporated by reference herein).
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12  |  | A*    Digital Origin Inc.'s 401(k) Savings and Investment Plan. (6)                                                                                                                                               
|       |  | B*    Amendment to Digital Origin Inc.'s 401(k) Savings and Investment Plan. (1)                                                                                                                                  
|       |  | C*    Digital Origin Inc.'s 401(k) Savings and Investment Plan Loan Policy. (1)                                                                                                                                   
|10.13* |  | Digital Origin Inc.'s 1995 Stock Option Plan. (1)                                                                                                                                                                 
|10.14* |  | Form of Stock Option Agreement and Exercise Request as currently in effect under 1995 Stock Option Plan. (1)                                                                                                      
|10.16  |  | Form of Indemnity Agreement with Directors. (5)                                                                                                                                                                   
|10.22  |  | Asset Sale Agreement dated as of December 4, 1998 between Splash Technology Holdings, Inc. and Digital Origin Inc. (12)                                                                                           
|10.26  |  | Settlement agreement (filed as exhibit 10.26 of the Company's Quarterly Report of Form 10-Q for the fiscal quarter ended February 28, 2002 and incorporated by reference herein)                                  
|21     |  | Subsidiaries of Media 100 Inc. (filed as Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997 and incorporated by reference herein).                                
|23     |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                               
|23.2   |  | Information Regarding Consent of Arthur Andersen LLP.                                                                                                                                                             
|24     |  | Power of Attorney (included in the signature page of this Annual Report on Form 10-K).                                                                                                                            

No
reports on Form 8-K were filed during the last quarter of the period covered by this report.



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