SEC Filing | Avid Technology, Inc.

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AVID TECHNOLOGY, INC. Avid Technology Park One Park West Tewksbury, MA 01876 August 13, 2003 Securities and Exchange Commission 450 Fifth Street, N.W. Judiciary Plaza Washington, DC 20549 Re: Avid Technology, Inc. File No. 0-21174 Quarterly Report on Form 10-Q ----------------------------- Ladies and Gentlemen: Pursuant to regulations of the Securities and Exchange Commission, submitted herewith for filing on behalf of Avid Technology, Inc. is the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003. This filing is being effected by direct transmission to the Commission's EDGAR System. Very truly yours, /s/ Carol E. Kazmer Carol E. Kazmer General Counsel

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 ---------- Commission File Number 0-21174 AVID TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2977748 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) AVID TECHNOLOGY PARK ONE PARK WEST TEWKSBURY, MA 01876 (Address of principal executive offices) Registrant's telephone number, including area code: (978) 640-6789 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No _____ The number of shares outstanding of the registrant's Common Stock as of August 4, 2003 was 29,822,652.

AVID TECHNOLOGY, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 TABLE OF CONTENTS ----------------- PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements: a) Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2003 and 2002 ...........1 b) Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002 .....................2 c) Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2003 and 2002 .....................3 d) Notes to Condensed Consolidated Financial Statements (unaudited).....4 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................11 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..........22 ITEM 4. Controls and Procedures.............................................23 PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders.................24 ITEM 5. Other Information...................................................24 ITEM 6. Exhibits and Reports on Form 8-K....................................24 SIGNATURES...................................................................25 EXHIBIT INDEX................................................................26

PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AVID TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended June 30, Six Months Ended June 30, ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Net revenues $113,317 $106,094 $225,494 $198,103 Cost of revenues 50,608 52,591 102,835 100,306 ------------- ------------- ------------- ------------- Gross profit 62,709 53,503 122,659 97,797 ------------- ------------- ------------- ------------- Operating expenses: Research and development 21,428 20,411 43,127 40,229 Marketing and selling 27,748 26,775 53,012 49,741 General and administrative 5,617 5,018 10,962 9,531 Restructuring and other costs, net (327) 1,783 (327) Amortization of intangible assets 341 257 634 603 ------------- ------------- ------------- ------------- Total operating expenses 55,134 52,134 109,518 99,777 ------------- ------------- ------------- ------------- Operating income (loss) 7,575 1,369 13,141 (1,980) Other income (expense), net 507 (717) 738 (452) ------------- ------------- ------------- ------------- Income (loss) before income taxes 8,082 652 13,879 (2,432) Provision for income taxes 300 500 600 1,100 ------------- ------------- ------------- ------------- Net income (loss) $7,782 $152 $13,279 ($3,532) ============= ============= ============= ============= Net income (loss) per common share - basic $0.27 $0.01 $0.47 ($0.14) ============= ============= ============= ============= Net income (loss) per common share - diluted $0.25 $0.01 $0.43 ($0.14) ============= ============= ============= ============= Weighted average common shares outstanding - basic 28,494 26,161 28,052 26,095 ============= ============= ============= ============= Weighted average common shares outstanding - diluted 31,673 26,511 30,904 26,095 ============= ============= ============= ============= The accompanying notes are an integral part of the condensed consolidated financial statements. 1

AVID TECHNOLOGY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) June 30, December 31, 2003 2002 -------------- -------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $78,915 $62,174 Marketable securities 56,151 26,860 Accounts receivable, net of allowances of $9,913 and $10,614 at June 30, 2003 and December 31, 2002, respectively 66,963 65,942 Inventories 36,247 38,047 Deferred tax assets, net 683 663 Prepaid expenses 7,023 4,515 Other current assets 5,801 6,741 -------------- -------------- Total current assets 251,783 204,942 Property and equipment, net 23,180 25,731 Intangible assets, net 1,458 1,513 Goodwill 1,087 1,087 Other assets 2,786 2,530 -------------- -------------- Total assets $280,294 $235,803 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $17,434 $24,297 Accrued compensation and benefits 16,947 13,425 Accrued expenses and other current liabilities 26,569 28,730 Income taxes payable 9,217 8,877 Deferred revenues 43,685 35,483 -------------- -------------- Total current liabilities 113,852 110,812 Long-term obligations under capital leases 924 1,427 -------------- -------------- Total liabilities 114,776 112,239 -------------- -------------- Contingencies (Note 5) Stockholders' equity: Preferred stock Common stock 291 273 Additional paid-in capital 389,709 364,481 Accumulated deficit (222,086) (235,365) Deferred compensation (73) (216) Accumulated other comprehensive loss (2,323) (5,609) -------------- -------------- Total stockholders' equity 165,518 123,564 -------------- -------------- Total liabilities and stockholders' equity $280,294 $235,803 ============== ============== The accompanying notes are an integral part of the condensed consolidated financial statements. 2

AVID TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six Months Ended June 30, ---------------------------------- 2003 2002 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $13,279 ($3,532) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 6,198 6,701 Provision for doubtful accounts 132 902 Compensation expense from stock grants and options 138 751 Equity in income of non-consolidated company (42) (133) Gain on sale of business (327) Write-down of investment in non-consolidated company 1,000 Changes in operating assets and liabilities: Accounts receivable (324) 693 Inventories 1,790 (3,384) Prepaid expenses and other current assets (1,371) (98) Accounts payable (6,891) 9,283 Income taxes payable 398 (1,096) Accrued expenses, compensation and benefits 321 (3,441) Deferred revenues and deposits 8,211 885 - --------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 21,839 8,204 - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,696) (5,711) Payments for other long-term assets (331) (132) Dividend from non-consolidated company 59 Payments for business acquisitions (408) Proceeds from sales of business 327 Purchase of marketable securities (34,204) (15,516) Proceeds from sales of marketable securities 7,518 20,866 - --------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (30,121) (107) - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of short-term debt (305) Payment on note issued in connection with acquisition (13,020) Proceeds from issuance of common stock under employee stock plans 25,251 1,062 - --------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 24,946 (11,958) - --------------------------------------------------------------------------------------------------- Effects of exchange rate changes on cash and cash equivalents 77 656 - --------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 16,741 (3,205) Cash and cash equivalents at beginning of period 62,174 45,613 - --------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $78,915 $42,408 - --------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the condensed consolidated financial statements. 3

PART I. FINANCIAL INFORMATION ITEM 1D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. FINANCIAL INFORMATION The accompanying condensed consolidated financial statements include the accounts of Avid Technology, Inc. and its wholly owned subsidiaries (collectively, "Avid" or the "Company"). These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements include all adjustments, consisting of only normal, recurring adjustments, necessary for their fair presentation. Interim results are not necessarily indicative of results expected for a full year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and footnotes necessary for a complete presentation of operations, the financial position, and cash flows of the Company, in conformity with generally accepted accounting principles. The Company filed audited consolidated financial statements for the year ended December 31, 2002 on Form 10-K, which included all information and footnotes necessary for such presentation. Certain amounts in the prior year's financial statements have been reclassified to conform to the current year presentation. The Company's preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. The most significant estimates reflected in these financial statements include accounts receivable and sales allowances, inventory valuation and income tax valuation allowances. Actual results could differ from those estimates. 2. NET INCOME (LOSS) PER COMMON SHARE Basic and diluted net income (loss) per share were as follows (in thousands, except per share data): Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net income (loss) $7,782 $152 $13,279 ($3,532) =========== =========== =========== =========== Weighted average common shares outstanding - basic 28,494 26,161 28,052 26,095 Weighted average potential common stock 3,179 350 2,852 - ----------- ----------- ----------- ----------- Weighted average common shares outstanding - diluted 31,673 26,511 30,904 26,095 =========== =========== =========== =========== Net income (loss) per common share - basic $0.27 $0.01 $0.47 ($0.14) Net income (loss) per common share - diluted $0.25 $0.01 $0.43 ($0.14) Common stock options and warrants that were considered anti-dilutive securities and excluded from the diluted net income (loss) per share calculations were as follows, on a weighted-average basis: 1,261 8,823 1,521 8,952 For the three and six months ended June 30, 2003 and 2002, certain stock options and warrants have been excluded from the diluted net income (loss) per share calculation as their effect would be anti-dilutive. For periods that the Company reports a net loss, all potential common stock is considered anti-dilutive; for periods when the Company reports net income, only potential common shares with purchase prices in excess of the Company's average common stock fair value for the related period are considered anti-dilutive. 4

3. INVENTORIES Inventories consisted of the following (in thousands): June 30, December 31, 2003 2002 --------------- --------------- Raw materials $12,378 $13,402 Work in process 1,465 2,697 Finished goods 22,404 21,948 --------------- --------------- $36,247 $38,047 =============== =============== As of June 30, 2003 and December 31, 2002, the finished goods inventory included deferred costs of $12.3 million and $8.6 million, respectively, associated with product shipped to customers for which revenue had not yet been recognized. During the three months ended March 31, 2003, in connection with an intercompany transfer of assets resulting from a change in its selling model in Japan, the Company recorded a charge to cost of revenues of $0.3 million related to prior year inventory transactions. 4. ACCOUNTING FOR STOCK BASED COMPENSATION The Company accounts for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation expense is recorded for options issued to employees in fixed amounts and with fixed exercise prices at least equal to the fair market value of the Company's common stock at the date of grant. When the exercise price of stock options granted to employees is less than the fair market value of common stock at the date of grant, the Company records that difference multiplied by the number of shares under option as deferred compensation, which is then amortized over the vesting period of the options. Additionally, deferred compensation is recorded for restricted stock granted to employees based on the fair market value of the Company's stock at date of grant less the amount paid, if any, for the stock by the employee and is amortized over the period during which the restrictions lapse. The Company reverses deferred compensation associated with options issued at below fair market value as well as restricted stock upon the cancellation of such options or shares for terminated employees. The Company follows the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," for employee awards. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123. The following table illustrates the effect on net income (loss) and income (loss) per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee awards (in thousands, except per share data). Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net income (loss) as reported $7,782 $152 $13,279 ($3,532) Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects 14 93 29 186 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (3,272) (3,389) (6,573) (6,342) -------- -------- -------- -------- Pro forma net income (loss) $4,524 ($3,144) $6,735 ($9,688) ======== ======== ======== ======== Income (loss) per share: Basic-as reported $0.27 $0.01 $0.47 ($0.14) ======== ======== ======== ======== Basic-pro forma $0.16 ($0.12) $0.24 ($0.37) ======== ======== ======== ======== Diluted-as reported $0.25 $0.01 $0.43 ($0.14) ======== ======== ======== ======== Diluted-pro forma $0.14 ($0.12) $0.22 ($0.37) ======== ======== ======== ======== 5

Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and is amortized over the stock option's vesting period. 5. CONTINGENCIES On March 11, 1996, Avid was named as a defendant in a patent infringement suit filed in the United States District Court for the Western District of Texas by Combined Logic Company, a California partnership located in Beverly Hills, California. On May 16, 1996, the suit was transferred to the United States District Court for the Southern District of New York on motion by the Company. The complaint alleges infringement by Avid of U.S. patent number 4,258,385, and seeks injunctive relief, treble damages and costs, and attorneys' fees. The Company believes it has meritorious defenses to the complaint and intends to contest it vigorously. However, an adverse resolution of this litigation could have an adverse effect on the Company's consolidated financial position or results of operations in the period in which the litigation is resolved. No costs have been accrued for this possible loss contingency. In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly Entertainment, Inc., a Tektronix distributor, claiming that Tektronix's discontinuance of the Tektronix Lightworks product line was the result of a strategic alliance by Tektronix and Avid. Glen Holly raised antitrust and common law claims against the Company and Tektronix, and sought lost future profits, treble damages, attorneys' fees, and interest. The anti-trust claims against the Company and Tektronix were dismissed by the United States District Court for the District of California on March 23, 2001, and the remaining common law claim against Avid was dismissed by stipulation and court order on April 6, 2001. Glen Holly is appealing the lower court's decision. All briefing on the appeal has been completed. The United States Court of Appeals for the Ninth Circuit heard oral arguments on October 9, 2002, but has not yet issued its decision. Avid views the complaint and appeal as without merit and will continue to defend itself vigorously. However, an adverse resolution of this litigation could have an adverse effect on the Company's consolidated financial position or results of operations in the period in which the litigation is resolved. No costs have been accrued for this possible loss contingency. Avid receives inquiries from time to time with regard to possible patent infringement claims. If any infringement is determined to exist, the Company may seek licenses or settlements. In addition, as a normal incidence of the nature of the Company's business, various claims, charges, and litigation have been asserted or commenced against the Company arising from or related to contractual or employee relations, intellectual property rights or product performance. Management does not believe these claims will have a material adverse effect on the financial position or results of operations of the Company. From time to time, the Company provides indemnification provisions in agreements with customers covering potential claims by third parties that Avid products infringe their intellectual property rights. Pursuant to these indemnification provisions, the Company agrees to indemnify customers for losses that they suffer or incur in connection with any valid U.S. patent or copyright infringement claim brought by a third party with respect to Avid products. These indemnification provisions generally offer perpetual coverage for infringement claims based upon the products covered by the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is theoretically unlimited; however, the Company has not incurred any material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the Company believes the estimated fair value of these indemnification provisions is minimal. 6

As permitted under Delaware law, Avid has agreements whereby the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at its request in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, Avid has mitigated the exposure through the purchase of directors and officers insurance, which is intended to limit the risk and enable the Company to recover all or a portion of any future amounts paid. As a result of this insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has a stand by letter of credit at a bank that is used as a security deposit in connection with the Company's Daly City, California office space lease. In the event of default on this lease, the landlord would, as of June 30, 2003 be eligible to draw against this letter of credit to a maximum of $5.1 million, subject to an annual reduction of approximately $0.8 million but not below $2.0 million. The letter of credit will remain in effect at $2.0 million throughout the remaining lease period, which extends to September 2009. As of June 30, 2003, the Company was not in default of this lease. The Company, through a third party, provides lease financing options to its customers, including distributors. During the terms of these leases, which are generally three years, the Company remains liable for any unpaid principal balance upon default by the end-user, but such liability is limited in the aggregate based on a percentage of initial amounts funded or, in certain cases, amounts of unpaid balances. At June 30, 2003 and December 31, 2002, Avid's maximum recourse exposure totaled approximately $15.6 million and $15.8 million, respectively. The Company records revenue from these transactions upon the shipment of products, provided that all other revenue recognition criteria are met, and maintains a reserve for estimated losses under this recourse lease program based on historical default rates. At June 30, 2003, the Company's accrual for estimated losses was $2.9 million. To date, the Company has not experienced significant losses under this lease financing program. Avid provides warranty on hardware sold through its Video segment which generally mirrors the manufacturers' warranties. The Company charges the related material, labor and freight expense to cost of revenues in the period incurred. With respect to the Audio business, Avid provides warranty on externally sourced and internally developed hardware and records an accrual for the related liability based on historical trends and actual material and labor costs. The warranty period for all of the Company's products is generally 90 days to one year but can extend up to five years depending on the manufacturer's warranty. As of June 30, 2003, the Company's accrued product warranty liability was approximately $1.3 million. The following table sets forth the activity in the product warranty accrual account for the six months ended June 30, 2003 (in thousands): Accrual balance at December 31, 2002 $922 Accruals for product warranties 1,322 Cost of warranty claims (986) -------- Accrual balance at June 30, 2003 $1,258 ======== 7

6. COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss), net of taxes, consists of net income (loss), the net changes in foreign currency translation adjustment and the net unrealized gains and losses on available-for-sale securities. The following is a summary of the Company's comprehensive income (loss), (in thousands): Three Months Ended Six Months Ended June 30, June 30, ------------------------ ---------------------- 2003 2002 2003 2002 ----------- ----------- ---------- ----------- Net income (loss) $7,782 $152 $13,279 ($3,532) Net changes in: Foreign currency translation adjustment 2,032 2,505 3,239 2,040 Unrealized gains (losses) on securities (5) 13 47 15 ----------- ----------- ---------- ----------- Total comprehensive income (loss) $9,809 $2,670 $16,565 ($1,477) =========== =========== ========== =========== 7. SEGMENT INFORMATION The Company's organizational structure is based on strategic business units that offer various products to the principal markets in which the Company's products are sold. These business units equate to two reportable segments: Video and Film Editing and Effects, and Professional Audio. The Company does not track or report segment assets as part of the assessment of segment performance. The following is a summary of the Company's operations by reportable segment (in thousands): Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ------------ ----------- ------------ Video and Film Editing and Effects: Net revenues $77,392 $70,227 $156,731 $129,976 =========== ============ =========== ============ Operating income (loss) $2,708 ($3,080) $7,828 ($8,938) =========== ============ =========== ============ Professional Audio: Net revenues $35,925 $35,867 $68,763 $68,127 =========== ============ =========== ============ Operating income $5,208 $4,379 $7,730 $7,234 =========== ============ =========== ============ Combined Segments: Net revenues $113,317 $106,094 $225,494 $198,103 =========== ============ =========== ============ Operating income (loss) $7,916 $1,299 $15,558 ($1,704) =========== ============ =========== ============ The following table reconciles operating income (loss) for reportable segments to total consolidated amounts for the three- and six-month period ended June 30, 2003 and 2002 (in thousands): Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------------- 2003 2002 2003 2002 ---------- ----------- ---------- ----------- Total operating income (loss)for reportable segments $7,916 $1,299 $15,558 ($1,704) Unallocated amounts: Amortization of acquisition-related intangible assets (341) (257) (634) (603) Restructuring and other costs, net 327 (1,783) 327 ---------- ----------- ---------- ----------- Consolidated operating income (loss) $7,575 $1,369 $13,141 ($1,980) ========== =========== ========== =========== 8

8. RESTRUCTURING AND OTHER COSTS, NET In December 2002, the Company recorded a charge of $3.3 million in connection with vacating excess space in its Tewksbury, Massachusetts; Daly City, California; and Montreal, Canada facilities. The portion of the charge related to Tewksbury ($0.5 million) resulted from a revision of the Company's estimate of the timing and amount of future sublease income associated with that facility for which a charge had previously been included in a 2001 restructuring. The remaining portion of the charge for Daly City and Montreal was a result of the Company's ceasing to use a portion of each facility in December 2002, and hiring real estate brokers to assist in finding subtenants. In March 2003, the Company implemented a restructuring program under which 48 employees worldwide were terminated, and a leased facility in California was vacated. In connection with these actions, the Company recorded a $1.8 million restructuring charge during the first quarter of 2003. The charge included $1.2 million for severance and related costs for terminated employees and $0.6 million for facility vacancy costs, including a $0.4 million non-cash charge relating to the disposition of leasehold improvements. The Company recorded the December 2002 and March 2003 charges in accordance with the guidance of Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that a liability be recognized for an operating lease that is not terminated based on the remaining lease rental costs, measured at its fair value on a discounted cash flow basis, when the entity ceases using the rights conveyed by the operating lease. That amount is reduced by any estimated potential sublease rentals, regardless of whether the entity intends to enter into a sublease. Future changes in the fair value of the Company's obligations will be recorded through operating expenses. The following table sets forth the activity in the restructuring accrual accounts for the six months ended June 30, 2003 (in thousands): Employee Facilities Related Related Total ------------ ------------ ------------ Accrual balance at December 31, 2002 $433 $4,934 $5,367 Restructuring charge 1,177 641 1,818 Revisions of estimated liabilities (67) 32 (35) Cash payments (1,184) (945) (2,129) Non-cash disposals (412) (412) ------------ ------------ ------------ Accrual balance at June 30, 2003 $359 $4,250 $4,609 ============ ============ ============ The Company expects that the majority of the remaining $0.4 million employee related accrual balance will be expended over the next six months and will be funded from working capital. The majority of the facilities-related accrual represents lease payments due on vacated premises and estimated losses incurred or expected to be incurred on subleases of such space. The leases extend through 2010 unless the Company is able to negotiate an earlier termination. In December 1999, the Company entered into an agreement to sell its Italian subsidiary to a third party. As part of that transaction, the Company extended the buyers $0.8 million of loans, which were fully reserved through the restructuring and other costs, net line. During the quarter ended June 30, 2002, the Company received the third and final payment of $0.3 million under these loans. Upon receipt of the payment, the Company recorded such amount as a credit to restructuring and other costs, net 9. RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the Emerging Issues Task Force of the FASB reached a consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 requires that for revenue arrangements with multiple deliverables, those deliverables be divided into separate units of accounting if the deliverables meet certain criteria as defined by EITF 00-21. Arrangement consideration is to be allocated among the separate units of accounting based on 9

their relative fair values and revenue recognition decisions should be considered separately for each separate unit of accounting. EITF 00-21 is effective for all arrangements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company is currently evaluating the scope of EITF 00-21 but believes that the Company's multiple element arrangements fall within the scope of SOP 97-2 and therefore, EITF 00-21 will not be applicable to the Company. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments including certain derivative instruments embedded in other contracts and hedging activities under SFAS No. 133. It is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity" which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer's equity shares or variations inversely related to changes in the fair value of the issuer's equity shares. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations. 10

PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We develop, market, sell and support a wide range of software and hardware for digital media production, management and distribution. Digital media are video, audio or graphic elements in which the image, sound or picture is recorded and stored as digital values, as opposed to analog, or tape-based, signals. Our diverse range of product and service offerings enables customers to "Make, Manage and Move Media." Make Media. Our Video and Film Editing and Effects segment offers digital, non-linear video and film editing systems and 3D and special effects software that enable customers to manipulate moving pictures and sound in a faster, easier, more creative, and more cost-effective manner than using traditional analog tape-based systems. (Non-linear systems allow editors to access material instantaneously rather than requiring them to work sequentially.) Our Professional Audio segment, Digidesign, offers digital audio software applications and hardware systems for music, film, television, video, broadcast, streaming media, and web development. These systems are based upon proprietary Digidesign/Avid audio hardware, software, and control surfaces, and allow users to record, edit, mix, process, and master audio in an integrated manner. Manage Media. We provide complete network, storage, and database solutions based on our Avid Unity MediaNetwork technology. This technology enables users to simultaneously share and manage media assets throughout a project or organization. The ability to effectively manage digital media assets is a critical component of success for many broadcast and media companies with multiple nonlinear editing workstations in a range of geographic locations. As a result, professionals can collaborate seamlessly on all production elements, and streamline the process for cost-effectively delivering compelling media experiences and quickly "re-purposing" or finding new uses or markets for media assets. Move Media. We offer products that allow our customers to distribute media over multiple platforms - including air, cable or satellite, or through the Internet. In addition, we provide technology for playback directly to air for broadcast television applications. Many of our products also support the broadcast of streaming Internet video. Our products are used worldwide in production and post-production facilities; film studios; network, affiliate, independent and cable television stations; recording studios; advertising agencies; government and educational institutions; corporate communication departments; and game developers and Internet professionals. Projects produced using our products have been honored with Oscar(R), Emmy(R), and Grammy(R) awards, as well as a host of other international awards. (Oscar is a registered trademark and service mark of the Academy of Motion Picture Arts and Sciences. Emmy is a registered trademark of ATAS/NATAS. Grammy is a registered trademark of The National Academy of Recording Arts and Sciences, Inc.) During the quarter ended June 30, 2003 the Company unveiled a new family of products called Digital Nonlinear Accelerators, or Avid DNA, a powerful series of specialized computer hardware products engineered specifically for media processing. When paired with Avid's next-generation nonlinear editing software, the Avid DNA family enables professionals to achieve real-time functionality and superior image and sound quality when capturing, editing, finishing and outputting DV, SD and, in future releases, HD video formats. The Avid DNA family includes Avid Media Composer Adrenaline and Avid Newscutter Adrenaline FX, both of which began shipping in the second quarter of 2003. The Avid Media composer Adrenaline leverages the key features of its predecessor to offer improved quality, speed and performance in high-pressure time-sensitive television and film editing and production environments. The Avid Newscutter Adrenaline FX expands news editing capabilities by offering speed, reliability and a broad range of professional news-oriented editing and workflow features in a single, turnkey PC-based platform. The Avid DNA family also includes Avid DS Nitris and Avid Xpress Pro with Avid Mojo, which are expected to ship in the near future. Our results for the balance of the year will depend, in part, on the timely shipment and market acceptance of the new products. 11

RESULTS OF OPERATIONS Net Revenues Our net revenues are derived mainly from the sales of computer-based digital, nonlinear media editing systems and related peripherals, licensing of related software, and sales of related software maintenance contracts. This market has been, and we expect it to continue to be, highly competitive. A significant portion of these revenues is generated by sales near the end of each quarter, which can impact our ability to accurately forecast revenues on a quarterly basis. Increasingly, revenues are also being derived from sales of "solutions" encompassing multiple products and networking capabilities that enable users to share and manage media throughout a project or organization. Such solution sales may include training and installation services, as well as workflow management assistance, to be provided by us or a third party. Depending upon the complexity of the arrangement and the level of our involvement, the revenues resulting from these solution sales may be deferred for one or more quarters while the services are being performed. Net revenues increased by $7.2 million (6.8%) to $113.3 million for the quarter ended June 30, 2003 from $106.1 million for the same quarter in 2002. This increase occurred almost exclusively in our Video and Film Editing and Effects ("Video") segment and reflected increases from Avid Unity and Broadcast products (including those sold as part of large solutions described above) as well as sales of Media Composer Adrenaline. Revenue from our Professional Audio ("Audio") segment increased slightly. Revenue from the combined segments includes a positive currency translation effect of approximately $5.8 million as compared to the quarter ended June 30, 2002, assuming revenues for the quarter ended June 30, 2002 were expressed at current quarter exchange rates. Net revenues increased by $27.4 million (13.8%) to $225.5 million for the six months ended June 30, 2003 from $198.1 million for the six months ended June 30, 2002. This increase primarily reflected increased demand across several product families in our Video business driven in large part by an increase in solution sales, as well as the introduction of Media Composer Adrenaline, both mentioned above. Revenue from our Audio segment increased slightly. Revenue from the combined segments includes a positive translation currency effect of approximately $11.0 million as compared to the six-month period ended June 30, 2002, assuming revenues for the six-month period ended June 30, 2002 were expressed at current exchange rates. Net revenues derived through indirect channels were approximately 71% of net revenues for the quarter ended June 30, 2003, compared to 82% of net revenues for the same period in 2002. Indirect channel revenues were approximately 75% and 82% of net revenues for the six-month periods ended June 30, 2003 and 2002, respectively. Sales in the Americas accounted for 58% and 55% of the Company's second quarter 2003 and 2002 net revenues, respectively. For the six-month periods ended June 30, 2003 and 2002, sales in the Americas accounted for 56% and 55% of net revenues, respectively. For the three- and six-month periods ended June 30, 2003, Americas sales increased by approximately $6.8 million or 11.5% and $17.7 million or 16.1%, respectively, compared to the same periods in 2002. Sales in the Europe and Asia Pacific regions accounted for 42% and 45% of the Company's second quarter 2003 and 2002 net revenues, respectively. For the six-month periods ended June 30, 2003 and 2002, sales in the Europe and Asia Pacific regions accounted for 44% and 45% of net revenues, respectively. The dollar amount of Europe and Asia Pacific sales in the second quarter of 2003 were relatively unchanged compared to the same period in 2002, and increased by approximately $9.7 million or 11% for the first half of 2003 compared to the same period in 2002. Gross Profit Cost of revenues consists primarily of costs associated with the procurement of components; the assembly, testing, and distribution of finished products; warehousing; post-sales customer support costs; royalties for third-party software included in the products; and provisions for inventory obsolescence. The resulting gross profit fluctuates based on factors such as the mix of products sold, the cost and proportion of third-party hardware and software included in the systems sold, the offering of product upgrades, price discounts and other sales promotion programs, the distribution channels through which products are sold, the timing of new product introductions, sales of aftermarket hardware products such as disk drives, and currency exchange rate fluctuations. 12

Gross margin increased to 55.3% in the second quarter of 2003 from 50.4% for the same period of 2002. Margins in both the Video and Audio segments improved, with the most significant factors being a shift in product mix, including the introduction of Media Composer Adrenaline, which has a higher gross margin than many of our products, and a positive impact on revenues from currency exchange rates with no offsetting impact on cost of revenues as most of our manufacturing costs are transacted in U.S. dollars. Gross margin increased to 54.4% for the six months ended June 30, 2003 from 49.4% for the same period in 2002. Margins in both the Video and Audio segments improved, with the most significant factors being more favorable product mix in the Video segment and a positive impact from currency exchange rates. The Audio segment was adversely affected by a change in product mix which was partially offset by a decrease in manufacturing costs. Research and Development Research and development expenses increased by $1.0 million (5.0%) in the second quarter of 2003 compared to the same period in 2002 and increased by $2.9 million (7.2%) for the six months ended June 30, 2003 compared to the same period in 2002. The increase was primarily the result of personnel-related expenses and engineering outsourcing associated with the development of new products. Research and development expenses decreased to 18.9% of net revenues in the second quarter of 2003 compared to 19.2% in the same quarter of 2002. Research and development expenses decreased to 19.1% of net revenues for the six months ended June 30, 2003 from 20.3% for the same period in 2002 due to the increased revenue base. Marketing and Selling Marketing and selling expenses increased by $1.0 million (3.6%) in the second quarter of 2003 compared to the same period in 2002 and increased by $3.3 million (6.6%) for the six months ended June 30, 2003 compared to the same period in 2002. The increase in both periods was primarily due to increased employee compensation expenses, as well as outsourcing of certain costs associated with our new product releases. We also experienced an increase in net foreign exchange and hedging losses in the three- and six-month periods ended June 30, 2003 as compared to the same periods in 2002, but in both cases these were essentially offset by a decrease in bad debt expense. Discretionary marketing expenses, including trade show expense, decreased in the three- and six-month periods ended June 30, 2003 as compared to the same periods in 2002. Marketing and selling expenses decreased to 24.5% of net revenues in the second quarter of 2003 compared to 25.2% in the same quarter of 2002. Marketing and selling expenses decreased to 23.5% of net revenues for the six months ended June 30, 2003 from 25.1% for the same period in 2002 due to the increased revenue base. General and Administrative General and administrative expenses increased by $0.6 million (11.9%) in the second quarter of 2003 compared to the same period in 2002 and increased by $1.4 million (15.0%) for the six months ended June 30, 2003 compared to the same period in 2002. The increase in both periods was primarily due to variable compensation-related expenses. The six-month period ended June 30, 2003 also included increased legal and audit fees both primarily related to costs of complying with recent legislation. General and administrative expenses increased to 5.0% of net revenues in the second quarter of 2003 compared to 4.7% in the same quarter of 2002 and increased to 4.9% from 4.8% of net revenues for the six months ended June 30, 2003 and 2002, respectively due to the increased expenses noted above. Restructuring and Other Costs, Net In March 2003, we implemented a restructuring program under which 48 employees worldwide were terminated, and a leased facility in California was vacated. In connection with these actions, we recorded a $1.8 million restructuring charge during the first quarter of 2003. The charge included $1.2 million for severance and related costs for terminated employees and $0.6 million for facility vacancy costs, including a $0.4 million non-cash charge relating to the disposition of leasehold improvements. In December 1999, we entered into an agreement to sell our Italian subsidiary to a third party. As part of that transaction, we extended the buyers $0.8 million of loans, which were fully reserved through restructuring and other costs, net. During the quarter ended June 30, 2002, we received the third and final payment of $0.3 million under these loans. We recorded this payment as a credit to restructuring and other costs, net 13

Amortization of Intangible Assets We recorded intangible assets associated with acquiring the following businesses: Rocket Network, Inc. in 2003; iKnowledge, Inc. in 2002; iNews, LLC in 2001; and The Motion Factory, Inc. in 2000. In connection with these acquisitions, we allocated $4.8 million of the purchase consideration to completed technologies which are being amortized over periods ranging from 3 to 4.5 years. Included in the operating results for each of the quarters ended June 30, 2003 and 2002 is amortization of these intangible assets of $0.3 million; the six-month periods ended June 30, 2003 and 2002 each include amortization of $0.6 million. . Other Income (Expense), Net Other income (expense), net generally consists of interest income and interest expense, but can also include income or losses associated with various non-consolidated companies. Other income (expense), net for the second quarter of 2003 increased $1.2 million to $0.5 million of income, as compared to the loss in the same period in 2002. The increase was due to the 2002 write-off of $1.0 million relating to an impaired investment accounted for under the cost method. For the six-month period ended June 30, 2003, other income (expense), net increased $1.2 million to $0.7 million of income, as compared to the loss in the same period in 2002, for the same reason mentioned above. Provision for Income Taxes We recorded a tax provision of $0.3 million in each of the first two quarters of 2003 and $0.6 million and $0.5 million for the first and second quarters of 2002, respectively. The provision for the first and second quarters of 2003 was substantially comprised of taxes payable by our foreign subsidiaries with only alternative minimum tax provided on anticipated U.S taxable profits. Regular federal income taxes resulting from anticipated U.S. profits have been offset by the utilization of deductions from acquisition-related temporary differences and net operating loss carry-forwards; the tax benefit of these items is reflected in a net reduction in the deferred tax asset valuation allowance. However, due to the remaining level of deferred tax assets and the level of related historical taxable income, we have determined that the uncertainty regarding the realization of these assets is sufficient to warrant the continued establishment of a valuation allowance against our deferred tax assets. The provision for the first and second quarters of 2002 was generally comprised of taxes payable by the Company's foreign subsidiaries with no tax benefit provided on the losses before income taxes in the U.S. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations to date through both private and public sales of equity securities as well as through cash flows from operations. As of June 30, 2003, our principal sources of liquidity included cash, cash equivalents and marketable securities totaling $135.1 million. Net cash provided by operating activities was $21.8 million for the six months ended June 30, 2003 compared to $8.2 million provided by operating activities in the same period in 2002. During the six months ended June 30, 2003, net cash provided by operating activities primarily reflects net income adjusted for depreciation and amortization and other non-cash adjustments as well as an increase in deferred revenue and a decrease in inventory, partially offset by a decrease in accounts payable. During the six months ended June 30, 2002, net cash provided by operating activities primarily reflects the net loss adjusted for depreciation and amortization and other non-cash adjustments as well as an increase in accounts payable, offset by an increase in inventories and a decrease in accrued expenses. We purchased $2.7 million of property and equipment during the six months ended June 30, 2003, compared to $5.7 million in the same period in 2002. In both of these periods, the purchases were primarily hardware and software to support research and development. 14

During the six months ended June 30, 2003 and 2002, we received cash proceeds of $25.3 million and $1.1 million, respectively, from the issuance of common stock upon stock option exercises and under our employee stock purchase plan. In February 2002, we made a payment of $13.0 million in full satisfaction of our outstanding note to Microsoft Corporation, issued in connection with our 1998 Softimage acquisition. Expected uses of cash in the near future include obligations under various past restructuring programs. We expect that the majority of the remaining $0.4 million employee-related restructuring accrual balance will be expended over the next six months and will be funded from working capital. We also have facility-related cash obligations of approximately $4.2 million as a result of required lease payments on vacated premises and losses to be incurred or expected to be incurred on subleases of such space. These payments will be made over the remaining terms of the leases, which have varying expiration dates through 2010, unless we are able to negotiate earlier terminations. All restructuring related payments will be funded through working capital. We believe existing cash, cash equivalents, marketable securities and funds generated from operations will be sufficient to meet our cash requirements for at least the next 12 months. In the event we require additional financing, we believe that we will be able to obtain such financing; however, there can be no assurance that we would be successful in doing so, or that we could do so on favorable terms. RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the Emerging Issues Task Force of the FASB reached a consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 requires that for revenue arrangements with multiple deliverables, those deliverables be divided into separate units of accounting if the deliverables meet certain criteria as defined by EITF 00-21. Arrangement consideration is to be allocated among the separate units of accounting based on their relative fair values and revenue recognition decisions should be considered separately for each separate unit of accounting. EITF 00-21 is effective for all arrangements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company is currently evaluating the scope of EITF 00-21 but believes that the Company's multiple element arrangements fall within the scope of SOP 97-2 and therefore, EITF 00-21 will not be applicable to the Company. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments including certain derivative instruments embedded in other contracts and hedging activities under SFAS No. 133. It is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity" which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer's equity shares or variations inversely related to changes in the fair value of the issuer's equity shares. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations. 15

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Some of the statements in this Form 10-Q relating to our future performance constitute forward-looking statements. Such forward-looking statements are based upon management's current expectations and involve known and unknown risks. Realization of any of these risks may cause actual results to differ materially from the results described in the forward-looking statements. Certain of these risks are as follows: Our performance will depend in part on market acceptance of our new digital nonlinear editing products. We recently introduced several new products, including a line of digital nonlinear accelerators and a next-generation Media Composer system. We will need to continue to focus marketing and sales efforts on educating potential customers, as well as our resellers, about the uses and benefits of these products. Our future success will depend in part on the acceptance and wide use of these products. In addition, there are several other risks involved with offering new products, including, without limitation, the possibility of defects or errors, failure to meet customer expectations, delays in shipping new products and the introduction of similar products by our competitors. At the same time, the introduction and transition to new products could have a negative impact on the market for our existing products, which could adversely affect our revenues and business. The broadcast market is large, widely dispersed, and highly competitive, and we may not be successful in growing our customer base or predicting customer demand in this market. We are currently building our presence in the broadcast market and have augmented our NewsCutter product offering with the Avid Unity for News products, and the server, newsroom, and browser products obtained in the Pluto and iNews acquisitions. The broadcast market is distinguished from our traditional Video business in that turn-key, fully integrated, complex "solutions" (including the configuration of unique workflows), rather than discrete point products, are frequently required by the customer. As a relatively new player in the broadcast market, we may encounter difficulties in establishing ourselves, creating compelling customer solutions, and developing a strong, loyal customer base. Large, complex broadcast orders often require us to devote significant sales, manufacturing, installation, and support resources to ensure their successful and timely fulfillment. As the broadcast market converts from analog to digital, our strategy has been to build our broadcast solutions team in response to customer demand. To the extent that customer demand for our broadcast solutions exceeds our expectations, we may encounter difficulties in the short run meeting our customers' needs. Meanwhile, our competitors may devote greater resources to the broadcast market than we do, or may be able to leverage their market presence more effectively. If we are unsuccessful in capturing and maintaining a share of this digital broadcast market or in predicting and satisfying customer demand, our business and revenues could be adversely affected. We have a significant share of the professional audio market, and therefore growth in this market will depend in part on our ability to successfully introduce new products. Currently, products of our Digidesign division have captured a significant portion of the professional audio market. Digidesign's strong performance in recent years reflects a series of successful product introductions. Our future success will depend in part upon our ability to offer, on a timely and cost-effective basis, new audio products and enhancements of our existing audio products. The timely development of new or enhanced products is a complex and uncertain process, and we could experience design, manufacturing, marketing, or other difficulties that delay or prevent our development, introduction or marketing of new products or enhancements, which, in turn, could harm our business. We are expanding our product line and offering solutions to new markets, and our future revenues depend in part on the success of this expansion. Traditionally, we have been a point products company. Increasingly, we are providing end-to-end solutions for our customers. We are expanding our product line beyond our core video and audio editing markets to offer digital media production solutions to the broadcast news market (including cable and 16

Internet news), the on-line film and video finishing market, and the emerging market for multimedia production tools (including the Internet and corporate markets). Because these markets are evolving, we must anticipate our customers' future needs and introduce compelling new products, gain market acceptance, and establish appropriate distribution channels, support, and maintenance. To the extent that we fail to accurately anticipate our customers' needs, we may need to adjust our plans accordingly, which could cause delays, unexpected expenses, and reallocation of our resources, and which in turn could harm our business and reduce our operating results. Our products are complex and delays or difficulties in introducing new products could harm our business. Our future success will depend in part on our ability to offer products that compete favorably with our competitors' products in terms of reliability, performance, ease of use, range of features, product enhancements, reputation, price, and training. Delays or difficulties in product development and introduction may harm our business. Our products are complex and, despite extensive testing and quality control, may contain errors or defects. Such errors or defects could cause us to issue corrective releases and could result in loss of revenues, increased product returns, lack of market acceptance, and damage to our reputation. New product announcements by our competitors and by us could have the effect of reducing customer demand for our existing products. Some of our new products constitute upgrades of existing products. In the past, we have offered discounts on the price of such upgrades to existing customers, which, where appropriate, have been based upon the return of circuit boards and system keys. To the extent that such circuit boards and system keys are not returned, it can decrease the revenue generated by such new products. New product introductions require us to devote time and resources to training our sales channels in product features and target customers, with the temporary result that the sales channels have less time to devote to selling our products. The markets for our products are competitive, and we expect competition to intensify in the future. The digital video, audio, and animation markets are competitive, with limited barriers to entry, and are characterized by pressure to reduce prices, incorporate new features, and accelerate the release of new products. Many of our current and potential competitors have substantially greater financial, technical, distribution, support, or marketing resources than we do. Such competitors may use these resources to lower their product costs, allowing them to reduce prices to levels at which we could not operate profitably. Further, such competitors may be able to develop products comparable or superior to ours, or adapt more quickly to new technologies or evolving customer requirements. If we are unable to compete effectively in our target markets, our business and results of operations could suffer. Competition in the 3-D market has increased dramatically since our acquisition of Softimage. The 3-D market has changed significantly from the time we acquired our Softimage subsidiary in August 1998. Since this acquisition, competitors' products have eroded Softimage's market share and have contributed to downward price pressure, which has resulted in reduced margins. In addition, we have experienced delays in introducing new products into the 3-D animation market. Finally, revenues in recent years have been increasingly derived from sales to the games industry and non-traditional markets. If these non-traditional markets were to slow or delay their purchases of 3-D tools, our revenues could be adversely affected. To the extent that these factors continue or worsen, our business could suffer. We use independent firms and contractors to perform some of our product development activities. Independent firms and contractors, some of whom are located in other countries, perform some of our product development activities. We generally own the software developed by these contractors. The use of independent firms and contractors, especially those located abroad, could expose us to risks related to governmental regulation, intellectual property ownership and rights, exchange rate fluctuation, political instability and unrest, natural disasters, and other risks, which could adversely impact our revenues. We depend on a number of sole source suppliers. We are dependent on a number of specific suppliers for certain key components of our products. We purchase these sole source components pursuant to 17

purchase orders placed from time to time. We generally do not carry significant inventories of these sole source components and have no guaranteed supply arrangements. If any of our sole source vendors failed to supply or enhance such components, it could imperil our supply of these components. Similarly, if any of our vendors encountered technical, operating or financial difficulties, it could threaten our supply of these components. While we believe that alternative sources for these components could be developed, or our products could be redesigned to permit the use of alternative components, an interruption of our supply could damage our business and negatively affect our operating results. Qualifying and supporting our products on multiple computer platforms is time consuming and expensive. Our software engineers devote significant time and effort to qualify and support our products on various computer platforms, including most notably, Microsoft's Windows and Apple's Macintosh and OSX platforms. Computer platform modifications and upgrades require additional time to be spent to ensure that our products will function properly. To the extent that the current configuration of the qualified and supported platforms changes or that we need to qualify and support new platforms, we could be required to expend valuable engineering resources, which is likely to adversely affect our operating results. Our operating results are dependent on several unpredictable factors. The revenue and gross profit from our products depend on many factors, including: o mix of products sold; o cost and proportion of third-party hardware included in such products; o product distribution channels; o acceptance of our new product introductions; o product offers and platform upgrades; o price discounts and sales promotion programs; o volume of sales of aftermarket hardware products; o costs of swapping or fixing products released to the market with defects; o provisions for inventory obsolescence; o competitive pressure on product prices; o costs incurred in connection with "solution" sales, which typically have longer selling and implementation cycles; and o timing and delivery of "solutions" to customers. Changes in any of these factors could affect our operating results. Our operating results could be harmed by currency fluctuations. A significant portion of our business is conducted in currencies other than the U.S. dollar. Accordingly, changes in the value of major foreign currencies (including the euro, the British pound, and the Japanese yen) relative to the value of the U.S. dollar could lower future revenues and operating results. Our operating costs are tied to projections of future revenues, which may differ from actual results. Our operating expense levels are based, in part, on our expectations of future revenues. Such future revenues are difficult to predict. For example, the current worldwide economic slowdown has had an impact on our recent results, and if this slowdown persists, it could have the potential to lower our revenues. Additionally, a significant portion of our business occurs near the end of each quarter, which can impact our ability to precisely forecast revenues on a quarterly basis. Further, we are generally unable to reduce quarterly operating expense levels rapidly in the event that quarterly revenue levels fail to meet internal expectations. Therefore, if quarterly revenue levels fail to meet internal expectations upon which expense levels are based, our results of operations could be adversely affected. 18

Poor global macroeconomic conditions could disproportionately impact our industry. As a result of unfavorable economic conditions and reduced capital spending, our customers in the media, broadcast and content-creation industries have delayed or reduced expenditures. The revenue growth and profitability of our business depends primarily on the overall demand for our products. Softening demand for our products resulting from ongoing economic uncertainty may result in decreased revenues or earnings levels or growth rates. If global economic conditions worsen, demand for our products may weaken, and our business and results of operations could suffer. Terrorism, acts of war, and other international conflicts may seriously harm our business. Terrorism or acts of war throughout the world may disrupt our business and harm our employees, facilities, suppliers, distributors, resellers or customers, which could significantly impact our revenue and operating results. The potential for terrorist attacks and other threats to national security, and the responses of the United States and other countries to such attacks or threats, have created many economic and political uncertainties that could adversely affect our business and stock price in ways that cannot be predicted. We are predominantly uninsured for losses and interruptions caused by terrorism, acts of war, and other international conflicts. If we fail to maintain strong relationships with our resellers, distributors, and suppliers, our ability to successfully deploy our products may be harmed. We sell many of our Video products and services, and substantially all of our Audio products and services, indirectly through resellers and distributors. The resellers and distributors of our Video segment products typically purchase Avid software and Avid - specific hardware from us, and third-party components from various other vendors, in order to produce complete systems for resale. Any disruption to our resellers and distributors, or their third-party suppliers, could reduce our revenues. Moreover, we are increasingly distributing our products directly, which could put us in competition with our resellers and distributors and could adversely affect our revenues. Most of the resellers and distributors of our Video products are not granted rights to return products after purchase, and actual product returns from them have been insignificant to date. However, our revenue from sales of Audio products is generally derived from transactions with distributors and authorized resellers that typically allow limited rights of return, inventory stock rotation and price protection. Accordingly, reserves for estimated returns, exchanges and credits for price protection are provided, as a reduction of revenues, upon shipment of the related products to such distributors and resellers, based upon our historical experience. To date, actual returns have not differed materially from management's estimates. However, if returns of our Audio segment products were to exceed estimated levels, our revenues and operating results could be adversely impacted. If we become dependent on third-party hardware for our products, our operating results could be harmed. Our gross profit margin varies from product to product depending primarily on the proportion and cost of third-party hardware included in each product. From time to time, we add functionality and features to our products. If we effect such additions through the use of more, or more costly, third-party hardware, and are not able to increase the price of such products to offset these increased costs, our gross profit margin on these products could decrease and our operating results could be adversely affected. Our future growth could be harmed if we lose the services of our key personnel. Our success depends upon the services of a number of key current employees. The loss of the services of one or more of these key employees could harm our business. Our success also depends upon our ability to attract highly skilled new employees. Competition for such employees is intense in the industries and geographic areas in which we operate. If we are unable to compete successfully for such employees, our business could suffer. 19

Our websites could subject us to legal claims that could harm our business. Some of our websites provide interactive information and services to our customers. To the extent that materials may be posted on and/or downloaded from these websites and distributed to others, we may be subject to claims for defamation, negligence, copyright or trademark infringement, personal injury, or other theories of liability based on the nature, content, publication or distribution of such materials. In addition, although we have attempted to limit our exposure by contract, we may also be subject to claims for indemnification by end users in the event that the security of our websites is compromised. As these websites are available on a worldwide basis, they could potentially be subject to a wide variety of international laws. Regulations could be enacted that restrict our Internet initiatives. Federal, state, and local authorities may adopt new laws and regulations governing the Internet, including laws and regulations covering issues such as privacy, distribution, and content. The enactment of any such laws or regulations could impede the growth of the Internet, harm our Internet initiatives, and place additional financial burdens on our business. We could incur substantial costs protecting our intellectual property or defending against a claim of infringement. Our ability to compete successfully and achieve future revenue growth depends, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We rely upon a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures, and contractual provisions, as well as hardware security keys, to protect our proprietary technology. However, our means of protecting our proprietary rights may not be adequate. From time to time unauthorized persons have obtained, copied, and used information that we consider proprietary. Policing the unauthorized use of our proprietary technology is costly and time-consuming, and software piracy can be expected to be a persistent problem. We occasionally receive communications suggesting that our products may infringe the intellectual property rights of others. It is our practice 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, we may be unable to do so on commercially reasonable terms. If we are unable to protect our proprietary technology or unable to negotiate licenses for the use of others' intellectual property, our business could be impaired. We are currently involved in various legal proceedings, including patent litigation. An adverse resolution of any such proceedings could harm our business and reduce our results of operations. See Note 5, " Contingencies" in our unaudited quarterly financial statements. If we acquire other companies or businesses, we will be subject to risks that could hurt our business. We periodically acquire businesses, form strategic alliances, or make debt or equity investments. The risks associated with such acquisitions, alliances, and investments include, among others, the difficulty of assimilating the operations and personnel of the target companies, the failure to realize anticipated returns on investment, cost savings and synergies, and the diversion of management's time and attention. Such acquisitions, alliances, and investments often involve significant transaction-related costs and could cause short-term disruption to normal operations. If we are unable to overcome or counter these risks, it could undermine our business and lower our operating results. A portion of our sales are financed under a third-party leasing program. We have an established leasing program with a third party that allows certain of our customers who choose to do so to finance their purchases. If this program ended abruptly or unexpectedly, some of our customers might be unable to purchase our products unless or until they were able to arrange for alternative financing, and this could adversely impact our revenues. 20

Our stock price may continue to be volatile. The market price of our common stock has been volatile in the recent past and could fluctuate substantially in the future based upon a number of factors, most of which are beyond our control. These factors include: o changes in our quarterly operating results; o shortfalls in revenues or earnings compared to securities analysts' expectations; o changes in analysts' recommendations or projections; o fluctuations in investors' perceptions of us or our competitors; o shifts in the markets for our products; o development and marketing of products by our competitors; o changes in our relationships with suppliers, distributors, resellers, system integrators, or customers; and o global macroeconomic conditions. Further, the stock market has witnessed unusual volatility with respect to the price of equity securities of high technology companies generally, and this volatility has, at times, appeared to be unrelated to or disproportionate to any of the factors above. 21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market Risk Our primary exposures to market risk are the effect of volatility in currencies on asset and liability positions of our international subsidiaries that are denominated in foreign currencies, and the effect of fluctuations in interest rates earned on our cash equivalents and marketable securities. Foreign Currency Exchange Risk We generally derive nearly half of our revenues from customers outside the United States. This business is, for the most part, transacted through international subsidiaries and generally in the currency of the end-user customers. Therefore, we are exposed to the risks that changes in foreign currency could adversely impact our revenues, net income (loss) and cash flow. To hedge against the foreign exchange exposure of certain forecasted receivables, payables and cash balances of our foreign subsidiaries, we enter into foreign currency forward-exchange contracts. We record gains and losses associated with currency rate changes on these contracts in results of operations, offsetting gains and losses on the related assets and liabilities. The success of this hedging program depends on forecasts of transaction activity in the various currencies. To the extent that these forecasts are over- or understated during the periods of currency volatility, we could experience unanticipated currency gains or losses. At June 30, 2003, we had $29.9 million of forward-exchange contracts outstanding, denominated in euros, Japanese yen, Canadian dollars, Singapore dollars, British pounds, and Australian dollars as a hedge against forecasted foreign currency-denominated receivables, payables and cash balances. For the three- and six-month periods ended June 30, 2003, net losses of $2.0 million and $3.2 million, respectively, resulting from forward-exchange contracts that were included in the results of operations and were offset by net transaction and translation gains on the related asset and liabilities for the same periods of $1.9 million and $3.4 million, respectively. A hypothetical 10% change in foreign currency rates would not have a material impact on our results of operations, assuming the above-mentioned forecast of foreign currency exposure is accurate, because the impact on the forward contracts as a result of a 10% change would at least partially offset the impact on the asset and liability positions of our foreign subsidiaries. Interest Rate Risk At June 30, 2003, we held $135.1 million in cash, cash equivalents and marketable securities, including short-term U.S. and Canadian government and government agency obligations. Marketable securities are classified as "available for sale" and are recorded on the balance sheet at market value, with any unrealized gain or loss recorded in other comprehensive income (loss). A hypothetical 10% increase or decrease in interest rates would not have a material impact on the fair market value of these instruments due to their short maturity. 22

ITEM 4. CONTROLS AND PROCEDURES Evaluation of Controls and Procedures. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2003. In designing and evaluating the Company's disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applied its judgment in evaluating the cost-benefit relationships of possible controls and procedures. Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that, as of June 30, 2003, the Company's disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company's chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 23

PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on May 21, 2003. At the meeting, Charles Brumback and Nancy Hawthorne were reelected as Class I Directors. The vote with respect to each nominee is set forth below: Total Vote For Total Vote Withheld Each Director From Each Director -------------- ------------------- Mr. Brumback 25,115,356 598,854 Ms. Hawthorne 25,610,358 103,852 Additional Directors of the Company whose term of office continued after the meeting are John Guttag, Robert Halperin, Pamela F. Lenehan, William Warner, and David A. Krall. In addition, the stockholders ratified the selection of PricewaterhouseCoopers LLP as the Company's independent accountants by a vote of 25,450,474 shares for, 5,978 shares against, and 257,758 shares abstaining. ITEM 5. OTHER INFORMATION A proposal that a stockholder would like included in the Company's proxy statement for the 2004 Annual Meeting must be received by the Secretary of the Company at its principal office in Tewksbury, Massachusetts no later than December 15, 2003. If a stockholder intends to present a proposal at the 2004 Annual Meeting of Stockholders, but not have such proposal included in the Company's proxy statement, the proposal must be submitted to the Secretary of the Company at the Company's principal offices no later than March 12, 2004 or 60 days before the date of the 2004 Annual Meeting, whichever is later. The Company has not yet set a date for the 2004 Annual Meeting; however, if the 2004 Annual Meeting is held on May 21, 2004 (the anniversary of the 2003 Annual Meeting), the deadline for delivery of the proposal is expected to be March 12, 2004. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS -------- 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K ------------------- A report on Form 8-K filed April 16, 2003, reporting under Item 9 the announcement that on April 16, 2003, the Company issued a press release regarding its financial results for the quarter ended March 31, 2003. In accordance with Securities and Exchange Commission Release No. 33-8216, the information contained in the Form 8-K, which was intended to be furnished under Item 12, "Results of Operations and Financial Condition," was instead furnished under Item 9, "Regulation FD Disclosure." 24

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Avid Technology, Inc. Date: August 13, 2003 By: /s/ Paul J. Milbury ------------------------ Paul J. Milbury Chief Financial Officer (Principal Financial Officer) Date: August 13, 2003 By: /s/ Carol L. Reid ------------------------ Carol L. Reid Vice President and Corporate Controller (Principal Accounting Officer) 25

EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 26

                                                               Exhibit 31.1

                                  CERTIFICATION

    I, David A. Krall, certify that:

1.  I have reviewed this Quarterly Report on Form 10-Q of Avid Technology, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of
    a material fact or omit to state a material fact necessary to make the
    statements made, in light of the circumstances under which such statements
    were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial
    information included in this report, fairly present in all material respects
    the financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for
    establishing and maintaining disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

    a)  Designed such disclosure controls and procedures, or caused such
        disclosure controls and procedures to be designed under our supervision,
        to ensure that material information relating to the registrant,
        including its consolidated subsidiaries, is made known to us by others
        within those entities, particularly during the period in which this
        report is being prepared;

    b)  Evaluated the effectiveness of the registrant's disclosure controls
        and procedures and presented in this report our conclusions about the
        effectiveness of the disclosure controls and procedures, as of the end
        of the period covered by this report based on such evaluation; and

    c)  Disclosed in this report any change in the registrant's internal
        control over financial reporting that occurred during the registrant's
        most recent fiscal quarter (the registrant's fourth fiscal quarter in
        the case of an annual report) that has materially affected, or is
        reasonably likely to materially affect, the registrant's internal
        control over financial reporting; and

5.  The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation of internal control over financial reporting, to the
    registrant's auditors and the audit committee of the registrant's board of
    directors (or persons performing the equivalent functions):

    a)  All significant deficiencies and material weaknesses in the design or
        operation of internal control over financial reporting which are
        reasonably likely to adversely affect the registrant's ability to
        record, process, summarize and report financial information; and

    b)  Any fraud, whether or not material, that involves management or other
        employees who have a significant role in the registrant's internal
        control over financial reporting.


Date:  August 13, 2003                   /s/ David A. Krall
                                         ------------------------------------
                                         David A. Krall
                                         President and Chief Executive Officer
                                         (principal executive officer)

                                                               Exhibit 31.2

                                  CERTIFICATION

    I, Paul J. Milbury, certify that:

1.  I have reviewed this Quarterly Report on Form 10-Q of Avid Technology, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of
    a material fact or omit to state a material fact necessary to make the
    statements made, in light of the circumstances under which such statements
    were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial
    information included in this report, fairly present in all material respects
    the financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for
    establishing and maintaining disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

    a)  Designed such disclosure controls and procedures, or caused such
        disclosure controls and procedures to be designed under our supervision,
        to ensure that material information relating to the registrant,
        including its consolidated subsidiaries, is made known to us by others
        within those entities, particularly during the period in which this
        report is being prepared;

    b)  Evaluated the effectiveness of the registrant's disclosure controls
        and procedures and presented in this report our conclusions about the
        effectiveness of the disclosure controls and procedures, as of the end
        of the period covered by this report based on such evaluation; and

    c)  Disclosed in this report any change in the registrant's internal
        control over financial reporting that occurred during the registrant's
        most recent fiscal quarter (the registrant's fourth fiscal quarter in
        the case of an annual report) that has materially affected, or is
        reasonably likely to materially affect, the registrant's internal
        control over financial reporting; and

5.  The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation of internal control over financial reporting, to the
    registrant's auditors and the audit committee of the registrant's board of
    directors (or persons performing the equivalent functions):

    a)  All significant deficiencies and material weaknesses in the design or
        operation of internal control over financial reporting which are
        reasonably likely to adversely affect the registrant's ability to
        record, process, summarize and report financial information; and

    b)  Any fraud, whether or not material, that involves management or other
        employees who have a significant role in the registrant's internal
        control over financial reporting.


Date:  August 13, 2003                   /s/ Paul J. Milbury
                                         -----------------------------
                                         Paul J. Milbury
                                         Chief Financial Officer
                                         (principal financial officer)

                                                                Exhibit 32.1

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with this Quarterly Report on Form 10-Q of Avid
Technology, Inc. (the "Company") for the period ended June 30, 2003, as filed
with the Securities Exchange Commission on the date hereof (the "Report"), the
undersigned, David A. Krall, Chief Executive Officer of the Company, and Paul J.
Milbury, Chief Financial Officer of the Company, each hereby certifies, pursuant
to 18 U.S.C. Section 1350, that:

        (1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

        (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.



Dated:  August 13, 2003                        /s/ David A. Krall
                                               ----------------------
                                               David A. Krall
                                               Chief Executive Officer


Dated:  August 13, 2003                        /s/ Paul J. Milbury
                                               ----------------------
                                               Paul J. Milbury
                                               Chief Financial Officer