|U.S. Securities and Exchange Commission
Washington, D.C. 20549
|--------------------------------------------------------------



|Form 20-F
|---------

|[Mark One]
|----------

|[  ] | Registration statement pursuant to Section
      12(b) or 12(g) of the Securities Exchange Act of 1934
|---- | ------------------------------------------------------------------------------------------------------

|or
|--

|[x] | Annual report pursuant to Section 13 or 15(d)
      of the Securities Exchange Act of 1934
|--- | ------------------------------------------------------------------------------------------

| |  | For
the fiscal year ended March 31, 2003
| |  | ----------------------------------------

|or
|--

|[  ] | Transition report pursuant to Section 13
      or 15(d) of the Securities Exchange Act of 1934 For the transition period
      from _____________ to _______________
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Commission File Number: 0-25872
| |  | -------------------------------



|Plaintree Systems Inc.
      (Exact name of Registrant as Specified in Its Charter)
|-----------------------------------------------------------------------------------



|Not Applicable
      (Translation of Registrants Name Into English)
|--------------------------------------------------------------------



|Canada
      (Jurisdiction of Incorporation or Organization)
|------------------------------------------------------------



|110 DeCosta St. Arnprior, Ontario, K7S
      3X1, Telephone (613) 623-3434
      (Address of Principal Executive Offices)
|-------------------------------------------------------------------------------------------------------------------------



|Securities registered or to be registered
pursuant to Section 12(b) of the Securities Exchange Act of 1934.
|-----------------------------------------------------------------------------------------------------------



| | Title of each class | Name of each exchange on which registered
| | ------------------- | -----------------------------------------
| |                     |                                          
| |                     |                                          





|Securities registered or to be
registered pursuant to  Section 12(g) of the Securities Exchange Act of 1934.
|------------------------------------------------------------------------------------------------------------



|Common Shares, without par value
      (Title of Class)
|-------------------------------------------------------



|Securities for which there is a reporting
obligation pursuant to Section 15(d)  of the Securities Exchange Act of 1934.
|-----------------------------------------------------------------------------------------------------------------------



|Not Applicable
      (Title of Class)
|-------------------------------------



|Indicate the
number of outstanding shares of each of the issuers  classes of capital or common
stock as of the close of the period covered by the  annual report.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------



|90,221,634 Common Shares,
without par value
|-------------------------------------------



|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 which financial statement item the registrant  has elected to follow.
|--------------------------------------------------------------------------------------------

|Item 17 [X]            Item
18 [  ]
|-----------------------------------



|(APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.)
|-------------------------------------------------------------------------------------------



|Indicate by check
mark whether the registrant has filed all documents  and reports required to be filed by
Section 12, 13 or 15(d) of the  Securities Exchange Act of 1934 subsequent to the
distribution of securities  under a plan confirmed by a court.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Yes [  ]            No
[  ]
|---------------------------





---





|Table of Contents
|-----------------

|Part I     |                                                                                             | 1 
|---------- | ------------------------------------------------------------------------------------------- | --
|           | Item 1: Identity of Directors, Senior Management
      and Advisers                         | 1 
|           | Item 2: Offer Statistics and Expected Timetable                                             | 1 
|           | Item 3: Key Information                                                                     | 1 
|           | Item 4: Information on the Company                                                          | 2 
|           | Item 5: Operating and Financial Review and
      Prospects                                  | 11
|           | Item 6: Directors, Senior Management and
      Employees                                    | 17
|           | Item 7: Major Shareholders and Related Party
      Transactions                             | 23
|           | Item 8: Financial Information                                                               | 24
|           | Item 9: The Offer and Listing                                                               | 25
|           | Item 10: Additional Information                                                             | 26
|           | Item 11: Quantitative and Qualitative Disclosures
      About Market Risks                  | 27
|           | Item 12: Description of Securities Other
      than Equity Securities                       | 27
|           |                                                                                             |   
|Part II    |                                                                                             | 27
|           | Item 13: Defaults, Dividend Arrearages and
      Delinquencies                              | 27
|           | Item 14: Material Modifications to the Rights
      of Security Holders and Use of Proceeds | 27
|           | Item 15:                                                                                    | 27
|           | Item 16A:                                                                                   | 28
|           | Item 16B:                                                                                   |   
|           |                                                                                             |   
|Part III   |                                                                                             | 28
|           | Item 17: Financial Statements                                                               | 28
|           | Item 18: Financial Statements                                                               | 28
|           | Item 19. Exhibits                                                                           | 28
|           |                                                                                            
|SIGNATURES | 29                                                                                         



| |  | 
| |  | 



---





|Statements contained herein that are not historical facts
      constitute forward-looking statements as that term is defined
      in the Private Securities Litigation Reform Act of 1995. All forward-looking
      statements are subject to risks and uncertainties which could cause results
      to differ materially from those anticipated. These factors include the ability
      of the Companys value added resellers and distributors to sell the
      Companys products in their respective markets, the timing of orders
      from and shipments to major customers, the timing of new product introductions
      by the Company and its competitors, market acceptance of new and enhanced
      versions of the Companys products, increased competition, changes
      in manufacturing costs, changes in the mix of product sales, changes in
      the mix of distribution channels, inability to obtain sufficient supplies
      of sole or limited source components and changes in world economic conditions.
      All dollar amounts referred to herein, unless otherwise stated, are in Canadian
      dollars.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|PART I
|------



|ITEM 1:  IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISERS
|--------------------------------------------------------------



|Not Applicable.
|---------------



|ITEM 2:  OFFER STATISTICS AND EXPECTED
TIMETABLE
|------------------------------------------------



|Not Applicable.
|---------------



|ITEM 3:  KEY INFORMATION
|------------------------



|A. Selected Financial Data
|--------------------------



|The selected consolidated financial data set
forth below was derived from the  Consolidated Financial Statements of Plaintree Systems
Inc. (the Company or  Plaintree) presented in Canadian dollars,
included elsewhere herein. All data  presented below should be read in conjunction with,
and is qualified in its  entirety by, reference to the audited Consolidated Financial
Statements and  Notes thereto included in Item 19 of this Report. The Companys
Consolidated  Financial Statements are presented in accordance with accounting principles
in  Canada, which also conform in all material respects with principles generally
accepted in the United States except as disclosed in Note 22 to the audited  Consolidated
Financial Statements.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Summary of Financial Information
|--------------------------------

|                                                                              | Year Ended March 31,
|----------------------------------------------------------------------------- | --------------------
|                                                                              | 1999                
|Net
      Sales                                                               | $13,704,805         
|Loss
      from Operations                                                    | $(23,510,312)       
|Net assets (net
      book value)                                             | $1,302,599          
|Total assets                                                                  | $5,301,635          
|Capital Stock
      (excluding long term debt and redeemable preferred stock) | $68,618,407         
|Number of common
      shares outstanding                                     | 18,288,468          
|Long term debt
      and capital leases                                       | $17,402             
|Dividends per
      share                                                     |                    
|Net earnings
      (loss)                                                     | $(23,802,053)       
|Net earnings
      (loss) per share                                           | $(1.37)             
|Net earnings
      (loss) per share on a fully diluted basis                  | $(1.37)             
|Net Earnings
      (Loss) under US GAPP                                       |                     



| |  | 
| |  | 



---





|-2-
|---



|Summary of Financial Information
|--------------------------------

|                                                                                  | Year Ended March 31,
|--------------------------------------------------------------------------------- | --------------------
|                                                                                  | 1999                
|Net Earnings
      (Loss) per share under US GAPP (per share/fully diluted basis) |                     



|Foreign currency translation
|----------------------------



|Other monetary assets and liabilities, which are
denominated in currencies  foreign to the local currency of the operation, are translated
to the local  currency at fiscal year-end exchange rates, and transactions included in
earnings are translated at rates prevailing during the fiscal year. Exchange  gains and
losses resulting from the translation of these amounts are included in  net earnings.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|B. Capitalization and Indebtedness
|----------------------------------



|Not Applicable.
|---------------



|C. Reasons for the Offer and Use of Proceeds
|--------------------------------------------



|Not Applicable.
|---------------



|D.  Risk Factors
|----------------



|The risk factors that are specific to the
Company include the absence of  profitable operation, the financial position of the
company, dependence of the  Company on proprietary technology, the attraction and
retention of highly  skilled employees, the establishment and the maintenance of the
Companys sales  force and the Companys distribution channels, the market
acceptance of the  Companys new products, the need for additional financing,
competition, the  dependence of the Company on key personnel, potential dilution,
fluctuations in  exchange rates and the possible infringement of the Companys
intellectual  property rights by third parties.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 4:  INFORMATION ON THE COMPANY
|-----------------------------------



|A.  History and Development of the Company
|------------------------------------------



|The Company was created on May 20, 1993 in
Canada pursuant to the provisions of the Canada Business Corporations Act upon the
amalgamation of CANAI Computer and Networks Architecture Inc. and 2879484 Canada Limited
and Plaintree Systems Inc. The registered office address of the Company is located at
110 DeCosta St., Arnprior, Ontario, K7S 3X1 telephone (613) 623-3434. The Company has
undergone several changes over the past three years including a significant down-sizing
of operations following the fiscal year ended March 31, 2002 (fiscal 2002) and a
financial reorganization completed during the fiscal year ended March 31, 2003 (fiscal
2003). The material events involving the Company are discussed below.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Recent Developments
|-------------------



|Change in Corporate Strategy
|----------------------------



|The Companys strategy was initially to offer its customers
      a single-source solution for switching and wireless connectivity. However,
      management noted erosion in both demand and pricing for switches as well
      as the market potential for FSO (Free Space Optics) wireless systems, during
      the fiscal year ended March 31, 2002.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Accordingly, in fiscal 2002 as a result of the
lower than expected revenues,  management took measures to reduce costs at the beginning
of the fourth quarter  of fiscal 2002. These measures included a temporary 30 percent
reduction in  employees hours. In fiscal 2003, the Company experienced further
delays in  expected orders and management took additional steps to cut operating costs
through a temporary lay off of approximately 70 percent of its workforce in  order to
conserve cash until expected sales materialize. This layoff was made  permanent in
September of 2002.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-3-
|---



|The Company then reorganized its finances by
filing a formal proposal to  creditors under the Bankruptcy and Insolvency Act (Canada) (BIA).
This was  accepted by the creditors on January 8, 2003 and sanctioned by the Ontario
Superior Court of Justice in Bankruptcy and Insolvency in January 2003. The  Company made
its final payment under this arrangement to the trustee in August  2003.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company, despite its reduced work force has
continued to further develop its  product lines and now offers lower priced modular FSO
products that have  increased performance over last years offerings.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Private Placement of Series I Shares
|------------------------------------



|On or about November 28, 1997, Acktion
Corporation (Acktion) purchased, by way  of private placement, 7,000 Series I
Shares at a price of $1,000 per Series I  Share for gross proceeds of $7,000,000 to the
Company. In accordance with the  provisions contained in the articles of the Company, the
holders of the Series I  Shares each had the right, at their option, to convert the
Series I Shares held  into that number of common shares of the Company (Common
Shares) obtained by  dividing the issue price of $1,000 per Series I Share together
with accrued and  unpaid dividends thereon, by $4.25. In addition, the share provisions
provide  that the Company had the right to convert the Series I Shares into Common Shares
or to redeem such shares for cash on the happening of a merger event such as the
Business Arrangement (as later defined) with Targa Group Inc. (Targa)
discussed in more detail under Targa Business Arrangement.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In the fiscal year ended March 31, 1999, the
Company completed a private  placement of Series II Shares as discussed below.
|---------------------------------------------------------------------------------------------------------------------------



|Private Placement of Series II Shares
|-------------------------------------



|On June 3, 1998, Nortel Networks Corporation (Nortel)
purchased, by way of  private placement, 9,000 Series II Shares for gross proceeds of
$9,000,000 to  the Company. In accordance with the provisions contained in the articles
of the  Company, the holders of the Series II Shares each had the right, at their
option, to convert the Series II Shares held into that number of Common Shares  obtained
by dividing the issue price of $1,000 per Series II Share together with  accrued and
unpaid dividends thereon, by $2.15. In addition, the share  provisions provide that the
Company had the right to convert the Series II  Shares into Common Shares or to redeem
such shares for cash on the happening of  a merger event such as the Business Arrangement
(as later defined) with Targa  discussed in more detail under Targa Business
Arrangement.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In the fiscal year ended March 31, 2000, the
Company underwent a major financial  restructuring. As part of the restructuring, the
Company entered into a business  arrangement with Targa. Other material events during the
year included a special  warrant private placement and the acquisition of the business
assets of A.T.  Schindler Communications Inc. (ATS).
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Bankruptcy Proposal
|-------------------



|On September 1, 1999, the Company filed a
proposal (the BIA Proposal) under Section 62 of the Bankruptcy and
Insolvency Act (Canada). The proposal was approved by the Companys creditors on
September 21, 1999 and was sanctioned by the Ontario Superior Court of Justice in
Bankruptcy and Insolvency on January 26, 2000.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Under the BIA Proposal, the secured creditors of
the Company had claims against  the Company in the approximate aggregate amount of
$434,865, which were paid by  the Company on or about February 14, 2000. In addition, the
unsecured creditors  had claims against the Company in the approximate aggregate amount
of  $2,293,670. Pursuant to the terms of the BIA Proposal, the Company could satisfy
these claims by payment to the unsecured creditors of an amount of not more than  $0.70
on the dollar per claim. To date, the Company has negotiated settlements  of claims with
several of the unsecured creditors at amounts of less than $0.70  on the dollar. As a
result, the Company paid to its unsecured creditors in the  aggregate an amount of
$1,295,153 for unsecured creditor claims. The BIA  Proposal further provided for the
unsecured creditor claims to be paid in four  installments over an 18 month period. The
final installment payment was made on  August 26, 2001 and as of the date of this
document the Company has satisfied  all conditions under the BIA Proposal.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-4-
|---



|In November of 2002, the Company filed a second BIA proposal
      to creditors (the Second Proposal). The Second Proposal was
      approved by the Companys creditors on January 8, 2003, and the Company
      made its final payment under this arrangement to the trustee in August of
      the same year. The Second Proposal entitles the creditors to up to $0.30
      on the dollar for their unsecured claims that existed on November 18, 2002.
      This proposal also limits the amount of the total payment to creditors by
      the Company to $175,000 including trustees fees. The Company has paid
      all amounts required under the Second Proposal to the trustee.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Targa Business Arrangement
|--------------------------



|On January 13, 2000, the Company entered into a
business arrangement with Targa  (the Business Arrangement). Pursuant to the
terms of the Business Arrangement,  Targa agreed to provide the Company with a credit
facility of up to $3,000,000  (the Credit Facility), of which up to
$1,600,000 was available to the Company  solely to satisfy amounts owed by the Company to
its creditors under the BIA  Proposal and up to $1,400,000 was available solely to
satisfy the current  operating losses directly attributable to the normal day-to-day
operations of  the Company (the Operating Costs). In addition, Targa
permitted certain  members of its management team (the Executives) to be
retained in similar  capacities by the Company. In consideration for the foregoing, Targa
received an  aggregate of 34,526,284 Common Shares, which amount represented 49% of the
then  issued and outstanding Common Shares of the Company on a non-diluted basis
following the conversion of the Series I Shares and the Series II Shares (as  discussed
below). As part of the Business Arrangement, Targa was entitled to  have two (2) nominees
appointed to the board of directors of the Company until  the next annual meeting of
shareholders. In addition to the foregoing issuance,  Targa also received from the
treasury of the Company an additional 1,197,137  Common Shares following the issuance of
1,246,000 Common Shares to Manaca Inc.  as compensation for the services of Mr. James A.
Richardson in connection with  the closing of the Business Arrangement transaction.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The amount of the Credit Facility ($1,600,000)
allocated to the BIA Proposal was  available to the Company until the obligation of the
Company under the BIA  Proposal was satisfied (the Expiry Date) which was for
a period of 18 months  expiring on August 26, 2001. On the other hand, the amount of the
Credit  Facility ($1,400,000) allocated to the Operating Costs expired on February 9,
2001. As security for repayment of the amounts advanced under the Credit  Facility, Targa
was granted a general security interest over all of the assets  of the Company, which
security interest ranks subsequent to the interests of the  creditors under the BIA
Proposal. The Company did not draw upon the Credit  Facility for either purpose for which
it was established nor did it renew the  Credit Facility beyond August 26, 2001.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|As an additional term of the Business Arrangement, the Company
      entered into a services agreement (the Services Agreement) with
      Targa and its related companies, Targa Electronics Systems Inc., Tidal Quality
      Management Corporation, Hypernetics Limited and Wade-Tech CAD & Graphics
      Inc. (collectively, the Targa Group of Companies) pursuant to
      which the Company agreed to provide to any or all of the Targa Group of
      Companies with management, administrative and other services as required
      by any of such companies primarily utilizing the Executives as well as any
      other employee or contractor of the Company which is satisfactory to such
      Targa Group of Companies. The Services Agreement is for a term of at least
      three years and the Targa Group of Companies is obligated to utilize such
      services of the Company over the first two years of the term so as to result
      in a minimum of $1,000,000 in service fees being paid by the Targa Group
      of Companies to the Company, which minimum fee was achieved during the fiscal
      year ended March 31, 2001. These services continued at a reduced rate in
      fiscal year 2002 and were discontinued in fiscal 2003.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Conversion of Series I and II Shares
|------------------------------------



|On October 22, 1999, Acktion and the Company
entered into an agreement pursuant  to which Acktion agreed to accept 7,000,000 Common
Shares in full settlement of  its entitlement to Common Shares on conversion of the
Series I Shares held. On  November 3, 1999, Nortel and the Company entered into an
agreement pursuant to  which Nortel agreed to accept 9,000,000 Common Shares in full
settlement of its  entitlement to Common Shares on conversion of the Series II Shares
held. In the  case of the Business Arrangement, the Company could have redeemed the
Series I  Shares and Series II Shares by making cash payments totaling $16,000,000 or
converting the shares on the basis of approximately one Common Share for each  $0.18 of
Series I Share and Series II Share held. The cash payment was not  feasible and the
forced conversion ratio was deemed to result in too great a  dilution for the other
shareholders of the Company. However, it was a condition  of the Business Arrangement
that the Series I Shares and Series II Shares be  converted into Common Shares prior to
the completion of the Business  Arrangement. As a result, the
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-5-
|---



|Company negotiated for the conversion of the
Series I Shares and Series II Shares prior to the completion of the Business  Arrangement
on the basis of one Common Share for each $1.00 of Series I Share  and Series II Share
held.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Private Placement of Special Warrants
|-------------------------------------



|On March 30, 2000, the Company sold by way of
private placement 10,000,000  special warrants (the Special Warrants) at a
price of $1.00 per Special  Warrant for gross proceeds of $10,000,000 pursuant to an
agreement (the Agency  Agreement) dated March 30, 2000 between the Company
and Taurus Capital Markets  Ltd. (the Agent). In consideration of the
services rendered by the Agent in  connection with the offering and sale of the Special
Warrants (the Offering),  the Company agreed pursuant to the Agency Agreement
to pay to the Agent an  aggregate fee equal to 7.5% of the gross proceeds realized by the
Company in  respect of the sale of the Special Warrants (the Agents Fee),
which was paid  at the closing of the private placement of the Special Warrants on March
30,  2000. In addition to the Agents Fee, the Company provided the Agent on closing
of the Offering with local area networking (LAN) switching equipment having a  cost base
of $30,000. No fee or commission is payable to the Agent with respect  to the exercise of
the Special Warrants or warrants underlying the Special  Warrants.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|As further consideration for the services of the
Agent in connection with the  Offering, the Company issued to the Agent on March 30,
2000, non-assignable  compensation warrants (Compensation Warrants)
exercisable, without payment of  additional consideration, into non-assignable options
(the Compensation  Options) to purchase up to 800,000 Units (as later
defined) (the Optioned  Units). Each Compensation Option entitles the Agent
to purchase one (1)  Optioned Unit at an exercise price of $1.09 per Optioned Unit at any
time prior  to March 30, 2002. During the 2001 fiscal year, 400,000 Compensation Options
were exercised by the Agent and the Company issued 400,000 Common Shares to the  Agent
for gross proceeds of $436,000 to the Company. As of the date of this  document, 400,000
Compensation Options remain outstanding.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company obtained a receipt for a (final)
prospectus on July 13, 2000, which  qualified the distribution of the Common Shares, and
Warrants underlying the  Special Warrants and 500,000 of the Compensation Options
obtained on exercise of  the Compensation Warrants in the Province of Ontario. The
Special Warrants and  Compensation Warrants were automatically exercised at 5:00 p.m.
(Toronto time)  on July 20, 2000.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|As a result of the deemed exercise, each Special
Warrant entitled the holder to  acquire, for no consideration in addition to the purchase
price paid for the  Special Warrants, one (1) unit of the Company (a Unit).
Subject to adjustment  in certain events, each Unit consists of one (1) common share in
the capital of  the Company (singularly, a Common Share and collectively, the
Common Shares)  and one-half (1/2) of one Common Share purchase warrant
(singularly, a Warrant and collectively, the Warrants). The
Common Shares and Warrants comprising the  Units separated immediately upon issuance of
the Units pursuant to the deemed  exercise of the Special Warrants. Each whole Warrant
entitled the holder to  purchase one (1) Common Share (a Warrant Share),
subject to adjustment as  provided by the warrant indenture, at an exercise price of
$2.00 per Warrant  Share at any time on or prior to June 30, 2001. None of the Warrants
were  exercised throughout the exercise period which ended on June 30, 2001 and have
since expired.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The sum of $9,170,000, being the amount equal to
the gross proceeds of the issue  and sale of the Special Warrants less: (i) the Agents
Fee; (ii) the estimated  out-of-pocket costs of the Agent; and (iii) the reasonable fees
and  disbursements of the Agents counsel, was released to the Company on the
closing  of the Offering.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Schindler Asset Acquisition
|---------------------------



|On March 29, 2000, the Company completed the
acquisition of certain assets (the  ATS Assets) of ATS including its FiRLAN
line of products, from Doyle,  Salewski, the court appointed interim receiver of all of
the assets, property  and undertaking of ATS valued at $1,631,616 following receipt of a
vesting order  issued by the Ontario Superior Court of Justice in Bankruptcy and
Insolvency.  Pursuant to the terms of the vesting order, the interim receiver was
authorized  to complete the acquisition in accordance with the terms of a purchase
agreement  dated as of March 13, 2000 between the Company, ATS and Andrew Schindler (the
ATS Purchase Agreement). Originally, by letter agreement dated December 1,
1999 as amended by letter agreement dated February 23, 2000, ATS had agreed to  sell the
ATS Assets to Targa. However, on March 13, 2000, Targa assigned its  entitlement to
purchase the ATS Assets to the Company in consideration for the  issuance to Targa on the
closing date of 242,574 Common Shares in the
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-6-
|---



|capital of  the Company. As a result of the
acquisition, the Company has added the FiRLAN  line of optical wireless links to its
portfolio of products.
|-------------------------------------------------------------------------------------------------------------------------------------------------------



|The purchase price of the ATS Assets was paid
and satisfied by the Company (i)  by cash consideration of $346,655; and (ii) by the
issuance to ATS of 2,327,347  Common Shares.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Private Placement of Units
|--------------------------



|During the fiscal year ended March 31, 2002,
pursuant to a subscription  agreement dated December 19, 2001, the Company completed a
private placement  financing with Targa Group Inc. (Targa), the Companys largest
shareholder, of  3,911,765 units of the Company at a subscription price of $0.34 per unit
for  aggregate gross proceeds of $1,330,000 less related issue costs of $35,970. Each
unit was comprised of one Common Share and one warrant. Each warrant entitles  Targa to
acquire one Common Share at an exercise price of $0.51 per Common Share  up to January 8,
2005. The financing was completed without the use of an agent  and the Company has not
undertaken to qualify any of the securities being  offered pursuant to the financing. As
of the date of this document all of the  warrants remain outstanding.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Credit Facility With Related Party
|----------------------------------



|The Company has in place an operating credit
facility with a Company controlled  by Targa. The credit facility is secured by a general
security agreement  covering all assets of the Company and expired on March 25, 2003, at
which time  the principle and interest accrued is due and payable. The credit facility
may  be terminated earlier upon the happening of a default of the covenants contained  in
the credit facility, which would include if the Company ceases its business  or becomes
insolvent. Under the terms of the credit facility all amounts drawn  down shall bear
interest at the Companys banks prime rate plus 2%. As at the  date of this
document, the Company is in default of this credit facility and the  current outstanding
amount is $266,321 plus applicable interest.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Subsequent to March 31, 2003, a new $225,000
additional credit line was extended  by Targa to the Company at 2% above the prime rate
charged by the Companys bank  and secured by all of the assets of the Company.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|B.  Business Overview
|---------------------



|Headquartered in Arnprior, Ontario, Canada,
Plaintree designs, develops and  manufactures a series of infrared optical wireless
transmission links. The  Companys mission is to become a global leader in the field
of Free Space Optics  (FSO), providing a solution for the broadband access bottleneck or
Last Mile connection problems.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Plaintree also continues to provide support of
the Companys switching equipment  to its customers. The Companys goal is to
become a global leader in the field  of FSO which is becoming the accepted terminology
for optical wireless. This is  based on the combined attributes of the Companys
optical wireless engineering  expertise with its specialization in LED (Light Emitting
Diode) technology, and  the solution that the optical wireless links provide to the
broadband access  bottleneck or the `last mile connection problem.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Key elements of the Companys strategy to
achieve this goal include developing  and manufacturing a broad range of the
WAVEBRIDGE(TM) FSO links to provide  high-speed network connections for a variety of
customers. The Company intends  to continue to build a global sales presence through a
network of sales  representatives, and VARs (Value Added Resellers) and VAIs (Value Added
Integrators) strategically positioned around the world.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Companys WAVEBRIDGE links send
information (voice, video and data) on a  beam of infrared light. These links act as a
replacement for cable or fiber,  thus avoiding the delay and expense of the planning and
installation of wireline  connections. Simplicity of installation of the WAVEBRIDGE links
ensures they can  be up and running in a matter of hours thus avoiding costly network
downtime.  These links are also an alternative to Microwave or Radio Frequency (RF)
systems  as they require no licensing. The high deployment densities of RF and Microwave
systems are causing frequency interference and overlap problems that are not  experienced
by FSO systems. Optical wireless can also carry a bigger payload  than RF systems, making
it a very attractive solution.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Plaintree specializes in LED technology.
Although FSO refers to both lasers and  LED, they differ in many respects including
eye-safety, reliability and  atmospheric attenuation.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-7-
|---



|The WAVEBRIDGE links have a Class 1 eye hazard rating from
      the IEC (International Electrotechnical Commission) and the American National
      Standards Institute (ANSI), the highest eye-safe rating possible. The Class
      1 rating means that the WAVEBRIDGE LED links can be viewed for any length
      of time, with or without binoculars under all foreseeable circumstances.
      This is of tremendous importance as binoculars or other viewing aids are
      often used in the initial alignment of optical wireless equipment.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Background
|----------



|Founded in 1988, Plaintrees original focus
was engineering and manufacturing  intelligent network switches that quickly gained a
reputation for their  robustness and reliability. Many of these switches continue to be
in use as  network backbones around the world.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|As part of the Targa Business Arrangement,
Plaintree hired key members of  Targas management team. Shortly after the Targa
Business Arrangement, Plaintree  completed a strategic acquisition that positioned the
Company to become a leader  in the optical wireless networking market. Plaintree
purchased the assets of  ATS, an early entrant into the field of optical wireless
communication.  Established in 1985, ATS introduced its first wireless LANs in 1991,
under the  name FiRLAN. With over 3,000 installations world-wide with high profile
customers including the Smithsonian Institute, Harvard University and Johns  Hopkins
Medical Center, ATS products were an ideal fit with Plaintrees  switching
line.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Plaintree was to remain a switching manufacturer with a secondary
      line of optical wireless products. However, the markets for Plaintrees
      products changed dramatically over the fiscal 2001 year. Switching supply
      has grown and demand has fallen, leading to a predictable fall in margins.
      Optical wireless on the other hand has a market that is growing rapidly.
      Plaintree decided that the interests of Plaintree and its shareholders would
      be best served by focusing management, marketing, sales, and manufacturing
      efforts, and financial resources in serving the optical wireless market
      rather than on the lower margin, highly competitive, switching market. Plaintree
      continues to provide technical support to all of its switching customers.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Products
|--------



|Plaintree offers a series of optical wireless
links to meet a broad range of  customer requirements. All FSO communications systems
need line-of-sight for  connectivity. The only factor limiting the reliability of these
systems is fog.  Installation planning can reduce this factor by calculating the fade
margin to  measure optimum distance between the links.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|WAVEBRIDGE 300 Series
|---------------------



|The 300 Series is a lightweight, easily
transported design, intended for indoor  use such as a small office. This is an ideal
application for LEDs in particular  as the units can be located near people without any
concerns regarding eye  hazards. It is also ideal for special events or emergency
applications as set-up  time is minimal and the equipment can be moved easily. This very
cost-effective  unit offers speeds of 10Mbps (megabits per second) and covering distances
from  27 meters to 500 meters. The 300 Series also offers a Multiplex unit that offers
an additional E1/T1 line as well as the 10 Mbps. E1/T1 lines are essentially a  telephone
line.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|WAVEBRIDGE 400 Series
|---------------------



|The 400 Series is an indoor/ outdoor Optical Wireless link
      that provides connection speeds from E1/T1 through to OC3 (155Mbps). The
      400 is fully modular and has a list price of under USD $10,000, one of the
      less expensive products on the market.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|WAVEBRIDGE 500 Series
|---------------------



|The 500 Series is primarily an outdoor system but can also
      easily be mounted indoors to operate through windows. It provides a variety
      of connection speeds from E1 or T1 to 10 Mbps Ethernet or a combination
      of both. With a range of up to 2000 meters, businesses can now eliminate
      the hassles of last mile connectivity and get high speed network connections
      in just a few hours. This solution is favored by Internet Service
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-8-
|---



|Providers (ISPs),  cellular operators and
information technology (IT) managers due to its  reliability and rapid installation.
Businesses can connect offices or create  their own backbone across rivers, highways,
streets or courtyards.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|WAVEBRIDGE 600 Series
|---------------------



|The latest WAVEBRIDGE product is the 600 Series.
This series is an open  protocol, full duplex system offering speeds up to 100 Mbps Fast
Ethernet/155  Mbps Asynchronous Transfer Mode (ATM) up to 500 meters. This product meets
the  requirements of customers such as ISPs, cellular operators and enterprise  customers
who need greater bandwidth than 10 Mbps.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Applications
|------------



|Plaintrees range of WAVEBRIDGE optical
wireless links are designed for a  variety of applications and customers.
|-----------------------------------------------------------------------------------------------------------------



|Cellular and Global System for Mobile
communications (GSM) operators can connect  their base stations to micro-cells using
Plaintrees WAVEBRIDGE optical wireless  links. The use of FSO in this application
helps the cellular companies avoid the  frequency interference problems in areas of high
congestion. They can also avoid  the expense and delay of installing a fiber line to
connect the micro-cells to  the base station.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ISP customers are demanding more bandwidth and
the capacity to carry rich media.  ISPs can use the WAVEBRIDGE links to deliver high
bandwidth to business parks,  MTUs (multi-tenant units), MDU (multi-dwelling units),
hotels and strip malls  and avoid the monthly cost of leased lines.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Businesses can connect remote buildings and
create their own VPN (virtual  private network). This is of particular interest to
government agencies that are  looking for a high degree of channel security in their
network. Interception of  the beam is immediately detectable by network management as it
would cause  interruption of the signal, immediately notifying IT managers.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Other applications include mining,
manufacturing, telehealth and avionics. The  abundant use of RF systems in wireless
applications will continue to cause  frequency interference in some areas. FSO is not
only unlicensed but does not  experience RF overlap and interference. This is of great
importance in areas  where frequencies are highly regulated such as airports or hospitals.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Marketing; Sales and Customer Support
|-------------------------------------



|The Company markets its products world-wide
through direct sales, VARs,  distributors and systems integrators. Notwithstanding the
layoff of certain of  its staff following fiscal 2002, the Company intends to re-engage
and to  increase the size of its marketing and sales force and revitalize distribution
channels, as expected sales begin to materialize and Company resources become  available.
Plaintrees business plan includes global representation for all its  optical
wireless products.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Value Added Resellers (VARs)
|-----------------------------



|The Plaintree reseller program has established
close working relationships with  a limited number of solution providers to serve as an
extended sales and support  force in Canada, the United States and around the world.
These programs combine  a selective recruitment process with a comprehensive partnering
methodology,  allowing Plaintree authorized resellers to promote, sell and support the
WAVEBRIDGE products. The authorized Plaintree reseller program ensures that  resellers
are carefully selected to offer focused value-added services or  solutions. They share
Plaintrees commitment to customer satisfaction, and  undergo extensive training to
ensure they have the same world class selling and  support skills as those required
internally. The Company has signed contracts  with approximately 40 VARs throughout
the world. Several of the contracted  VARs have offices in multiple countries and
regions.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Value Added Integrators (VAIs)
|-------------------------------



|Plaintree has established a network of systems
integrators who include  WAVEBRIDGE products in total solutions for customers. VAIs
enjoy VAR purchasing  privileges, and provide increased market exposure for Plaintree.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-9-
|---



|Customer Support
|----------------



|The Company believes that high-quality customer
service and support is essential  to developing long-term relationships with its
customers. Notwithstanding the  layoff of 70% of its workforce following fiscal 2002, the
Company continues to  provide support to its customers for all of its products. This
includes  technical advice, trouble diagnosis and repair. Except for repair, such
services  are usually provided by telephone. Since replacement of failed equipment is
crucial to most customers, the Company provides overnight replacements (where  possible)
to its customers. The Companys products typically have warranties of  up to 12
months, with extended warranties also available. To date, the Company  has not
experienced any significant warranty claims.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Research and Product Development
|--------------------------------



|The market for the Companys products is
characterized by declining market  conditions in the telecommunications market, rapidly
changing technology,  evolving industry standards and frequent new product introductions
as well as  product modifications. As a result, the Company believes that its future
success  depends upon its ability to continue to enhance its product line and to develop
new products complementary to its WAVEBRIDGE product line. As with all research  and
developments projects, it is difficult for the Company to predict with  certainty the
capital requirements or the time that will be required to bring  any new products to
market. The Company is presently exploring several  alternative areas of research and
development and the ongoing emphasis will be  determined over the next few months by
analysis of the potential market and the  Companys available resources.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Operations
|----------



|The Companys manufacturing operations are located within
      the Ottawa region near a substantial community of high technology companies.
|--------------------------------------------------------------------------------------------------------------------------------------------



|The Companys manufacturing operations
consist primarily of quality control,  final assembly and testing. The Company generally
purchases components, many of  which are prepared to the Companys specifications,
and sorts these components  into kits for subcontractors to assemble according to the
Companys  specifications. The final assembly of major manufactured subcomponents,
quality  control testing, packing and shipping to the customer are performed by the
Company at its manufacturing premises. Most of the Companys subcontractors and
component suppliers also have their offices in the Ottawa area. These companies  provide
an infrastructure of services and a local pool of skilled workers and  professionals.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company currently purchases its components
and materials from a vendor base  of approximately 50 different suppliers. Most of the
components and materials  are available from more than one supplier. Certain components
such as diodes and  optical chip sets, however, are available from only a single source
or from  limited sources, some of which require order lead times of up to 20 weeks. In
general, the Company has been able to obtain adequate supplies of all components  by
scheduling orders over specified periods of time. In order to avoid late  shipments due
to delays in the manufacturing process, the Companys policy is to  maintain an
inventory of components, materials and assembled products in  quantities sufficient to
meet approximately three months of expected sales.  Although the Company seeks to develop
alternative sources of supply for products  that are available from only one supplier, it
expects that it will continue to  be dependent on single or limited source supplier
relationships in the future.  These suppliers are generally major manufacturers.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company determines the geographic location of revenues
      based on the location of its customers. All of the Companys assets
      are primarily located in Canada. Product revenue in excess of 10 percent
      of the Companys total revenue was earned from two customers during
      the year ended March 31, 2003, accounting for 45 and 14 percent of the total.
      In 2002, one customer located in the US accounted for 27 percent of the
      total revenue and in 2001, two customers located in US and South America
      accounted for 35 percent of total revenue.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Competition
|-----------



|The competitors for Plaintree are companies that
produce short-haul wireless  connectivity products which include RF, Microwave and FSO
companies. FSO has  significant advantages over radio-based systems for certain markets,
defined by  range, bandwidth, flexibility, ease of installation and environmental
requirements. As FSO addresses
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-10-
|----



|some of the problems that are created by the
abundant use of RF and Microwave systems, this Form will focus and address  competing FSO
companies.
|-------------------------------------------------------------------------------------------------------------------------------------------------



|The competitive landscape for FSO has
approximately 18 companies that target  various segments of the FSO market. Almost all of
Plaintrees known FSO  competition relies on laser-based transmitters, with
eye-damage risks and signal  degradation problems inherent in the technology. Only
Plaintrees WAVEBRIDGE LED  solution is certified to be the highest eye-safe Class 1
by the International  Electrotechnical Commission. Some customers have eliminated all
laser-based  systems by reason of safety concerns alone, and eye safety will become a
major  concern for residential and all indoor use.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The companies listed below use laser technology
as opposed to Plaintrees LED  technology.
|------------------------------------------------------------------------------------------



|Two of the larger FSO companies, AirFiber Inc.
and Terabeam Corp., did focus on  mesh network applications, involving several device
installations and the cost  of acquisition, installation and maintenance make these
systems more appropriate  to large carriers, and very large enterprises. Airfibre has
ceased to exist and  Terabeam is now changing its product line. The systems are high-end
(622 Mbps  and higher), short range products. Terabeam Corp. differs slightly in that it
has rolled out its own network in Seattle, Washington and Denver, Colorado.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|fSONA Communications Corporation (fSona), a
Canadian competitor, has laser  equipment that they claim provides data rates up to 1.25
Gbps (Gigabit Ethernet,  OC-24).
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Optical Access Inc. of Denver, Colorado supplies
optical wireless and IP switching and routing solutions using a mesh topology.
|-------------------------------------------------------------------------------------------------------------------------------



|LightPointe Communications Inc. of San Diego,
California, provides a range of  scaleable FSO products including 10 Mbps, 20 Mbps, 155
Mbps, 622 Mbps and 1.25  Gbps.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Other competitors include PAV Data Systems Ltd.
in the United Kingdom and Canon Europa, of Amsterdam, Netherlands.
|------------------------------------------------------------------------------------------------------------------



|Plaintree has learned from its customers and VARs
that the greatest market is  for units capable of carrying E1 and T1 (i.e. 2 Mbps), with
migration to 10 Mbps  and 100/155 Mbps. Plaintree appears to be one of the few FSO
companies that has  targeted the high-volume, lower-cost, lower bandwidth market.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company believes its WAVEBRIDGE LED optical
wireless links offer a very  competitive alternative to the competitors laser
products. However, there can  be no assurance that the Companys competitors will
not succeed in developing  products which are more effective than any that are being
developed by the  Company, or which would render the Companys technologies and
products obsolete  and non-competitive.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Many of the Companys competitors are significantly
      larger and have longer operating histories, greater name recognition and
      substantially greater financial, technical, personnel, research and development,
      marketing and other resources than the Company. The Company expects competition
      to persist and intensify. As well, such companies may have a better ability
      to withstand a prolonged downturn in the telecommunications market than
      the Company.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Intellectual Property
|---------------------



|The Company principally relies on copyright,
trade secret and contract law to  protect its proprietary technologies. It may be
possible for a third party to  copy or otherwise obtain and use the Companys
products or technologies without  authorization, or to develop similar technologies
independently and there can be  no assurance that such measures are adequate to protect
the Companys  proprietary technologies. In addition, the Companys products
may be licensed in  foreign countries and the laws of such foreign countries may treat
the  protection of proprietary rights differently than, and may not protect the  Companys
proprietary rights to the same extent as do, the laws of Canada.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Although the Company appreciates the benefits of
patent protection, it believes  that the rapid pace of technological change in this
industry makes patent  protection less significant than factors such as the knowledge,
ability and
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-11-
|----



|experience of the Companys employees,
frequent product enhancements, and the  timeliness and quality of support services
provided by the Company. The Company  also has registered trademarks in Canada and the
United States.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 5:  OPERATING AND FINANCIAL REVIEW AND
PROSPECTS
|-----------------------------------------------------



|A.  Operating Results
|---------------------



|The section of Managements
Discussion and Analysis contains, in accordance  with applicable Canadian
securities laws and policies, certain forward-looking  information about the business and
affairs of Plaintree. Such forward-looking  information is subject to significant risks
and uncertainties. The Companys  actual results could differ materially from those
anticipated in these  forward-looking statements. Readers should carefully review the
risks concerning  the business of the Company and the industries in which it operates
generally  described in the documents filed from time to time with the United States
Securities Exchange Commission and Canadian securities regulatory authorities.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The following discussion of the financial
condition, changes in financial  condition and results of operations of the Company for
the years ended March 31,  2003 and 2002 should be read in conjunction with the notes
therein. Historical  results of operations, percentage relationships and any trends that
may be  inferred therefrom are not necessarily indicative of the operating results of
any future period. All amounts are in Canadian dollars unless otherwise stated.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Overview
|--------



|At the beginning of fiscal 2003, management
watched the growing uncertainty in  the telecommunications market and the effect of this
on Plaintrees WAVEBRIDGE  series of optical wireless products known as FSO (Free
Space Optics). The term  Free Space Optics or FSO is interchangeable with optical
wireless or OW.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The downturn in this industry was dramatic and
it was managements opinion that  the market would not recover in the fiscal 2003
year. Management then began a  series of stringent moves to restructure the Company into
one that could survive  the expected drought.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The first move was to reduce the work force by 70% and substantially
      reduce the operational expenses of the Company. This was done by closing
      all of the regional sales offices around the world and centralising all
      sales activities in the Canadian head office. The manufacturing team was
      cut back to levels that ensured that Plaintree was just able to meet the
      downwardly revised sales forecasts. Finance was reduced to a level that
      more accurately reflected the volume of corporate activity. In March of
      2003, Plaintree ceased to have an official CFO and instead relied on spreading
      the finance tasks among the remaining employees and its outside advisors
      for guidance. The engineering team was reduced to just the key talent required
      to support our existing technology and manufacturing.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In November 2002, as part of the restructuring, Plaintree
      filed a formal proposal to its creditors under the Bankruptcy and Insolvency
      Act (Canada). The proposal was accepted by the creditors of the Company
      on January 8, 2003, and the Company has made its final payment under the
      proposal to the trustee.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In short, Plaintree intended to go into a state of hibernation
      that would allow it to support its customers and technology, but expend
      a minimum of cash until the demand for telecommunication products returned.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|However, after a very quiet summer and fall,
Plaintree received a US$389,000  order for its legacy switching product from Northrop
Grumman in the fall of  2002. Then in early fourth quarter of 2003, Plaintree began to
get inquiries  from around the globe about the Wavebridge product. This increase in
customer  activity prompted a ground up review of the FSO line and a subsequent increase
in R&D.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The product line was extensively redesigned.
Plaintree was able to do this under  tight budgeting due to the recent increase in
available engineering talent at  very reduced rates now found in the Ottawa area. The
Wavebridge line is now  largely modular, allowing field upgradeability. The new designs
ensure greater  commonality of components which assists in lower manufacturing costs.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-12-
|----



|A brand new line, the 400 Series, was announced and launched
      to address the markets requests for lower priced, intermediate range
      products. List priced at US$8,570 for a 100 Mbps 500 Metre link, this is
      now one of the least expensive and robust units on the market. Redesigned
      electronics have given the Wavebridge line performance increases of up to
      50%.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|These design improvements combined with an
increase in customer inquiries  enticed Targa to extend a further $225,000 in financing
in April 2003. This was  extended under the condition that this amount and any previous
amounts owing to  Targa be converted to a convertible debenture, subject to the approval
of the  Toronto Stock Exchange (TSX). The conversion price to be set at the
time of  each further advance. The TSX approval for this conversion right has been
applied for. Targa has continued to advance the funds under the concurrence with  the
Board that this condition will be met. An application has been made to the  TSX for
approval of the convertible debenture transaction and such application  is currently
pending.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In March of 2003, Plaintree was given a major
concession by its landlord, a  division of Targa, and was released from the terms of its
lease on its Merivale  location. Plaintree has now consolidated its operations at its
Arnprior  location.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Despite the above financing, the Company will
require an infusion of additional  capital in order to continue to operate in its present
form and develop its  business. In this regard, management continues to investigate other
sources of  financing.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Current Products and Market Overview
|------------------------------------



|The WAVEBRIDGE series of optical wireless
systems uses LED (light-emitting  diode) technology to provide a local and wide area
networking alternative to  wireline, fiber, leased circuits, and radio wave (RF) data
solutions. A  WAVEBRIDGE link is transparent, replicating at the remote site the exact
signal  it receives from the network. The WAVEBRIDGE series of products can be used as a
bridge to extend, overbuild, or replace conventional cabling systems. The  WAVEBRIDGE
system can also be used to transport data, voice, and video  information among computer
workstations, file servers, PBXs, and printers  either in the same office or
between office buildings. Implementing the  WAVEBRIDGE series technology offers various
advantages including seamless  replacement for cables or fiber, IEC (International
Electrotechnical Commission)  Class 1, eye safety under all reasonably foreseeable
conditions, ease of  installation and relocation, currently no regulatory licensing
required and an  estimated MTTF (Mean Time To Failure) in excess of 17 years.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Very few FSO companies specialize in LED
systems, the vast majority have chosen  Laser Systems. The Company has based its decision
to go LED on the fact that  only LED systems are 100% eye safe under any condition and
they feel that this  is going to become a major decision for customers of FSO. The
Company feels that  the other advantages of LED, such as ease of installation and low
cost, offset  the one disadvantage, that the fastest speeds you can drive an LED Diode is
155Mbps. It is the Companies opinion that the largest market for FSO is at  speeds of
155Mbps or less and will be for a number of years to come.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|After the recent period of retraction in the
telecommunication markets, it is  the Companys opinion that the demand for wireless
access and bandwidth is about  to increase. The popularity of Wi-Fi, internet high speed
and increases in cell  phone functions will drive this growth.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The risk the Company faces, along with most
other telecommunication companies,  is ensuring that cash flows are sufficient to allow
the Company to continue and  remain competitive until the markets begin this expected
growth phase. To this  end, as described below, the Company has lowered its operating
costs  dramatically and will strive to keep these costs low until the sales level
warrants operating increases.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Selected Financial Information
|------------------------------



|The Companys consolidated financial
statements are stated in Canadian dollars  and are prepared in accordance with Canadian
generally accepted accounting  principles, which also conform in all material respects
with accounting  principles generally accepted in the United States, except as disclosed
in note  20 of the consolidated financial statements. The following table sets
forth-selected financial information of the Company extracted from the Companys
respective audited consolidated financial statements.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-13-
|----



|Balance Sheet Data:
|-------------------

|                                      | As at
      March 31 
      (audited)
|------------------------------------- | -------------------------------------
|2003                                  | 2002                                 
|                                     
|(thousands of Canadian
      dollars)
|Current Assets                        | $    277                             
|Total Assets                          | $    540                             
|Current Liabilities                   | $ 1,446                              
|Total Liabilities                     | $ 1,446                              
|Shareholders
      Equity            | $ (906)                              



|Statement of Operations Data:
|-----------------------------

|                                                                        | Years
      Ended March 31(audited)
|----------------------------------------------------------------------- | -----------------------------------
|2003                                                                    |                                    
|                                                                       
|(thousands
      of Canadian dollars except earnings per share amounts)
|                                                                        |                                    
|Statement of Operations:                                                |                                    
|Revenue                                                                 | $   1,304                          
|Gross
      margin                                                      | 1,105                              
|Expenses:                                                               |                                    
|Sales
      and marketing                                               | 756                                
|Finance
      and administration                                        | 583                                
|Restructuring
      Expense                                             | 201                                
|Research
      and development                                          | 765                                
|Write-down
      of inventory                                           | 2,082                              
|Write-down
      of intangible assets                                   |                                   
|Loss
      from operations                                              | (3,283)                            
|Interest
      (expense) income                                         | (55)                               
|Other
      (expense) income                                            | (126)                              
|Net Loss                                                                | $ (3,463)                          
|Loss per Share
      (Basic and Diluted)                                | $   (0.04)                         



|Results of Operations
|---------------------



|A meaningful analysis of the financial results
for fiscal 2003 must take into  account the strategic decision to institute major cost
reductions and  consolidate operations. With this in mind, the following is a comparison
of the  Companys operations for the fiscal year ended March 31, 2003 to the fiscal
year  ended March 31, 2002.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Revenues
|--------



|Plaintree had approximately 40 evaluations going
on around the Globe at the end  of fiscal 2002. In early fiscal 2003 most of these
evaluation customers, despite  advising that the performance of the Wavebridge product
line met or exceeded  their requirements, began to go quiet. However, it is important to
note that the  reason for the non-conclusion of these sales was not, to our best
knowledge, due  to the proposed sale going to any of our competitors. It is Managements
view  that the main reason appears to have been a lack of demand and financing for  these
companies. The termination of all of Plaintrees regional sales offices  also had an
impact on revenue expectations. Despite these setbacks, product  revenue increased by
$232,472 from $1,071,596 in fiscal 2002 to $1,304,068 in  fiscal 2003. It is important to
remember that CDN$583,638 of these revenues came  from the sale of legacy switching
product to one customer as mentioned above. It  is not known if this customer will order
again.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-14-
|----



|Gross Margin
|------------



|Gross margin from product and service revenue
for fiscal 2003 was 85% compared  to 46% in fiscal 2002. The increase was largely due to
the impact of the legacy  switching product order described above that had a high gross
margin due to the  majority of the shipment being from written off inventory.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company expects its current and future
WAVEBRIDGE high speed optical  wireless products will represent a greater portion of the
Companys revenues in  the future and that the gross margin will return to a level
closer to that  attained in fiscal 2002.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Sales and Marketing
|-------------------



|Sales and marketing expenses consist primarily
of personnel and related costs  associated with the Companys sales and marketing
departments which include  commissions for sales representatives, advertising, travel,
trade shows and  other promotional activities. Sales and marketing expenses decreased by
$2,037,847 from $2,794,261 in fiscal 2002 to $756,414 in fiscal 2003. The  decrease was
due to major cutbacks on the international sales force and  marketing initiatives.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Finance and Administration
|--------------------------



|Finance and administration expenditures
decreased by $387,137 from $970,440 in  fiscal 2002 to $583,303 in fiscal 2003. The
decrease was primarily attributable  to a reduction in personnel.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Research and Development
|------------------------



|Research and development expenditures consist
primarily of software and hardware  engineering personnel expenses, subcontracted
research and development costs and  costs associated with equipment and facilities.
Research and development  expenditures decreased by $1,329,351 from $2,094,823 in fiscal
2002 to $765,472  in fiscal 2003. This decrease in expenses was predominately related to
the  Companys employee cutbacks and much reduced engineering consulting rates now
available.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Restructuring Expense
|---------------------



|Restructuring expense of $201,000 represents the
pay in lieu of notice expense  resulting from the layoff of approximately 70% of Plaintrees
workforce in May  2002.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Write-down of inventory
|-----------------------



|After reviewing the remaining switching and
certain WAVEBRIDGE product  inventory, management determined it should be written down to
reflect its  estimated recoverable values resulting from the extensive redesign of the
product line. This resulted in a $2,081,792 charge against income. Accordingly,  the
revised WAVEBRIDGE product line represents 100% of the inventory as at March  31, 2003.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Critical Accounting Policies
|----------------------------



|Management reviews all inventory on a quarterly
basis. Extensive redesigns of  the WaveBridge product and consequently the redundancy of
some components and  assemblies resulted in management writing down the inventory to
correctly  reflect recoverable values.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|New Accounting Pronouncements
|-----------------------------



|The effective new accounting pronouncements
affecting Plaintree Systems Inc. are  noted in Note 20 part (g) of the Notes to the
Consolidated Financial Statements  found in Item 19.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| |  | 
| |  | 



---





|-15-
|----



|Interest Income (Expense) and Other
|-----------------------------------

|Other loss and interest (expense) income
increased by $131,014 from an expense  of $49,366 in fiscal 2002 to an expense of
$180,380 in fiscal 2003. The increase  is primarily due to a reduction in cash and
short-term investment balances and  an increase in interest expense incurred on lease
arrears and credit facilities.  A gain on settlement of claims and debts of the unsecured
creditors of the  Company pursuant to the BIA proposal undertaken in the year is expected
to be  recognized in 2004.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Net loss
|--------



|The net loss for fiscal 2003 was $3,463,266 or
$0.04 per share compared to  $7,322,926 or $0.08 per share for fiscal 2002.
|--------------------------------------------------------------------------------------------------------------------------



|Subsequent Events
|-----------------



|In May and June of 2003, the Company had parties
fly in from Japan, England and  South Korea. Each of these groups made the trip
specifically to view the  Plaintree product and operations and compare Plaintree to its
competition. All  three are viewed by management as being credible options for our sales
network.  All three recently advised Plaintree that they view Plaintrees product
and  pricing to be superior to its competitors and all three have signed Value Added
Reseller (VAR) agreements. All three have since ordered demonstration units  which they
have paid for. In addition to these visitors, Plaintree has signed up  another 5 VARs and
2 distributors over the past five months.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|On July 15, 2003, the Company announced the
acquisition of a 49% interest in a  manufacturing partnership (the Partnership
Interest). In a related  transaction, Plaintree obtained a non-recourse credit
facility of $20,300,000  from a Canadian chartered bank to fund its required capital
contribution of  $20,000,000 to the partnership. As part of these transactions, the
Company  completed an internal restructuring of its operations transferring primarily all
of its business, its tangible assets and liabilities (other than its  intellectual
property, the Partnership Interest and the Targa debt) to a newly  incorporated
wholly-owned subsidiary of Plaintree, 4178611 Canada Inc (Newco).  Newco will continue to
carry on the former business of Plaintree. The net result  of this transaction for the
Company was an immediate cash injection of $300,000  into Plaintree which was used to
settle off the amount owing to the creditors  agreed to at the creditors meeting of
January 8, 2003 and to pay any commissions  and other fees connected with the partnership
transaction. In addition to this,  the partnership may provide up to $1,100,000 in cash
to the Company over the  next four years or less.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company received on July 31, 2003 its
certificate of full performance from  its proposal trustee confirming that the Company
has paid in full its commitment  to its creditors as agreed to under the formal proposal
to creditors and the  Company is now released from the protection of the BIA.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In a related issue, the TSX announced on July 9,
2003 that it was reviewing the  TSX listing of Plaintree for the following reasons: (1)
Insolvency or bankruptcy  proceedings; (2) Financial condition and/ or operating results;
and (3) Payment  of fees. On July 24, 2003, David Watson and fellow director, Jerry
Vickers  attended a meeting of the TSX Listing Committee and explained that Plaintree had
obtained the required funding necessary to satisfy its obligations under the  Second
Proposal and as such would be able to successfully emerge from its BIA  restructuring,
that the fees owed to the TSX were under the jurisdiction of the  BIA and they were
therefore about to be satisfied. The representatives of the  Company then presented cash
flows, sales forecasts and preliminary financial  statements for fiscal 2004. After this
presentation, the review committee agreed  to defer the review until November 28, 2003,
at which point the performance of  the Company will be again reviewed.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|On April 8, 2003, Jay Richardson and Scott
Sinclair resigned as directors of the  Company.
|------------------------------------------------------------------------------------------



|At the Companys annual meeting of
shareholders held on May 6, 2003, Jerry  Vickers was elected as a director.
|--------------------------------------------------------------------------------------------------------------



|In June 2003 John Buchanan, Senator and former
Premier of New Brunswick, joined  the Company as a director.
|-----------------------------------------------------------------------------------------------------------



|In response to increased market interest in the
Companys legacy switching  lines, the Company has begun to research new markets for
this product line.
|-------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-16-
|----



|B.  Liquidity and Capital Resources
|-----------------------------------



|The Company closed fiscal 2003 with no long-term
debt.
|------------------------------------------------------



|Cash provided by financing activities was
$18,843 for fiscal 2003 compared to  $1,286,320 in fiscal 2002. In fiscal 2003, the
Company paid back $200,000 of its  original Targa operating line. In early 2003, Targa
extended a further $225,000  loan to Plaintree.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Cash flow generated from investing activities
totaled $35,571 for fiscal 2003  including proceeds from the sale of short-term
investments of $27,328.
|-----------------------------------------------------------------------------------------------------------------------------------------------------



|In addition to the above noted Targa facility,
the Company may require an  infusion of additional capital in order to continue to
operate in its present  form and develop its business. Management continues to
investigate other sources  of financing. However, the source, timing and costs of such
infusion are  uncertain, and there is no certainty that the Company will be successful in
raising additional working capital, either through the sale of debt or equity
securities, or through commercial banking lines of credit.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|If the Company is not successful in obtaining
the necessary funding and/or if  the Company does not meet its existing forecast,
continuation of the existing  business may not be viable. There can be no assurance that
the Company will be  able to raise additional capital.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|C.  Research and Development and Licenses,
etc.
|-----------------------------------------------



|Research and development expenditures consist
primarily of software and hardware  engineering personnel expenses, subcontracted
research and development costs and  costs associated with equipment and facilities.
Research and development  expenditures decreased by $1,329,351 from $2,094,823 in fiscal
2002 to $765,414  in fiscal 2003. This decrease in expenses was predominately related to
the  Companys employee cuts backs and the result of reduced engineering consulting
rates now available to the company.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|D.  Trend Information
|---------------------



|The past two years have seen the demand for
telecommunications products all but  completely cease due to excess inventories, falling
demand and the inability of  the telecoms and service providers to raise funding for
capital expansion. This  of course resulted in Plaintrees less than expected sales
and the subsequent  cutbacks during this period.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|However, since the start of this calendar year, the Company
      has seen an increase in customer interest from around the world. Telecoms
      and Service Providers are now inquiring about evaluation units for network
      expansions that could result in multiple orders.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The key points of interest are the low price of
the Plaintree product and the  high bandwidth that this product can deliver.
|----------------------------------------------------------------------------------------------------------------------------



|This new interest in FSO has not yet resulted in
tangible sales for the Company  and discussions with competing FSO manufacturers around
the world has indicated  that no one is seeing actual order increases at this point in
time.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|It is the Companys expectation that this
initial interest period will last for  another few months and that by the end of Calendar
2003, beginning of 2004 the  industry will see increased sales of this equipment.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|E.  Off-Balance Sheet Arrangement
|---------------------------------



|On July 15, 2003, the Company completed the acquisition of
      a 49% minority interest (the Partnership Interest) for $20,000,000
      in an unrelated manufacturing partnership doing business in Canada. Plaintree
      will not be involved in the day to day management of the partnership. In
      a related transaction, Plaintree obtained a non-recourse credit facility
      (the Credit Facility) from a Canadian chartered bank in the
      amount of $20,300,000 to fund its required $20,000,000 capital contribution
      to the Partnership, to cover related acquisition expenses and to fund its
      payment obligations under the proposal approved by its creditors in July
      2003. The only security for the Credit Facility will
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-17-
|----



|be the Partnership Interest itself and the
Credit Facility  will be repaid only from cash distributions from the Partnership and not
from  Plaintrees general working capital. The Company anticipates generating
approximately $1,100,000 of cash flow from this investment over a five year  period,
following which the Partnership Interest will be terminated. In the  event that the
partnership is unable to execute on its business plan, the  availability of anticipated
cash flow will be diminished.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|As part of the these transactions, Plaintree
completed an internal restructuring  of its operations, transferring primarily all of its
business, its tangible  assets (other than its intellectual property and its Partnership
Interest) to a  newly incorporated wholly-owned subsidiary of Plaintree, 4178611 Canada
Inc.  (Newco). Newco has also assumed all of the liabilities of Plaintree,
except  for its liabilities to Targa Electronics Systems Inc. pursuant to various credit
facilities and its liabilities under the Credit Facility. Newco will continue to  carry
on the former business of Plaintree. This transfer was approved by the  shareholders of
Plaintree at its Annual and Special Meeting held on May 6, 2003.  See also description in
Item 5 Operating & Financial Review and Prospects;  Subsequent Events.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 6:  DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES
|---------------------------------------------------



|A.  Directors and Senior Management
|-----------------------------------

|                                
|--------------------------------
|Name                            
|                                
|William David Watson            
|                                
|W. David Watson II(1)(3)        
|                                
|Robert G. Shea(2)               
|                                
|Jerry Vickers(1)(2)             
|                                
|John Buchanan                   
|                                
|Girvan L. Patterson(1)
      (2)
|                                
|Lynn E. Saunders                
|                                
|Jason Lee                       
|                                



| | (1) | Member of the Compensation and Corporate Governance
      Committee.
| | --- | --------------------------------------------------------------------

| | (2) | Member of the Audit Committee.
| | --- | ------------------------------

| | (3) | David Watson II is the son of William David Watson
| | --- | --------------------------------------------------



|Set out below are profiles of the directors and
officers of the Company  including particulars of their principal occupations for the
past five years:
|------------------------------------------------------------------------------------------------------------------------------------------------------



|WILLIAM DAVID
      WATSON,Chairman of the Board of Directors and
      Vice President, Mergers and Acquisitions. Mr. Watson was appointed Chairman
      of the board of directors of the Company on February 9, 2000 and Vice President,
      Mergers and Acquisitions, effective November 1, 1999. Since November 4,
      1999, Mr. Watson has been acting as a special advisor to the Company. From
      October 1993 to November 1999, Mr. Watson was special advisor to Targa Group
      Inc., a company founded in 1993 as a vehicle for acquiring troubled companies
      and turning them around with a primary interest in avionics and high technology.
      Prior to 1993, Mr. Watson was a self-employed businessman involved with
      a number of corporations. Mr. Watson attended Ryerson Polytechnical Institute.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-18-
|----



|WILLIAM DAVID WATSON II, President, Chief
Executive Officer and Director. Mr. Watson became President and Chief Executive Officer
of the Company on November 4, 1999 and was appointed a director of the Company on
February 9, 2000. From October 1993 to November 1999, Mr. Watson was President and Chief
Executive Officer of Targa Group Inc. Prior to 1993, Mr. Watson was a tax specialist in
public and private practice. Mr. Watson holds a Bachelor of Management Economics from
the University of Guelph.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ROBERT E. SHEA, Director. Mr. Shea was
appointed a director of the Company on May 1, 2000. Mr. Shea is currently, and for the
past five years has been, Chairman of Shea Financial Group, a company engaged in the
design and funding of executive compensation plans. Mr. Shea has served on many boards
including, Highliner Foods Inc., MBB Helicopter Canada Inc., Halifax-Dartmouth
Industries Ltd., American Manor Corp., England Canada Business Council, Embassy
Insurance Agency Inc., Silk Fashion Group Ltd. and San-Vel Concrete Corporation.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|JOHN M. BUCHANAN, Director, Mr. Buchanan was
appointed to the Senate of Canada by the Rt. Hon. Brian Mulroney on September 12, 1990.
Prior to being appointed Senator, Mr Buchanan was elected Premier of Nova Scotia in
1978. He was re-elected in 1981, 1984 and 1988 becoming the third Premier in the
history of Nova Scotia to be elected to four consecutive terms and the fourth longest
premier in Nova Scotia. Mr. Buchanan was appointed Queens Council in 1972 and
awarded Doctorates from Mount Allison University, St. Marys University, St.
Francis Xavier University and Universite Ste. Anne. On April 17, 1982, Senator
Buchanan was made a member of Her Majestys Privy Council and in 1979 received the
Toastmasters International Communication and Leadership Award. Mr. Buchanan is an
executive member of the Canada-United States Inter-parliamentary Association.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|GIRVAN L. PATTERSON, Director. Mr. Patterson
was appointed a director of the Company in January 2000. In 1988, Mr. Patterson
co-founded CANAI Inc. (which in 1991 became Plaintree Systems Inc.) and from
1995 through 1999 was the Vice-President of International Sales, and served as the
Corporate Secretary of the Company from 1988 to 2001. Mr. Patterson is currently the
Chief Executive Officer of Motepoint Inc., a wireless mesh network applications
company. Mr. Patterson currently also serves as an advisor and director to several
early-stage corporations. Mr. Patterson was educated at Manchester and Aston
University in the United Kingdom and holds a Chartered Engineer designation.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|JERRY VICKERS, Director. Until recently, Mr.
Vickers was Vice-President, Corporate Finance, Technology Group for Desjardins
Securities, an indirect wholly-owned subsidiary of Desjardins Mouvement, a financial
services conglomerate. From August 1996 through to December 2001, Mr. Vickers was an
independent finance/business consultant to private and public companies. He has been a
director of private and public companies engaged in technology (software, hardware,
internet-based technologies) as well as the hospitality industry. He was a
Vice-President in Corporate Finance at Groome Capital.com Inc. and Yorkton Securities
Ltd. from July 1996 through to July 2000 specializing in new economy companies (i.e.
software, hi-tech, telecom, biotech). From January 1990 to July 1996, he was the Senior
Manager and Manager of Company Listings at the TSX. From July 1985 to December 1989, he
was a corporate lender at the CIBC and a senior analyst in Engineering Economics at Bell
Canada. Mr. Vickers earned a Master of Arts Degree in Economics from the University of
Toronto (1985) and a Bachelor of Arts (Honours) in Economics (summa cum laude) from
McMaster University (1982).
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|LYNN E. SAUNDERS, Vice President of Operations.
Ms. Saunders was appointed Vice President of Operations in 2000. Prior to this, Ms.
Saunders was the Manager of Operations and Finance at Hypernetics Limited from 1997 to
1999. Ms. Saunders also worked at Mitel Corporation as a supervisor in the Finance
department from 1996 to 1997.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|JASON LEE, Vice President of Business
Development. Mr. Lee joined the Company as a Regional Sales representative in June, 2000
and was appointed Vice President of Business Development on January 16, 2002. From 1998
to 2000, he was a Sales Engineer for Zim Technologies. Prior to 1998, Mr. Lee was an IT
consultant for various companies after studying Marketing and Computer Science at Durham
College of Applied Arts and Technologies in Oshawa, Ontario. In January 2002, Mr. Lee
received a scholarship for the Excellence in Leadership award by the Ottawa
Centre for Research and Innovation (OCRI).
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|B.  Compensation
|----------------



|(a) | The
following table sets forth the compensation for each of the  Companys last three
financial years paid to Mr. William David Watson  II who was, at March 31, 2003, the
president and Chief Executive  Officer of
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| |  | 
| |  | 



---





|-19-
|----



| | the Company (the Named
      Executive Officer). No other executive officer of the Company earned
      a combined salary and bonus in the excess of $100,000 during the fiscal
      year ended March 31, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b)
|---



|Summary Compensation Table
|--------------------------

|                                                                                      
|--------------------------------------------------------------------------------------
|Name and Principal
      Position                                                     
|                                                                                      
|William
      David Watson II, 
        President and Chief 
        Executive Officer
|                                                                                      
|2002                                                                                  
|                                                                                      
|2001                                                                                  
|                                                                                      



|(1) | Unless otherwise stated, perquisites
      and other benefits do not exceed the lesser of $50,000 and 10% of the total
      of the annual salary and bonus for any of the noted executive officers.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | All references are to options to
      acquire common shares.
|--- | -------------------------------------------------------------

|(3) | Salary is annualized. Actual salary
      paid to Mr. William David Watson II in fiscal 2002 was $187,917.
|--- | ----------------------------------------------------------------------------------------------------------





|Directors and Officers Liability
Insurance
|--------------------------------------------



|The Company does not maintain directors and
officers liability insurance on  behalf of its directors and officers.
|--------------------------------------------------------------------------------------------------------------------



|Long-Term Incentive Plan (LTIP)
Awards
|----------------------------------------



|The Company does not have a LTIP pursuant to
which cash or non-cash compensation  intended to serve as a long-term incentive for
performance (whereby performance  is measured by reference to financial performance or
the price of the Companys  securities or any other measure) was paid or distributed
to the Named Executive  Officer during the most recently completed financial year ended
March 31, 2003.  However, see Incentive Stock Options below.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Incentive Stock Options Granted to the Named
Executive Officer during Financial Year Ended March 31, 2003
|---------------------------------------------------------------------------------------------------------



|No options were granted to the Named Executive
Officer during this period.
|--------------------------------------------------------------------------



|The following table sets forth the particulars
of individual grants of options  to purchase common shares made to the Named Executive
Officer during the  financial year ended March 31, 2003.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                
|--------------------------------------------------------------------------------
|Name                                                                            
|                                                                                
|William David Watson II, 
        President and Chief 
        Executive Officer
|                                                                                



|(1) | In accordance with the Companys
      Stock Option Plan, options are granted at the closing price of the common
      shares on the Toronto Stock Exchange on the trading date immediately preceding
      the date of grant.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| |  | 
| |  | 



---





|-20-
|----



|Aggregated Option Exercises During the Most Recently
      Completed Financial Year Ended March 31, 2003 and Option Values as at March
      31, 2003
|-----------------------------------------------------------------------------------------------------------------------------------------------------



|The following table sets forth information with
respect to the exercise of  options during the financial year ended March 31, 2003 by the
Named Executive  Officer and the number and value of unexercised options held as at March
31,  2003.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                      
|--------------------------------------------------------------------------------------
|Name                                                                                  
|                                                                                      
|William
      David Watson II, 
        President and Chief 
        Executive Officer
|                                                                                      



|Compensation of Directors
|-------------------------



|During the fiscal year ended March 31, 2003, no
cash remuneration was paid to  the directors of the Company for their services as
directors. The Companys  current policy is not to pay cash compensation to any
individual for serving as  director. Rather, the directors receive incentive in the form
of stock options,  at the discretion of the board of directors, for serving as directors
of the  Company. The purpose of granting such options is to assist the Company in
compensating, attracting, retaining and motivating the directors of the Company  and to
align the personal interest of each of the directors to that of the  shareholders.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|No options were granted to the directors during
the fiscal 2003 year. On  November 21, 2001 and January 16, 2002, the Company granted
options to purchase  an aggregate of 620,000 common shares to its directors pursuant to
the Companys  stock option plan.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Incentive Stock Options
|-----------------------



|The Management and the directors of the Company
are of the view that to be able  to attract the most suitable employees, officers and
directors to the Company,  it is often necessary to be able to offer them options to
purchase common  shares, as an incentive or inducement. The Company has granted options
to  purchase common shares pursuant to the stock option plan of the Company. See  Executive
Compensation  Stock Option Plan.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|As of March 31, 2003, the Company has issued and
outstanding options to purchase  1,740,000 common shares at exercise prices ranging from
$0.29 per common share  to $7.00 per common share, of which options to purchase 1,070,500
common shares  have been granted to directors and officers of the Company.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|C.  Board Practices
|-------------------



|Employment Agreements of Named Executive
Officer
|------------------------------------------------



|On February 8, 2000, the Company entered into an employment
      agreement with Mr. William David Watson II (the Watson II Agreement)
      for his services as President and Chief Executive Officer of the Company
      effective November 4, 1999. The Watson II Agreement specifies, among other
      matters, duties, remuneration, confidentiality, termination of employment
      and non-competition provisions. The Watson II Agreement is for no fixed
      term and provides for an initial base salary of $200,000. The Watson II
      Agreement provides for salary to be reviewed on an annual basis and adjusted,
      as required, to reflect industry standards. Annual bonuses are at the discretion
      of the board of directors of the Company. The Watson II Agreement may be
      terminated by the Company upon twelve months notice to Mr. William David
      Watson II or by Mr. William David Watson II upon two months notice to the
      Company. During the 2003 fiscal year, Mr. William David Watson II voluntarily
      took a temporary salary reduction to $90,000 per year.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company has no other compensatory plan or
arrangement in respect of  compensation received or that may be received by any executive
officer in the  Companys most recently completed or current financial year to
compensate
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-21-
|----



|such  executive officer in the event of
termination of employment or in the event of a  change in responsibilities following a
change in control.
|-------------------------------------------------------------------------------------------------------------------------------------------------



|Audit Committee and Compensation and
Corporate Governance Committee
|-------------------------------------------------------------------



|The Companys audit committee is composed
of Robert G. Shea, Jerry Vickers and  Girvan Patterson The Companys compensation
and corporate governance committee  is composed of W. David Watson II, Girvan Patterson
and Jerry Vickers.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|D.  Employees
|-------------



|As at the date of this document, the Companys
total work force (including  service providers) is nine (9) persons. During fiscal 2003,
the Company laid off  over 70% of its work force (see Item 5: Operating and Financial
Review and  Prospects). All employees and service providers execute confidentiality
agreements with the Company and assignments of intellectual property rights to  the
Company. The Companys employees are not unionized.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|E.  Share Ownership
|-------------------



|The following table sets out the names of the
directors and senior management of  the Company together with the number of shares of the
Company held, directly or  indirectly, by each as at August 12, 2003;
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    
|--------------------
|Name                
|                    
|William David Watson
|                    
|W. David Watson II  
|                    
|Robert G. Shea      
|                    
|Jerry Vickers       
|                    
|John Buchanan       
|                    
|Girvan L. Patterson 
|                    
|Lynn E. Saunders    
|                    
|Jason Lee           
|                    



|As at the date hereof, the directors and senior
officers of the Company, as a  group, beneficially owned, directly or indirectly, 858,000
common shares,  representing 0.95% of the common shares then outstanding.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Stock Option Plan
|-----------------



|On July 9, 2001, the board of directors of the
Company resolved to amend the  1994 stock option plan to (i) change the name of the 1994
Stock Option Plan from  1994 Employee and Director Stock Option Plan to Stock
Option Plan; (ii)  allow the Company to grant options to directors, officers,
employees and service  providers; and (iii) increase the maximum number of options which
may be granted  from 4,500,000 to up to 8,600,000. The Company received shareholder
approval for  this amendment at the Companys annual meeting of shareholders held on
September  20, 2001. The purpose of the Stock Option Plan is to encourage ownership of
common shares by directors, officers, service providers and employees of the  Company and
its subsidiaries and thereby provide additional incentive for such  directors, officers,
service providers and employees of the Company and its  subsidiaries to promote the
success and business of the Company and its  subsidiaries.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-22-
|----



|The Stock Option Plan is administered by the
board of directors of the Company  and provides that a majority of members of the board
participating in any  decisions as to a grant of options under the Stock Option Plan
shall be persons  who are not employees of the Company. Options may be granted at any
time to any  director, officer, service provider or employee (who shall be a full-time
salaried employee of the Company or one of its subsidiaries) of the Company or  its
subsidiaries, taking into consideration, among other things, the past,  present and
potential contribution of a particular director, officer, service  provider or employee
to the success of the Company, the value of his or her  services to the Company and any
other factors which the board of directors may  deem proper and relevant provided that a
director to whom any option may be  granted may not participate in the discussion of the
board of directors to grant  such option.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Subject to the provisions of the Stock Option
Plan, the board of directors shall  determine the time or times when options shall be
granted, the number of common  shares for which any option may be granted, the option
exercise price at which  common shares may be purchased under any option, the conditions,
if any, to be  satisfied before any option may be exercised and the expiry date of any
option  and cause the Company, subsequent to the grant of an option, to enter into an
option agreement with each participant evidencing each option granted which  shall
incorporate such terms as the board of directors in its discretion deems  consistent with
the Stock Option Plan. The Stock Option Plan provides that the  terms and conditions upon
which an option is granted need not be the same for  each participant.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The maximum term of any option granted under the
Stock Option Plan is ten years  from the date of grant of the option. However, it is
currently the Companys  practice to grant options that expire five years after the
date of grant. The  expiration of any option is accelerated if the optionees
employment or  cessation of involvement with the Company terminates for any reason, other
than  for just cause, in which case the unexercised options granted to such optionee
immediately terminate. Subject to different arrangements being made between the  Company
and the optionee, the Stock Option Plan provides that the optionee has  90 days from the
date of termination, resignation, removal or discharge to  exercise all existing options,
except in the case of death of an optionee, in  which case options may be exercised by
the legal representative (or by the  person or persons to whom the rights of the optionee
have passed by will or  operation of law) generally for a period of 180 days from the
date of death.  Other than on death, the options are non-transferrable.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The current terms of the Stock Option Plan
provide that the maximum number of  options granted under the Stock Option Plan shall not
exceed 8,600,000, and the  number which may be reserved for issuance to any one
individual shall not exceed  5% of the issued and outstanding common shares (on a
non-diluted basis) at the  time of the granting.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The exercise price of an option is set by the
board of directors at the time of  grant, based upon the closing price on The Toronto
Stock Exchange of the common  shares on the last trading day prior to the date of the
grant. Payment of the  exercise price of an option may be made by cash, certified cheque
or bank draft.  The Stock Option Plan does not provide for any financial assistance to be
provided to any optionee to facilitate the purchase of common shares.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The board of directors may suspend, amend or
terminate the Stock Option Plan at  any time without notice, provided that no outstanding
option is adversely  affected thereby unless the affected participant consents to such
amendment. The  further approval of the Companys shareholders is required only for
amendments  that increase the number of shares available for issuance under the Stock
Option  Plan, that materially increase the benefits accruing to participants, or that
materially change the class of persons eligible for the granting of options.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|As of March 31, 2003, options to purchase a
total of 1,740,000 common shares are  outstanding under the Stock Option Plan.
|--------------------------------------------------------------------------------------------------------------------------



|(a) | The
following table provides information concerning outstanding options  to purchase Common
Shares under the 1994 Stock Option Plan and  predecessor plans and other agreements as of
August 31, 2003:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                
|------------------------------------------------
|Holder of Options                               
|                                                
|Total Options Outstanding                       
|                                                
|Officers and Directors
      as 
        a Group
|                                                





| |  | 
| |  | 



---





|-23-
|----



|(b) | The
following table provides information concerning outstanding options  to purchase Common
Shares under the ESOP and predecessor plans for the  executive officers listed in the
Summary Compensation Table as of March  31, 2003:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                
|--------------------------------------------------------------------------------
|Holder of Options                                                               
|                                                                                
|W. David Watson II
      
        President and Chief 
        Executive Officer
|                                                                                





|ITEM 7:  MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
|----------------------------------------------------------



|A. Major Shareholders
|---------------------



|(a) | To
the Companys knowledge, the Company is not directly or  indirectly owned or
controlled by another corporation or by  any foreign government.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------





|(b) | The
Companys major shareholders do not have any different  voting rights than the
Companys other shareholders.
|--- | ----------------------------------------------------------------------------------------------------------------





|(c) | The
following table sets forth the common shares held by the  owners of 5% or more of the
Common Shares, as known to the  Company, and the Companys directors and officers as
a group  as of August 31, 2003:
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    
|--------------------
|Title
      of Class
|                    
|Common
      Shares 
|                    
|Common
      Shares 
|                    





|(1) | As
of March 31, 2003, there were  90,221,634 Common Shares outstanding.
|--- | -----------------------------------------------------------------------





|B.  Related Party Transactions
|------------------------------



|There are no material interests, direct or
indirect, of directors, senior  officers, any shareholder who beneficially owns, directly
or indirectly, or  exercises control or direction over more than 10% of the outstanding
voting  shares of the Company or any known associate or affiliate of such persons, in
any transaction of the Company during the fiscal year ended March 31, 2003 or in  any
proposed transaction which has materially affected or will materially affect  the Company
except as disclosed under Executive Compensation - Employment  Agreements of Named
Executive Officers and the following:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|1. Pursuant to the terms of a lease between the
Company and Tidal Quality  Management Corporation (Tidal), a corporation
wholly owned by Targa Group Inc.  which beneficially owns 38.3% of the outstanding voting
shares of the Company,  the Company paid an aggregate of $105,828 in rent during the
fiscal year ended  March 31, 2003 to Tidal for the use of a building located at 2081
Merivale Road,  Ottawa, Ontario. On June 27, 2002, Tidal agreed to defer rental amounts
owing  and to allow such lease arrears to grow until the earlier of January 2003 and
until regular monthly payments resume. In exchange for this agreement, the  Company has
granted a collateral mortgage over its land and building property in  Arnprior, Ontario
to Tidal as security for the lease arrears. As at March 31,  2003, the total amount of
rental arrears owing to Tidal amounted to $240,220  including accrued interest. The
Company has moved its offices to Arnprior and no  longer leases the Tidal premises,
however, the rental arrears remain unpaid.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. Pursuant to a subscription agreement dated,
December 19, 2001, the Company  completed a private placement financing with Targa Group
Inc. of 3,911,765 units  of the Company at a subscription price of $0.34 per unit for
aggregate gross  proceeds of $1,330,000 less related issue costs of $35,970. Each unit is
comprised of one common share and one warrant. Each warrant entitles the holder  to
acquire one common share at an exercise price
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-24-
|----



|of $0.51 per common share up to  January 8,
2005. The financing was completed without the use of an agent and the  Company has not
undertaken to qualify any of the securities being offered  pursuant to the financing.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. The Company has in place an operating credit
facility with a Company  controlled by Targa Group Inc. under terms and conditions that
the Board of  Directors of the Company considers advantages considering the prevailing
market  conditions at the time the credit facility was entered into. The credit facility
is secured by a general security agreement covering all assets. The facility  bears
interest at the Companys banks prime rate plus 2%. As of March 31, 2003,  the
Company owes $266,321 including accrued interest to Targa Group Inc. under  the credit
facility. The Company is currently in default under the credit  facility and to date
Targa Group Inc. has not yet commenced enforcement  proceedings. On April 3, 2003, the
Company entered into another operating credit  facility with a Company controlled by
Targa Group Inc. that again was favourable  considering the market conditions prevailing
at that time. The credit line is  for $225,000, is secured by a general security
agreement that covers all assets  and bears an interest rate at 2% above the Companys
prime rate. As of July 31,  2003, the Company owes $170,000 plus accrued interest.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 8:  FINANCIAL INFORMATION
|------------------------------



|A.  Consolidated Statements and Other
Financial Information
|-----------------------------------------------------------



|The following financial statements of the
Company and the report of the  independent auditor are incorporated by reference in the
Companys 2003 Annual  Report:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(a) | Independent
Auditors Report relating to the Consolidated Financial  Statements and notes
thereto;
|--- | --------------------------------------------------------------------------------------------------





|(b) | Consolidated
Statements of Operations and Deficit for the Years  Ended March 31, 2002 and 2003;
|--- | -----------------------------------------------------------------------------------------------





|(c) | Consolidated
Balance Sheets as at March 31, 2002 and 2003;
|--- | ----------------------------------------------------------





|(d) | Consolidated
Statements of Changes in Cash Flows for the Years Ended March 31, 2002 and 2003;
|--- | ---------------------------------------------------------------------------------------------





|(e) | Notes
to the Consolidated Financial Statements.
|--- | -----------------------------------------------





|Legal Proceedings
|-----------------



|In 2003, a former executive of the Company
launched a lawsuit against the  Company and certain of its directors in the Ontario Court
of Justice concerning  an alleged breach of such executives employment contract
with the Company. This  lawsuit was settled with the plaintiff in return for the payment
by the Company  of an amount equal to the vacation pay accrued to the date of the
expiration of  the executives employment agreement.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|B.  Significant Changes
|-----------------------



|None
|----



| |  | 
| |  | 



---





|-25-
|----



|ITEM 9:  THE OFFER AND LISTING
|------------------------------



|A.  Offer and Listing Details
|-----------------------------



|The following table sets forth the high and low
sale prices of the common shares  for the fiscal periods indicated:
|-------------------------------------------------------------------------------------------------------------------

|                            
|----------------------------
|Toronto Stock Exchange (TSX)
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            
|                            

|As of August 31, 2003, approximately 11.35% of
the Companys common shares, or  10,240,746 common shares, were held by 53 persons
having addresses of record  located in the United States.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|B.  Plan of Distribution
|------------------------



|Not Applicable
|--------------



|C.  Markets
|-----------



|The common shares have been listed on the
Toronto Stock Exchange (the TSX)  since June 1993. The Company was listed on
the NASDAQ National Market from May  1995 to April 1, 1999. The Companys common
shares are also quoted on the OTCBB.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|D.  Selling Shareholders
|------------------------



|Not Applicable
|--------------



|E.  Dilution
|------------



|Not Applicable
|--------------



| |  | 
| |  | 



---





|-26-
|----



|F.  Expenses of the Issue
|-------------------------



|Not Applicable
|--------------



|ITEM 10:  ADDITIONAL INFORMATION
|--------------------------------



|A.  Share Capital
|-----------------



|Not Applicable
|--------------



|B.  Memorandum and Articles of Association
|------------------------------------------



|A description of the Companys Memorandum
and Articles of Association was  included as Item 10.B of the Companys Form 20-F
filed for the year ended March  31, 2002. There have been no changes made to the Companys
Memorandum and  Articles of Association as described previously.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|C.  Material Contracts
|----------------------



|See Item 4A.
|------------



|D.  Exchange Controls
|---------------------



|To the best of the Companys knowledge,
there are no governmental laws, decrees,  regulations or other legislation in Canada
which may affect the import or export  of capital by the Company.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|E.  Taxation
|------------



|Canadian Income Tax
|-------------------



|The following is a summary of the principal Canadian federal
      income tax considerations under theIncome Tax Act (Canada) (the
      Act) generally applicable to holders of Common Shares who are
      not resident or deemed to be resident in Canada, who hold their Common Shares
      as capital property and who do not use or hold and are not deemed to use
      or hold Common Shares in carrying on business in Canada, except, in certain
      situations, holders who carry on an insurance business in Canada and elsewhere.
      This summary is based on the current provisions of the Act, the regulations
      thereunder, specific proposals to amend the Act or the regulations publicly
      announced by the Minister of Finance before the date hereof and counsels
      understanding of the current administrative practices published by Canada
      Customs and Revenue Agency but does not take into account provincial or
      territorial income tax laws. This summary is not exhaustive of all possible
      income tax considerations and holders or prospective purchasers are advised
      to consult with their own tax advisers with respect to their particular
      circumstances.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Capital gains realized on the disposition of
Common Shares will not be subject  to tax under the Act unless such Common Shares are
taxable Canadian property of  the holder within the meaning of the Act. Common Shares
will generally not be  taxable Canadian property to a holder unless, at any time during
the five-year  period immediately preceding a disposition, the holder, persons with whom
the  holder did not deal at arms length was considered to own under the Act 25% or
more of the issued shares of any class or series of the Company. Even if the  Common
Shares constitute taxable Canadian property to a particular holder, an  exemption from
tax under the act may be available under the provisions of any  applicable international
tax treaty. In the case of residents of the United  States (other than certain former
residents of Canada), the Canada-United States  Income Tax Convention (1980) (the US/Canada
Tax Treaty) provides an exemption  from tax unless the value of the Common Shares
at the time of disposition is  derived principally from real property situated in Canada
(which the Company  believes is not currently the case and does not expect to be the case
in the  future).
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Dividends paid or credited on the Common Shares
will be subjected to Canadian  withholding tax under the Act at a rate of 25%, subject to
reduction under the  provisions of any applicable international tax treaty. In the case
of residents  of the Unites States who own less than 10% of the Companys voting
stock, the  U.S./Canada Tax Treaty reduces the rate to 15%. Under the U.S./Canada Tax
Treaty, dividends paid to certain religious, scientific, charitable
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-27-
|----



|and similar  tax-exempt organizations and
certain pension organizations that are resident in,  and exempt from tax in, the United
States are exempt from Canadian non-resident  withholding tax. Provided that certain
administrative procedures are observed  regarding registration of such organizations, the
Company will not be required  to withhold such tax from payments made to such
organizations. Qualifying  organizations that fail to follow the required administrative
procedures will  have to file a claim for refund to recover any amounts withheld.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|F.  Dividend and Paying Agents
|------------------------------



|Not Applicable
|--------------



|G.  Statement by Experts
|------------------------



|Not Applicable
|--------------



|H.  Documents on Display
|------------------------



|Copies of the documents concerning the Company
referred to in this form may be  inspected at the principal executive office of the
Company.
|-------------------------------------------------------------------------------------------------------------------------------------------



|I.  Subsidiary Information
|--------------------------



|The Company has one wholly-owned inactive
subsidiary named Plaintree Systems  Corporation, a corporation incorporated
under the laws of the State of  Delaware.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 11:  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS.
|----------------------------------------------------------------------



|Market risk represents the risk of loss that may
impact the financial statements  of the company due to adverse changes in financial
markets. The Company is  exposed to market risk from changes in foreign exchange rates
and interest  rates. Inflation has not had a significant impact on the Companys
results of  operations.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company is financed through loans from
related parties which bear interest  at rates tied to the Canadian bank prime rates.
Consequently, the Company is  exposed to the risk of increases in the prime rate.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Company is exposed to foreign exchange risk
in that the majority of its  sales are denominated in U.S. dollars. The Company does not
currently hedge its  exposure to currency or interest rate fluctuations.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 12:  DESCRIPTION OF SECURITIES OTHER
THAN EQUITY SECURITIES
|----------------------------------------------------------------



|Not Applicable
|--------------



|PART II
|-------



|ITEM 13:  DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES
|---------------------------------------------------------



|None.
|-----



|ITEM 14:  MATERIAL MODIFICATIONS TO THE
RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|--------------------------------------------------------------------------------------



|None.
|-----



|ITEM 15: CONTROLS AND PROCEDURES
|--------------------------------



|The Companys management carried out an
evaluation, with the participation of  the Chief Executive Officer, of the effectiveness
of the Companys disclosure  controls and procedures as of March 31, 2003. Based
upon that evaluation, the  Companys Chief Executive Officer concluded that the
Companys disclosure  controls and procedures were effective to ensure that
information required to be  disclosed by the Company in reports that it files
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 
| |  | 



---





|-28-
|----



|or submits under the  Securities Exchange Act of
1934 is recorded, processed, summarized and reported,  within the time periods specified
in the rules and forms of the Securities and  Exchange Commission. There has not been any
change in the Companys internal  control over financial reporting in connection
with the evaluation required by  Rule 13A-15(d) under the Exchange Act that occurred
during the fiscal year ended  March 31, 2003 that has materially affected, or is
reasonably likely to  materially affect, the Companys internal control over
financial reporting.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT
|------------------------------------------



|Girvan Paterson, a member of the Companys
board of directors and audit  committee is a financial expert.
|---------------------------------------------------------------------------------------------------------



|ITEM 16B: CODE OF ETHICS
|------------------------



|The Company has not yet developed a code of
ethics for its Chief Executive  Officer or its other principle officers. The Company has
been concentrating on  finding revenue and funding sources and this has taken significant
management  and board time. The Company will develop a code of ethics for its officers as
circumstances improve.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 16C: AUDIT FEES
|--------------------



|Deloitte & Touche LLP have been the auditors
of the Company for the last two  fiscal years. Audit Fees and Audit Related Fees for 2003
were $32,000 (2002-  $25,000) and $nil (2002 -$1,500) respectively.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|PART III
|--------



|ITEM 17:  FINANCIAL STATEMENTS
|------------------------------



|The following financial statements of the
Company and the report of the  independent auditor are incorporated by reference in the
Companys 2003 Annual  Report;
|----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(a) | Independent
Auditors Report relating to the Consolidated Financial  Statements and notes
thereto;
|--- | --------------------------------------------------------------------------------------------------





|(b) | Consolidated
Statements of Operations and Deficit for the Years Ended March 31, 2001, 2002 and 2003;
|--- | ----------------------------------------------------------------------------------------------------





|(c) | Consolidated
Balance Sheets as at March 31, 2002 and 2003;
|--- | ----------------------------------------------------------





|(d) | Consolidated
Statements of Changes in Cash Flows for the Years Ended March 31, 2001, 2002 and 2003; and
|--- | -------------------------------------------------------------------------------------------------------





|(e) | Notes
to the Consolidated Financial Statements.
|--- | -----------------------------------------------





|ITEM 18:  FINANCIAL STATEMENTS
|------------------------------



|The Company has elected to provide financial
statements pursuant to Item 17.
|----------------------------------------------------------------------------



|ITEM 19:  EXHIBITS
|------------------

|      
|------
|Number
|      
|1     
|      



| |  | 
| |  | 



---





|-29-
|----



|SIGNATURES
|----------



|The registrant hereby certifies that it meets
all of the requirements for filing  on Form 20-F and that it has duly caused and
authorized the undersigned to sign  this annual report on its behalf.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date:  September 30, 2003
|-------------------------



| |  |  | PLAINTREE SYSTEMS INC.
| |  |  | ----------------------



| |  | Per: | /s/ David Watson
      David Watson 
      Chief Executive Officer
| |  | ---- | ------------------------------------------------------------------







---





|Consolidated Financial Statements of
|------------------------------------



|PLAINTREE SYSTEMS INC.
|----------------------



|March 31, 2003
|--------------



| |  | 
| |  | 



---





|Independent Auditors Report
|----------------------------



|To the Board of Directors of 
Plaintree Systems Inc.
|----------------------------------------------------



|We have audited the accompanying consolidated
balance sheets of Plaintree  Systems Inc. and subsidiary as at March 31, 2003 and 2002
and the related  consolidated statements of operations, shareholders equity and
cash flows for  each of the years in the three-year period ended March 31, 2003. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial  statements
based on our audits.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|In our opinion, these consolidated financial
statements present fairly, in all  material respects, the financial position of the
Company and subsidiary as at  March 31, 2003 and 2002 and the results of its operations
and its cash flows for  each of the years in the three-year period ended March 31, 2003,
in accordance  with Canadian generally accepted accounting principles.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|/s/ Deloitte & Touche LLP
|-------------------------



|Chartered Accountants 
Ottawa, Canada
|-------------------------------------



|July 25, 2003, except for Note 22 which is as of
July 31, 2003
|--------------------------------------------------------------



|Comments by Auditor on Canada-United States
of America Reporting Difference
|---------------------------------------------------------------------------



|In the United States of America, reporting
standards for auditors require the  addition of an explanatory paragraph when the
financial statements are affected  by conditions and events that cast substantial doubt
on the Companys ability to  continue as a going concern, such as those described in
Note 1 to the financial  statements. Although we conducted our audits in accordance with
both auditing  standards generally accepted in Canada and in the United States of
America, our  report to the Board of Directors dated July 25, 2003 is expressed in
accordance  with Canadian reporting standards which do not permit a reference to such
conditions and events in the auditors report when these are adequately  disclosed
in the financial statements.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Chartered Accountants 
Ottawa, Canada
|-------------------------------------



|July 25, 2003
|-------------



| |  | 
| |  | 



---





|PLAINTREE SYSTEMS INC. Financial Statements March 31, 2003
|----------------------------------------------------------

---

|                                                |  | PAGE  
|----------------------------------------------- |  | ------
|Consolidated Balance Sheets                     |  | 1     
|                                                |  |       
|Consolidated Statements of Operations           |  | 2     
|                                                |  |       
|Consolidated Statements of Cash Flows           |  | 3     
|                                                |  |       
|Consolidated Statements of Shareholders Equity |  | 4     
|                                                |  |       
|Notes to the Consolidated Financial Statements  |  | 5 - 23

| |  | 
| |  | 



---





|PLAINTREE SYSTEMS INC.
|----------------------

|Consolidated Balance Sheets 
      as at March 31, 2003 and 2002
|----------------------------------------------------------------

|                                                                        | 2003 |                 |  
|----------------------------------------------------------------------- | ---- | --------------- | -
|CURRENT ASSETS                                                          |      |                 |  
|Cash                                                                    |      | $        42,148 |  
|Short-term investments                                                  |      |                |  
|Trade accounts receivable
      (net of allowance for doubtful accounts |     
|of $110,160;
      2002 - $137,827)                                     |      | 90,884          |  
|Investment tax credits
      receivable                                 |      |                |  
|Current portion of
      loans receivable (Note 6)                      |      |                |  
|Due from related parties
      (Note 18)                                |      |                |  
|Inventories - net
      (Note 4)                                        |      | 116,343         |  
|Prepaid expenses and
      advance contract payments                    |      | 27,384          |  
|                                                                       
|                                                                        |      | 276,759         |  
|LOANS RECEIVABLE (Note 6)                                               |      |                |  
|CAPITAL ASSETS (Notes 5 and 18)                                         |      | 263,655         |  
|                                                                       
|                                                                        |      | $      540,414  |  
|                                                                       
|CURRENT LIABILITIES                                                     |     
|Due to related party
      (Note 8)                                     |      | $      297,856  |  
|Due to related parties
      (Note 18)                                  |      | 377,808         |  
|Accounts payable and
      accrued liabilities (Note 9)                 |      | 745,363         |  
|Warranty reserve                                                        |      | 25,073          |  
|                                                                       
|                                                                        |      | 1,446,100       |  
|                                                                       
|GUARANTEES, CONTINGENCIES AND
      COMMITMENTS (Note 17)               |     
|SHAREHOLDERS (DEFICIENCY)
      EQUITY                                 |     
|Share capital (Note
      10)                                           |     
|Series
      I, preferred shares (authorized - 7,000; NIL outstanding)  |      |                |  
|Series
      II, preferred shares (authorized - 9,000; NIL outstanding) |      |                |  
|Common
      shares (unlimited number of shares authorized, 90,221,634  |     
|outstanding;
      2002 - 90,221,634)                                   |      | 97,561,140      |  
|Deficit                                                                 |      | (98,019,751     | )
|Accumulated foreign
      currency translation adjustment               |      | (447,075        | )
|                                                                       
|                                                                        |      | (905,686        | )
|                                                                       
|                                                                        |      | $      540,414  |  
|                                                                       



|APPROVED BY THE BOARD:
|----------------------



| |  | 
| |  | 



|1
|-



|See accompanying Notes to the Consolidated
      Financial Statements
|---------------------------------------------------------------------



| |  | 
| |  | 



---





|PLAINTREE SYSTEMS INC.
|----------------------

|Consolidated Statements of Operations 
      years ended March 31, 2003, 2002 and 2001
|--------------------------------------------------------------------------------------

|                                               | 2003 |                
|---------------------------------------------- | ---- | ---------------
|Revenue                                        |      |                
|Product and service revenue                    |      | $   1,304,068  
|Management service revenue (Note
      18)     |      |               
|                                              
|                                               |      | 1,304,068      
|                                              
|Cost of revenue                                |     
|Product and service costs                      |      | 199,370        
|Management service costs                       |      |               
|                                              
|                                               |      | 199,370        
|                                              
|Gross margin                                   |      | 1,104,698      
|                                              
|Operating expenses                             |     
|Sales and marketing                            |      | 756,414        
|Finance and administration                     |      | 583,303        
|Research and development                       |      | 765,472        
|Restructuring (Note 11)                        |      | 200,603        
|Write-down of inventory (Note
      11)        |      | 2,081,792      
|Write-down of intangible assets
      (Note 7) |      |               
|                                              
|                                               |      | 4,387,584      
|                                              
|Loss from operations                           |      | (3,282,886     
|Interest (expense) income (Note 12)            |      | (54,847        
|Other income (loss) (Note 13)                  |      | (125,533       
|                                              
|NET LOSS                                       |      | $(3,463,266    
|                                              
|Basic and diluted loss                         |     
|per common share (Note 15)                     |      | $         (0.04
|                                              
|Weighted average common shares                 |     
|outstanding                                    |      | 90,221,634     
|                                              



|See accompanying Notes to the Consolidated
      Financial Statements
|---------------------------------------------------------------------



|2
|-



| |  | 
| |  | 



---





|PLAINTREE SYSTEMS INC.
|----------------------

|Consolidated Statements of Cash Flows 
      years ended March 31, 2003, 2002 and 2001
|--------------------------------------------------------------------------------------

|                                               | 2003 |                 |  
|---------------------------------------------- | ---- | --------------- | -
|OPERATING                                      |      |                 |  
|Net loss                                       |      | $(3,463,266     | )
|Items not affecting cash                       |     
|Amortization                                   |      | 200,798         |  
|Shares issued for
      services               |      |                |  
|Write-down of intangible
      assets          |      |                |  
|Loss on disposal of
      capital assets       |      | 113,805         |  
|Changes in non-cash operating                  |     
|working capital items
      (Note 16)          |      | 2,703,566       |  
|                                              
|                                               |      | (445,097        | )
|                                              
|INVESTING                                      |     
|Purchases of capital assets                    |      |                |  
|Capitalized development costs                  |      |                |  
|Decrease (increase) in loans receivable        |     
|from related parties                           |      | 8,243           |  
|Proceeds from disposition of                   |     
|short-term investments                         |      | 27,328          |  
|                                              
|                                               |      | 35,571          |  
|                                              
|FINANCING                                      |     
|Payments on capital leases                     |      |                |  
|Proceeds from disposal of capital
      assets |      | 18,843          |  
|Proceeds on issuance of share
      capital -  |     
|net of issue costs                             |      |                |  
|                                              
|                                               |      | 18,843          |  
|                                              
|Decrease in cash                               |      | (390,683        | )
|Cash, beginning of year                        |      | 432,831         |  
|                                              
|Cash, end of year                              |      | $      42,148   |  
|                                              
|Supplementary information:                     |     
|Interest paid                                  |      | $           297 |  



|See accompanying Notes to the Consolidated
      Financial Statements
|---------------------------------------------------------------------



|3
|-



---



|PLAINTREE SYSTEMS INC.
|----------------------

|Consolidated Statements of Shareholders Equity 
      years ended March 31, 2003, 2002 and 2001
|------------------------------------------------------------------------------------------------

|                              | Common Shares |            |                                                                             |                                        
|----------------------------- | ------------- | ---------- | --------------------------------------------------------------------------- | ---------------------------------------
|                              | Number        | Amount     | Accumulated
      Foreign
      Currency
      Translation
      Adjustment | Retained
      Earnings
      (Deficit)
|Balance March 31, 2001        |               | 86,059,869 |                                                                             | $96,189,610                            
|Issuance of shares            |              
|Private issue net of $35,970  |              
|issue costs (Note
      10)   |               | 3,911,765  |                                                                             | 1,294,030                              
|Issued for services (Note 10) |               | 250,000    |                                                                             | 77,500                                 
|Net loss                      |               |           |                                                                             |                                       
|                             
|Balance March 31, 2002        |               | 90,221,634 |                                                                             | 97,561,140                             
|Net loss                      |               |           |                                                                             |                                       
|                             
|Balance March 31, 2003        |               | 90,221,634 |                                                                             | $97,561,140                            
|                             



|See accompanying Notes to the Consolidated
      Financial Statements
|---------------------------------------------------------------------



|4
|-



---







|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|1. | GOING
CONCERN
|-- | -------------





| | The
financial  statements have been prepared assuming that the Company  will continue as a
going  concern, which contemplates the realization of  assets and the satisfaction of
liabilities in the normal course of  business. However, there is substantial doubt about
the Companys  ability to continue as a going concern because of the Companys
losses  during the past year of $3,463,266 and an accumulated deficit of  $98,019,751 as
at March 31, 2003. The Companys continued existence is  dependent upon its ability
to raise additional capital, to increase  sales and ultimately become profitable.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
Company believes that future funding and certain sales-related  efforts will provide
sufficient cash flow for it to continue as a going  concern in its present form. However,
there can be no assurances that  the Company will achieve such results and to date, the
Company has not  secured such funding either through an equity investment or strategic
partnership. Accordingly, the consolidated financial statements do not  include any
adjustments related to the recoverability and  classification of recorded asset amounts
or the amount and  classification of liabilities or any other adjustments that might be
necessary should the Company be unable to continue as a going concern.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | DESCRIPTION
OF BUSINESS
|-- | -----------------------





| | The
Company designs, develops, manufactures, markets and supports  optical wireless links,
network switches and telecommunications  products that allow its customers to improve the
performance and  increase the manageability of their existing local area networks,  while
providing a migration path to emerging networking technologies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | ACCOUNTING
POLICIES
|-- | -------------------





| | The
consolidated financial statements have been prepared in accordance  with Canadian
generally accepted accounting principles. These  principles conform in all material
respects with accounting principles  generally accepted in the United States of America
except as disclosed  in Note 20.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Basis
of presentation
| | ---------------------



| | The
consolidated  financial  statements  include  the  accounts of the Company and its
wholly-owned inactive U.S. subsidiary,  Plaintree Systems Corporation.  All significant
intercompany accounts and transactions have been eliminated.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Inventories
| | -----------



| | Finished
goods are valued at the lower of cost (first-in, first-out)  and net realizable value.
Work in process and raw materials are valued  at the lower of cost and replacement cost.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Provisions
for excess and obsolete inventory are made in the period in  which management determines
the inventory to be excess or obsolete.
| | -------------------------------------------------------------------------------------------------------------------------------------------



| | 5 | 
| | - | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|3. | ACCOUNTING
POLICIES (Continued)
|-- | -------------------------------





| | Capital
assets
| | --------------



| | Capital
assets are stated at cost. Amortization is provided using the  following methods and
rates:
| | ---------------------------------------------------------------------------------------------------

| | Software                      | 2 years straight-line            
| | ----------------------------- | ---------------------------------
| | Computer and office equipment | 3 years straight-line            
| | Other equipment               | 2 years straight-line            
| | Furniture and fixtures        | 20% declining-basis              
| | Leasehold improvements        | Straight-line over the lease term
| | Building                      | 20 years straight-line           



| | The
Companys policy is to review all long-lived assets for impairment  whenever events
or changes in circumstances indicate that the carrying  amount as an asset may not be
recoverable. If events or changes in  circumstances indicate that the carrying amount of
such assets may not  be recoverable, the Company will estimate the future cash flows
expected to result from the use of the assets and their eventual  disposition and record
an impairment of the assets if required.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Research
and development costs
| | ------------------------------



| | Research
costs are expensed as incurred. Development costs are deferred  once technical
feasibility has been established and all criteria for  deferral under generally accepted
accounting principles are met. Such  costs are amortized, commencing when the product is
released, over the  lesser of the expected life of the related product and three years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Revenue
recognition and warranties
| | ----------------------------------



| | Revenue
from product sales is recorded on shipment provided evidence of  an arrangement exists
and collection is probable. In addition, a  provision for potential warranty claims is
recorded at the time of  sale, based on warranty terms and prior claims experience.
Customer  support and maintenance contracts are sold separately from the  product.
Service revenue is recognized when the service is performed,  or, in the case of
maintenance contracts, is recognized on a  straight-line basis over the term of the
contract. Deferred revenue  arises when maintenance or services are paid in advance.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Management
service revenue is recognized when the service is performed.
| | -----------------------------------------------------------------------



| | Foreign
currency translation
| | ----------------------------



| | The
Company accounts for its foreign subsidiary using the temporal  method resulting in
foreign exchange gains and losses being included  in the determination of net earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Other
monetary assets and liabilities, which are denominated in  currencies foreign to the
local currency of the operation, are  translated to the local currency at fiscal year-end
exchange rates,  and transactions included in earnings are translated at rates
prevailing during the fiscal year. Exchange gains and losses resulting  from the
translation of these amounts are included in net earnings.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6 | 
| | - | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|3. | ACCOUNTING
POLICIES (Continued)
|-- | -------------------------------





| | Stock
option plans
| | ------------------



| | The
Company has stock option plans as described in Note 10. Effective  April 1, 2002, the
Company adopted the new recommendations of section  3870 of the CICA Handbook (CICA
3870) with respect to stock-based  compensation. The Company records an expense
only when the exercise  price of the option is lower than the market price of the stock
on the  date of grant. To date, no option grants have met the criteria for  expense
recognition. The Company discloses in Note 10 the pro forma  effect of the options on the
net loss as if they were valued using a  fair value method.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Use
of accounting estimates
| | ---------------------------



| | The
preparation of financial statements in conformity with generally  accepted accounting
principles requires the Companys management to  make estimates and assumptions that
affect the reported amounts of  assets and liabilities and disclosure of contingent
assets and  liabilities as at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods  presented. Actual results
could differ from the estimates made by  management.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Income
taxes
| | ------------



| | The
Company uses the asset and liability method to account for income  taxes. Future income
tax assets and liabilities are recognized for the  future tax consequences attributable
to differences between the  carrying amounts of existing assets and liabilities for
accounting  purposes, and their respective tax bases. Future income tax assets and
liabilities are measured using statutory tax rates expected to apply to  taxable income
in the years in which those temporary differences are  expected to be recovered or
settled. The effect on future income tax  assets and liabilities of a change in statutory
tax rates is recognized  in net income in the year of change. A valuation allowance is
recorded  for those future income tax assets whose recoverability is not  sufficiently
likely.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | INVENTORIES
|-- | -----------



| |                 | 2003      | 2002      
| | --------------- | --------- | ----------
| | Raw materials   | $  81,328 | $1,088,068
| | Work in process | 34,820    | 524,850   
| | Finished goods  | 195       | 450,000   
| |                 |          
| |                 | $116,343  | $2,062,918
| |                 |          



| | 7 | 
| | - | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|5. | CAPITAL
ASSETS
|-- | --------------



| |                               | 2003        
| | ----------------------------- | ------------
| |                               | Cost        
| |                               |             
| | Software                      | $     57,538
| | Computer and office equipment | 2,724,702   
| | Other equipment               | 233,392     
| | Furniture and fixtures        | 134,213     
| | Leasehold improvements        |            
| | Land and building             | 218,672     
| |                               |             
| |                               | $3,368,517  
| |                               |             
| |                               |             
| |                               | 2002        
| |                               | Cost        
| |                               |             
| | Software                      | $     57,538
| | Computer and office equipment | 2,724,702   
| | Other equipment               | 304,290     
| | Furniture and fixtures        | 142,148     
| | Leasehold improvements        | 255,657     
| | Land and building             | 218,672     
| |                               |             
| |                               | $3,703,007  
| |                               |             



|6. | LOANS
RECEIVABLE
|-- | ----------------



|                                                                                                                                                    |  | 2003            | 2002      
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ----------
|                                                                                                                                                    |  |                 |           
|Note receivable, bearing interest at 6.5%, principal and 
        interest repayable in monthly installments of $613, maturing  
        April 2003 |  |                 |           
|                                                                                                                                                    |  | $              | $    8,243
|                                                                                                                                                    |  |                
|                                                                                                                                                    |  |                | 8,243     
|Less current portion                                                                                                                                |  |                | 7,027     
|                                                                                                                                                    |  |                
|Non-current portion                                                                                                                                 |  | $              | $    1,216
|                                                                                                                                                    |  |                



|The loans are unsecured and were made to senior
officers of the  Company.
|-------------------------------------------------------------------------



| | 8 | 
| | - | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|7. | INTANGIBLE
ASSETS
|-- | -----------------



| |                                          | 2003         | 2002           |  
| | ---------------------------------------- | ------------ | -------------- | -
| |                                          |              |                |  
| | Goodwill and acquired technology at cost | $           | $1,485,075     |  
| | Less accumulated amortization            |             | (742,537       | )
| | Less write-down                          |             | (742,538       | )
| |                                          |             
| |                                          | $           | $             |  
| |                                          |             



| | On
March 29, 2000, the Company acquired all the business assets of A.T.  Schindler
Communications Inc. (ATS), a designer and manufacturer of the  FiRLAN wireless networking
products. The acquisition has been accounted  for by the purchase method of accounting.
The purchase consideration  was comprised of $346,655 cash and the issuance of 2,569,921
common  shares. The difference between the purchase price valued at $1,631,616  and the
fair value of the acquired net tangible assets of $146,541  amounted to $1,485,075, which
is attributable to acquired technology  and goodwill (the intangible assets).
The intangible assets were to  be amortized over their expected useful lives of four
years on a  straight-line basis and reviewed periodically for impairment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | At
March 31, 2002, it became evident that the carrying amount of the  intangible assets
would not be recoverable. As a result, the net book  value of intangible assets remaining
on the books of $742,538 was  written off.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | CREDIT
FACILITY DUE TO RELATED PARTY
|-- | ------------------------------------





| | The
Company had in place an operating credit facility with a company  controlled by Targa
Group Inc., the largest shareholder of the Company.  The credit facility was secured by a
general security agreement  covering all assets of the Company but expired on March 25,
2003. The  Company is consequently in default on this facility and no further  draws may
be made. As at March 31, 2003, the facility which bears  interest at the Companys
banks prime rate plus 2%, amounted to  $266,321 (2002 - $400,000). This principal
amount and interest arrears  of $31,535 (2002 - $NIL) are due upon demand and are
reflected as the  due to related party amount shown as a current liability on the balance
sheet.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | A
new agreement was signed subsequent to year-end authorizing a new  credit facility with
the same company controlled by the Targa Group as  above. Under the terms of the new
credit facility, the Company can draw  to a maximum of $225,000. This new facility is
also secured by a  general security agreement over the assets of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. | ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
|-- | ----------------------------------------





| | Accounts
payable and accrued liabilities are comprised of:
| | ----------------------------------------------------------

| |                               | 2003     | 2002       | 
| | ----------------------------- | -------- | ---------- | 
| |                               |          |            | 
| | Accounts payable              | $424,670 | $251,116   | 
| | Accrued liabilities           | 117,526  | 200,852    | 
| | Restructuring                 | 200,603  |           | 
| | Salaries and benefits payable |         | 145,134    | 
| | Commissions payable           | 2,564    | 19,311     | 
| |                               |         
| |                               | $745,363 | $  616,386 | 
| |                               |         



| | 9 | 
| | - | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|10. | SHARE
CAPITAL
|--- | -------------





| | Authorized
| | ----------

| |  | Unlimited number of preferred shares, issuable
      in series
| |  | --------------------------------------------------------------

| | Series I:  | 7% cumulative dividend payable in cash
      or, subject to applicable law and stock exchange approval, common shares;
      semi-annually on the 30th day of May and November of each year;  
      redeemable at the option of the Company and retractable at the option of
      the holder at $1,000 per share after November 21, 2002 or on the occurrence
      of a merger event;  
      convertible at the option of the holder to 1,647,058 common shares at any
      time prior to November 22, 2002;  
      amounts due for redemption or retraction may be converted to common shares
      at the option of the Company;  
      non-voting.
| | ---------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Series II: | 7% cumulative dividend payable in cash
      or, subject to applicable law and stock exchange approval, common shares;
      semi-annually on the 30th day of May and November of each year;  
      redeemable at the option of the Company and retractable at the option of
      the holder at $1,000 per share after June 3, 2003 or on the occurrence of
      a merger event; 
      convertible at the option of the holder to 4,186,046 common shares at any
      time prior to June 4, 2003;  
      amounts due for redemption or retraction may be converted to common shares
      at the option of the Company;  
      voting.               









| |  | Unlimited number of common shares
| |  | ---------------------------------



| | Pursuant
to a subscription agreement dated, December 19, 2001, the  Company completed a private
placement financing with Targa Group Inc.  (Targa), the Companys principal
shareholder at the time, of 3,911,765  units of the Company at a subscription price of
$0.34 per unit for  aggregate gross proceeds of $1,330,000 less related issue costs of
$35,970. Each unit is comprised of one common share and one warrant.  Each warrant
entitles the holder to acquire one common share at an  exercise price of $0.51 per common
share up to January 8, 2005. The  financing was completed without the use of an agent and
the Company has  not undertaken to qualify any of the securities being offered pursuant
to the financing.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Pursuant
to the terms of an employment agreement entered into during  the year 2000, the Company
issued 250,000 common shares in 2002 to an  employee for no cash consideration. All
common shares issued resulted  in compensation expense being recorded in 2002 in the
amount of $77,500  which was determined based on the market price of the shares at the
time of issuance.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Warrants
| | --------



| | As
at March 31, 2003, 3,911,765 common share purchase warrants remain  outstanding. Each
warrant is exercisable into one common share of the  Company at an exercise price of
$0.51 per common share, expiring  January 8, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | As
at March 31, 2002, 5,000,000 common share purchase warrants and  400,000 agent
compensation warrants remained outstanding. Each of the  common share purchase warrants
were exercisable at $2 per common share  of the Company, expiring June 30, 2001. Each
compensation warrant were  exercisable into one common share of the Company at an
exercise price  of $1.09 per warrant, expiring March 30, 2002. None of these warrants
were exercised during their exercise period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|10. | SHARE
CAPITAL (Continued)
|--- | -------------------------





| | Stock
option plans
| | ------------------



| | During
fiscal 2002 the Company amended the 1994 Stock Option Plan to  (i) change the name of the
1994 Stock Option Plan from 1994 Employee  and Director Stock Option Plan to
Stock Option Plan; (ii) allow the  Company to grant options to officers and
service providers; and (iii)  increase the maximum number of options which may be granted
under the  1994 Stock Option Plan from 4,500,000 to up to 8,600,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
Company also has a 1993 stock option plan for key employees and  directors. No further
options are eligible for grant under the 1993  plan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------



| | Options
under the stock option plans may not expire later than 10 years  from the date of grant
and the exercise price may not be less than the  latest closing price of the common
shares on the last trading day  preceding the date of grant. Eligibility is determined by
the Companys  Board of Directors and the aggregate number available for issuance to
any one person may not exceed 5% of the issued and outstanding common  shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Activity
in the stock option plan is summarized as follows:
| | -----------------------------------------------------------

| |                                    | Number ofOptions | OptionPrice | WeightedAverageOptionPrice
| | ---------------------------------- | ---------------- | ----------- | --------------------------
|
|
|
| | Options outstanding March 31, 2001 | 1,712,000        |             | $0.72-$7.00               
| |                                    |                  |             |                           
| | Granted during fiscal 2002         | 2,207,000        |             | $0.29-$0.51               
| | Cancelled                          | (68,000          | )           | $0.72-$5.35               
| |                                    |                 
| | Options outstanding March 31, 2002 | 3,851,000        |             | $0.29-$7.00               
| |                                    |                  |             |                           
| | Granted during fiscal 2003         |                 |             |                          
| | Cancelled                          | (2,111,000       | )           | $0.29-$4.80               
| |                                    |                 
| | Options outstanding March 31, 2003 | 1,740,000        |             | $0.29-$7.00               
| |                                    |                 



| | Additional
information regarding options outstanding as of March 31,  2003 is as follows:
| | -----------------------------------------------------------------------------------------

|                                       | Options Outstanding       | Options Exercisable                                                                    
|-------------------------------------- | ------------------------- | ---------------------------------------------------------------------------------------
|Range of 
      Exercise 
      Prices | Number 
      Outstanding | Weighted 
        Average 
        Remaining 
        Contractual 
        Life (Years)
|                                      
|                                      
|                                      
|                                      
|$0.29 - $0.39                          | 1,000,000                 |                                                                                        
|$0.50 - $0.72                          | 165,000                   |                                                                                        
|$0.95 - $1.40                          | 50,000                    |                                                                                        
|$2.31 - $2.35                          | 375,000                   |                                                                                        
|$7.00                                  | 150,000                   |                                                                                        
|                                      
|$0.29 - $7.00                          | 1,740,000                 |                                                                                        
|                                      

| | 11 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|10. | SHARE
CAPITAL (Continued)
|--- | -------------------------





| | Stock
option plans
| | ------------------



| | Additional
information regarding options outstanding as of March 31,  2002 is as follows:
| | -----------------------------------------------------------------------------------------

|                                       | Options Outstanding       |                                                                                         | Options Exercisable                                 
|-------------------------------------- | ------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------------------
|Range of 
      Exercise 
      Prices | Number 
      Outstanding | Weighted 
        Average 
        Remaining 
        Contractual 
        Life (Years) | Weighted 
      Average 
      Exercise 
      Price
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|$ 0.29 - $ 0.39                        | 1,807,500                 |                                                                                         | 4.8                                                 
|$ 0.50 - $ 0.72                        | 845,500                   |                                                                                         | 3.9                                                 
|$ 0.95 - $ 1.40                        | 376,000                   |                                                                                         | 3.3                                                 
|$ 1.95 - $ 2.35                        | 662,000                   |                                                                                         | 4.0                                                 
|$ 4.80 - $ 7.00                        | 160,000                   |                                                                                         | 1.1                                                 
|                                      
|$ 0.29 - $ 7.00                        | 3,851,000                 |                                                                                         | 4.2                                                 
|                                      



| | CICA
3870 requires pro forma disclosures of the net loss and loss per  share, as if a fair
value based method of accounting had been applied.  As there were no option grants in
fiscal 2003, no pro forma  disclosures are provided.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11. | WRITE-DOWN
OF INVENTORY AND RESTRUCTURING CHARGES
|--- | -------------------------------------------------





| | During
2003 and 2002, it became evident that the Company would not  recover the cost of certain
inventory reflected on the balance sheet.  Accordingly, the Company has written down this
inventory by $2,081,792  (2002 - $1,362,840; 2001 - $1,442,493) to reflect estimated
recoverable  value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | During
2003, the Company restructured its operations in order to reduce  costs and streamline
operations. Restructuring charges, primarily  workforce reduction related, recorded
during 2003 were $200,603 and  remain in accrued liabilities at March 31, 2003. In total,
26 employees  were terminated of which 7 performed research and development, 10 were
involved in manufacturing and 9 were involved in sales and  administration activities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12. | INTEREST
(EXPENSE) INCOME
|--- | -------------------------





| | Interest
expense in fiscal 2003 is presented net of interest income in  the amount of $4,291. (In
2002, interest income on the financial  statements was presented net of interest expense
of $1,425. In 2001  interest income on the financial statements was presented net of
interest expense of $10,337).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 12 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|13. | OTHER
INCOME
|--- | ------------





| | Other
income is comprised of the following items:
| | -------------------------------------------------

| |                                    | 2003        |  | 2002       |  | 2001     
| | ---------------------------------- | ----------- |  | ---------- |  | ---------
| | Foreign exchange (loss) gain       | $  (23,213) |  | $(129,709) |  | $   5,849
| | Gain on creditor proposal          |            |  |           |  | 130,827  
| | Loss on disposal of capital assets | (113,805)   |  |           |  |         
| | Miscellaneous                      | 11,485      |  | 15,026     |  | 23,223   
| |                                    |            
| |                                    | $(125,533)  |  | $(114,683) |  | $159,899 
| |                                    |            



|14. | INCOME
TAXES
|--- | ------------





| | (a)
Investment tax credits
| | --------------------------



| |  | At March 31, 2003, the Company has approximately
      $4,774,000 (2002 - $4,846,000) of investment tax credits, relating primarily
      to research and development, available to reduce future years Canadian federal
      income taxes. These potential benefits expire as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2004 | $ 516,000   | 
| | ---- | ----------- | 
| | 2005 | 799,000     | 
| | 2006 | 1,314,000   | 
| | 2007 | 1,561,000   | 
| | 2011 | 240,000     | 
| | 2012 | 344,000     | 
| |      | $ 4,774,000 | 



| | (b)
Tax losses available to carry forward
| | -----------------------------------------



| |  | The
Company has losses available to reduce future years Canadian  federal and
provincial taxable income totalling approximately  $42,859,000 and $46,353,000
respectively. These potential benefits  expire as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |      | Federal      |  | Provincial  
| | ---- | ------------ |  | ------------
| | 2004 | $ 1,180,000  |  | $ 3,592,000 
| | 2005 | 13,872,000   |  | 13,872,000  
| | 2006 | 14,592,000   |  | 15,682,000  
| | 2007 | 880,000      |  | 872,000     
| | 2008 | 3,850,000    |  | 3,850,000   
| | 2009 | 5,032,000    |  | 5,032,000   
| | 2010 | 3,453,000    |  | 3,453,000   
| |      |             
| |      | $ 42,859,000 |  | $ 46,353,000
| |      |             



| | 13 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|14. | INCOME
TAXES (Continued)
|--- | ------------------------





| | (c)
Research and development deductions
| | ---------------------------------------



| |  | The Company has claimed less research and development
      expenses for income tax purposes than has been reflected in the financial
      statements. These unclaimed expenses total approximately $20,593,000 (2002
      - $20,593,000; 2001 - $19,350,000) for Canadian federal and provincial income
      tax purposes. These are available without expiry to reduce future years
      taxable income.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
potential future benefits associated with investment tax credits,  tax losses, and
unclaimed research and development expenses have not  been reflected in these financial
statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Current
federal and provincial tax law in Canada includes provisions  limiting the annual use of
net operating loss and credit carryforwards  in the event of certain defined changes in
stock ownership.  Accordingly, the annual use of the Companys net operating loss
and  credit carryforwards could be limited according to these provisions in  the event of
certain changes in stock ownership.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
provision for income taxes reported differs from the amount  computed by applying the
Canadian statutory rate to the income (loss)  before income taxes for the following
reasons:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                    |  | 2003             |   | 2002             |   | 2001             |  
| | ---------------------------------------------------------------------------------- |  | ---------------- | - | ---------------- | - | ---------------- | -
| |                                                                                    |  |                  |   |                  |   |                  |  
| | Statutory income tax rate (Canada)                                                 |  | 38.1%            |   | 40.9%            |   | 43.1%            |  
| |                                                                                    |  |                  |   |                  |   |                  |  
| | Expected recovery of income tax                                                    |  | $(1,320,197      | ) | $(2,993,612      | ) | $(1,942,631      | )
| | Reversal of timing differences, the  
           benefit of which are not recorded |  | (1,728           | ) | 929,491          |   | 294,604          |  
| | Benefit of loss carryforward not recorded                                          |  | 1,318,799        |   | 2,057,214        |   | 1,644,895        |  
| | Other                                                                              |  | 3,126            |   | 6,907            |   | 3,132            |  
| |                                                                                    |  |                 
| | Reported income tax provision                                                      |  | $               |   | $               |   | $               |  
| |                                                                                    |  |                 



| | The
source of accumulated timing differences and the related future  income taxes as at March
31 are as follows:
| | ----------------------------------------------------------------------------------------------------------------

| |                                                                              |  | 2003                 |   | 2002               |  
| | ---------------------------------------------------------------------------- |  | -------------------- | - | ------------------ | -
| |                                                                              |  |                      |   |                    |  
| | Accounting amortization in excess of tax                                     |  | $   2,048,000        |   | $   2,386,000      |  
| | Research and development expenses  
           not deducted for tax purposes |  | 6,203,000            |   | 6,203,000          |  
| | Losses available to offset future  
           income taxes                  |  | 13,190,000           |   | 12,078,000         |  
| | Other                                                                        |  | 96,000               |   | 192,000            |  
| |                                                                              |  |                     
| | Future income tax assets before  
           valuation allowance             |  | 21,537,000           |   | 20,859,000         |  
| | Less valuation allowance                                                     |  | (21,537,000          | ) | (20,859,000        | )
| |                                                                              |  |                     
| | Future income taxes                                                          |  | $                   |   | $                 |  
| |                                                                              |  |                     



| | 14 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|15. | LOSS
PER COMMON SHARE
|--- | ---------------------





| | Loss
per share has been calculated on the basis of net loss divided by  the weighted average
number of common shares outstanding during the  year. Diluted loss per common share is
calculated by dividing the  applicable net loss by the sum of the weighted average number
of  common shares outstanding and all additional common shares that would  have been
outstanding if potentially dilutive common shares had been  issued during the period. The
treasury stock method is used to compute  the dilutive effect of options and warrants.
For all years presented,  diluted loss per share is the same as basic loss per share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | For
all years presented, basic and diluted loss per share under United  States generally
accepted accounting principles are the same as the  amounts presented under Canadian
generally accepted accounting  principles.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|16. | CHANGES
IN NON-CASH OPERATING WORKING CAPITAL ITEMS
|--- | ---------------------------------------------------

| |                                                             |  | 2003       |   | 2002       |   | 2001        |  
| | ----------------------------------------------------------- |  | ---------- | - | ---------- | - | ----------- | -
| |                                                             |  |            |   |            |   |             |  
| | Trade accounts receivable                                   |  | $  105,365 |   | $  188,423 |   | $   839,294 |  
| | Investment tax credits receivable                           |  | 246,000    |   | (156,000   | ) | (90,000     | )
| | Due to related parties                                      |  | 36,878     |   | 404,241    |   | (345,447    | )
| | Inventories                                                 |  | 1,946,575  |   | 454,874    |   | (1,358,105  | )
| | Prepaid expenses and advance  
           contract payments |  | 76,084     |   | 94,327     |   | (87,505     | )
| | Due to related party                                        |  | 181,020    |   | 400,000    |   | -           |  
| | Accounts payable and accrued liabilities                    |  | 128,977    |   | (43,455    | ) | (1,082,072  | )
| | Warranty reserve                                            |  | (17,333    | ) | (23,683    | ) | 66,089      |  
| |                                                             |  |           
| |                                                             |  | $2,703,566 |   | $1,318,727 |   | $(2,057,746 | )
| |                                                             |  |           





|17. | GUARANTEES,
COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------------------





| | Commitments
| | -----------



| | The
Company is committed under lease contracts for the rental of  certain premises and
certain equipment in the aggregate amount of  approximately $8,900.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | Annual
lease payments over the life of the leases are as follows:
| | -----------------------------------------------------------------

| | 2004 | $6,700 | 
| | ---- | ------ | 
| | 2005 | 2,200  | 
| |      |        | 
| |      | $8,900 | 
| |      |        | 



| | The
Company was awarded a Microelectronics and System Development  Program (MSDP) grant
during 1991 for approximately $1,800,000 to  assist in the development and
commercialization of certain of its  products. This grant is repayable to the government
in the form of a  royalty of two percent of total sales attributable to those products
and expired in February 2003. These products were not sold during  2003, 2002 or 2001.
This royalty does not apply to the Companys  WaveSwitch line of products.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 15 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|17. | GUARANTEES,
COMMITMENTS AND CONTINGENCIES (Continued)
|--- | -----------------------------------------------------





| | Contingencies
| | -------------



| | The
Company has signed a general security agreement over all corporate  assets in favour of a
company controlled by Targa Group Inc., the  largest shareholder of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Guarantees
| | ----------



| | Plaintree
has entered into agreements that contain features which meet  the definition of a
guarantee under Canadian Accounting Guideline (AG)  14 and U.S. FIN 45. The
pronouncements define a guarantee to be a  contract that contingently requires Plaintree
to make payments (either  in cash, financial instruments, other assets, common shares of
the  Company or through the provision of services) to a third party based on  changes in
an underlying economic characteristic (such as interest  rates or market value) that is
related to an asset, a liability or an  equity security of the other party. Plaintree has
the following major  types of guarantees that are subject to the disclosure requirements
of  AG 14 and FIN 45:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Product
warranties
| |  | ------------------



| |  | As
part of the normal sale of product, Plaintree provides its  customers with product
warranties. These warranties extend for  periods generally ranging from one to two years
from the date  of sale. The following summarizes the accrual of product  warranties that
is recorded as part of accrued liabilities in  the accompanying consolidated balance
sheet as at March 31,  2003:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Balance at the beginning of the year |  | $  42,406 |  
| | ------------------------------------ |  | --------- | -
| |                                      |  |           |  
| | Payments made during the year        |  | (42,406   | )
| | Warranties issued during the year    |  | 25,073    |  
| |                                      |  |           |  
| | Balance at end of year               |  | $  25,073 |  
| |                                      |  |           |  



|18. | RELATED
PARTY TRANSACTIONS
|--- | --------------------------





| | Until
March 31, 2003, the Company leased facilities in Canada from a  company controlled by
Targa Group Inc., the largest shareholder of the  Company. For the year, lease costs for
these facilities amounted to  $116,335 (2002 - $105,828; 2001 - $105,878). Lease arrears
including  interest of $21,412 (2002 - $NIL) owing to this related party amounted  to
$240,220. During the year, this related party entered into a  forbearance agreement with
Plaintree whereby Plaintree agreed to repay  the amounts owing and the related party was
provided with a security  interest in the form of a mortgage on the property owned by the
Company. As a result of the proposal to creditors, the forbearance  agreement is now in
default and the amounts owing are due and payable.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Consulting
fees and salary to a senior officer of the Company and  majority shareholder of Targa
Group Inc., amounted to $151,679, plus  interest charges of $5,658 for a total payable of
$157,337. Sales and  marketing expense includes $151,679 for these fees paid and salary.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 16 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|18. | RELATED
PARTY TRANSACTIONS (Continued)
|--- | --------------------------------------





| | In
the past, the Company performed consulting and management services  under an agreement
between the Company and corporations controlled by  Targa Group Inc.. The amount owed to
the Company related to these  services is $19,749. The consulting and management fees
billed under  this agreement totalled $275,000 in 2002 and $750,000 in 2001. These  fees
are included in revenue and the related costs of $77,145 in 2002  and $232,710 in 2001
are included in cost of revenue.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
amounts arising from the related party transactions comprise the  due to related parties
amount, and are shown as a current liability on  the balance sheet.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



|19. | BUSINESS
SEGMENT INFORMATION
|--- | ----------------------------





| | The
Companys chief decision maker, the Chief Executive Officer tracks  the Companys
operations as principally one business segment - the  design, development, manufacture,
marketing and support of computer  networking products. The Company also provides
management services  primarily to related companies. The revenue and cost of sales
related  to these services are presented on the statement of operations. No  other
expenses or assets are attributable to this segment.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
Company determines the geographic location of revenues based on the  location of its
customers. All of the Companys assets are primarily  located in Canada.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Revenue
by geographic location
| | ------------------------------

| |               |  | 2003         |  | 2002        |  | 2001      
| | ------------- |  | ------------ |  | ----------- |  | ----------
| |               |  |              |  |             |  |           
| | Canada        |  | $     81,610 |  | $   519,559 |  | $1,066,752
| | United States |  | 948,271      |  | 361,750     |  | 470,748   
| | Europe        |  | 77,553       |  | 31,211      |  | 330,274   
| | Other         |  | 196,633      |  | 434,076     |  | 131,846   
| |               |  |             
| |               |  | $1,304,067   |  | $1,346,596  |  | $1,999,620
| |               |  |             



| | Product
revenue in excess of 10 percent of the Companys total revenue  was earned from two
customers during the year ended March 31, 2003 who  accounted for 45 and 14 percent of
the total. In 2002, one customer  accounted for 27 percent of total revenue and in 2001,
two customers  accounted for 35 percent of total revenue.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 17 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|20. | RECONCILIATION
TO UNITED STATES GAAP
|--- | ------------------------------------





| | The
financial statements of the Company have been prepared in  accordance with Canadian
generally accepted accounting principles  (GAAP). The following adjustments and/or
additional disclosures would  be required in order to present the financial statements in
accordance  with United States generally accepted accounting principles (GAAP):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Under
US GAAP, the net loss and loss per common share figures for the  years ended March 31,
2003, 2002 and 2001 and the shareholders (deficiency) equity for the years ended
March 31, 2003, 2002 and 2001  would be adjusted as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                             | Net loss         
| | --------------------------------------------------------------------------- | -----------------
| |                                                                             |                  
| |                                                                             | 2003             
| |                                                                             |                  
| | Canadian GAAP                                                               | $ (3,463,266)    
| |                                                                             |                  
| | Adjustment to development costs (a)                                         |                 
| |                                                                             |                  
| | Adjustment to operating expenses 
          relating to share issuances (b) |                 
| |                                                                             |                  
| | US GAAP                                                                     | $ (3,463,266)    
| |                                                                             |                  
| | Basic and diluted loss per share 
         based on US GAAP                 | $          (0.04)
| |                                                                             |                  



| | Under
US GAAP, for all periods presented, net loss is equivalent to  comprehensive loss.
| | ----------------------------------------------------------------------------------------

| |                                                                            | Shareholders
      (deficiency) equity
| | -------------------------------------------------------------------------- | ---------------------------------------
| |                                                                            |                                        
| |                                                                            | 2003                                   
| | Canadian GAAP                                                              | $ (905,686)                            
| |                                                                            |                                        
| | Adjustment to development costs (a)                                        |                                       
| |                                                                            |                                        
| | Adjustment to operating expenses 
         relating to share issuances (b) |                                       
| |                                                                            |                                        
| | US GAAP                                                                    | $ (905,686)                            
| |                                                                            |                                        



| | (a)Accounting for development
      costs
| | -----------------------------------------



| |  | Under
US GAAP, development costs would not be deferred.  Accordingly under US GAAP, research
and development expenses and  net loss would have been adjusted by $NIL (2002 - $114,717;
2001 -  ($114,717)). Closing deficit and shareholders equity would have  been
adjusted by $NIL (2002 - $NIL; 2001 - $114,717). The basic  and diluted loss per share
would be ($0.04) (2002 - ($0.08); 2001  - ($0.06)).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 18 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|21. | RECONCILIATION
TO UNITED STATES GAAP (Continued)
|--- | ------------------------------------------------





| | (b)  Accounting for stock options
      and share issuances
| | -----------------------------------------------------------



| |  | The Company applies Accounting Principles Board
      Opinion No. 25, Accounting for Stock Issued to Employees, and
      related interpretations, in accounting for its employee stock option plan.
      Accordingly, no compensation expense has been recognized for its stock-based
      compensation plan. Had compensation cost for the Companys employee
      stock option plan been determined based on the fair value at the grant date
      for awards under the plan, consistent with the methodology prescribed under
      Statement of Financial Accounting Standards No. 123, Accounting for
      Stock-Based Compensation, the Companys net loss would have decreased\increased
      to the pro forma amounts indicated below:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                               | 2003               |  | 2002              |  | 2001             
| | ------------------------------------------------------------- | ------------------ |  | ----------------- |  | -----------------
| | Net loss as reported for US GAAP 
         purposes           | $ (3,463,266)      |  | $ (7,086,334)     |  | $ (4,743,858)    
| | Estimated stock based 
         compensation (costs) reversal | 255,199            |  | (385,519)         |  | (344,018)        
| |                                                               |                   
| | Pro forma net loss                                            | $ (3,208,067)      |  | $ (7,471,853)     |  | $ (5,087,876)    
| |                                                               |                   
| | Pro forma basic net loss 
         per share                  | $           (0.04) |  | $          (0.09) |  | $          (0.06)
| |                                                               |                   



| |  | The weighted average fair value of all options
      granted during 2002 and 2001 was estimated as of the date of grant using
      the Black-Scholes option pricing model with the following weighted average
      assumptions:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                              | 2003 |  | 2002 |  | 2001
| | ---------------------------- | ---- |  | ---- |  | ----
| | Expected option life (years) | N/A  |  | 4.5  |  | 4.5 
| | Volatility                   | N/A  |  | 130% |  | 129%
| | Risk free interest rate      | N/A  |  | 3.5% |  | 5.6%
| | Dividend yield               | N/A  |  | NIL  |  | NIL 



| |  | The weighted average fair value of grant, for
      stock options granted during 2002 and 2001 were $0.29 and $1.12 per option,
      respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Black-Scholes model used by the Company to
      calculate option values, as well as other currently accepted option valuation
      models, were developed to estimate the fair value of freely tradable, fully
      transferable options without vesting restrictions, which significantly differ
      from the Companys stock option awards. These models also require highly
      subjective assumptions, including future stock price volatility and expected
      time until exercise, which greatly affect the calculated values. Accordingly,
      management believes that this model does not necessarily provide a reliable
      single measure of the fair value of the Companys stock option awards.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 19 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|20. | RECONCILIATION
TO UNITED STATES GAAP (Continued)
|--- | ------------------------------------------------





| | (b)  Accounting for stock options
      and share issuances (Continued)
| | -----------------------------------------------------------------------



| |  | For the year ended March 31, 2001, compensation
      expense of $121,875 would be recorded under US GAAP pursuant to FASB Interpretation
      No. 28, Accounting for Stock Appreciation Rights and other Variable
      Stock Option or Award Plans as a result of 250,000 shares issuable
      to an employee related to development of products. If the Company reported
      under US GAAP, this accrual would change at each reporting date until the
      final measurement date. Under Canadian GAAP, compensation expense is based
      upon the market price at the time of share issuance which resulted in compensation
      expense of $77,500 for the year ended March 31, 2002. Under US GAAP, the
      date of share issuance becomes the measurement date and compensation expense
      is fixed at $77,500, resulting in a reduction of the previous accrual under
      US GAAP of $44,375 and a reversal of the Canadian accrual of $77,500 for
      a total reduction of Canadian GAAP income of $121,875 in fiscal 2002 to
      arrive at US GAAP income. Accordingly, under US GAAP, fiscal 2002 finance
      and administration expenses and net loss would have been reduced by $121,875
      (2001 - increased by $121,875). The closing deficit and shareholders
      equity would have been adjusted by $NIL (2001 - reduced by 121,875). The
      basic and diluted loss per share would be $(0.08) (2001 - $(0.06)).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c)  Accounting for investment tax
      credits
| | ------------------------------------------------



| |  | Under US GAAP, the benefit of investment tax
      credit receivable would be recorded as an income tax recovery, rather than
      as a reduction of research and development expense under Canadian GAAP.
      Accordingly, under US GAAP, research and development expense and the loss
      from operations would increase by $39,754 to $805,226 and $3,322,640 (2002
      - $156,000 to $2,250,823 and $7,429,560; 2001 - $90,000 to $1,329,861 and
      $5,167,381) respectively. An income tax recovery of $39,754 (2002 - $156,000;
      2001 - $90,000) would be reflected resulting in no change to the net loss.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d)Accounting for write-down of
      inventory
| | -----------------------------------------------



| |  | Under US GAAP, the write-down of inventory would
      be recorded in cost of sales, rather than operating expenses. Accordingly,
      under US GAAP, cost of sales would increase by and the gross margin and
      operating expenses would decrease by $2,081,792 to $2,281,162, ($977,094),
      and $2,305,792, (2002 - $1,362,840 to $2,018,094, ($671,498) and $6,602,062;
      2001 - $1,442,493 to $2,622,500, ($622,880) and $4,454,501) respectively,
      resulting in no change to the net loss.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e)Accounting for short-term investments
| | ----------------------------------------



| |  | Under US GAAP, the short-term investment would
      be classified as an available-for-sale security. The investment for the
      2002 fiscal year is a guaranteed investment certificate that matures on
      April 5, 2002 and earns interest at a rate of 1.25% per annum.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 20 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|20. | RECONCILIATION
TO UNITED STATES GAAP (Continued)
|--- | ------------------------------------------------





| | (f)  Derivative instruments
| | ---------------------------



| |  | In June 1998, the Financial Accounting Standards
      Board issued the Statement of Financial Accounting Standards No. 133 (SFAS
      133), Accounting for Derivative Instruments and Hedging Activities.
      SFAS 133 establishes accounting and reporting standards for derivative instruments,
      including certain derivative instruments embedded in other contracts, (collectively
      referred to as derivatives) and for hedging activities. Implementation of
      SFAS 133 was required for the Company effective April 1, 2001. The adoption
      of SFAS 133 did not have an effect on the Companys financial position
      or results of operations.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g)  Recent United States Accounting
      Standards
| | ----------------------------------------------------



| |  | In January 2003, the FASB issued Interpretation
      No. 46 (FIN 46) Consolidation of Variable Interest Entities.
      FIN 46 clarifies the application of Accounting Research Bulletin No. 51
      Consolidated Financial Statements to those entities defined
      as Variable Interest Entities (more commonly referred to as
      special purpose entities) in which equity investors do not have the characteristics
      of a controlling financial interest or do not have sufficient
      equity at risk for the entity to finance its activities without additional
      subordinated financial support from other parties. FIN 46 applies immediately
      to all Variable Interest Entities created after January 31, 2003, and by
      the beginning of the first interim or annual reporting period commencing
      after June 15, 2003 for Variable Interest Entities created prior to February
      1, 2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Plaintrees operations as at March 31, 2003
      would not be affected by this pronouncement. Plaintree has not yet determined
      the impact of the FIN 46 on the subsequent event described in Note 22.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In December 2002, the Financial Accounting Standards
      Board (FASB) issued SFAS No. 148 Accounting for Stock-Based
      Compensation  Transition and Disclosure  an amendment of FASB Statement
      No. 123 (SFAS 148) which amended the transitional provisions of SFAS
      123 for entities choosing to recognize stock-based compensation under the
      fair value based method of SFAS 123, rather than electing to continue to
      follow the intrinsic value method of APB 25. Under SFAS 148, Plaintree may
      adopt the recommendations of SFAS 148 either in its fiscal year beginning
      April 1, 2002 using certain implementation procedures or in its fiscal year
      beginning April 1, 2003 using different implementation procedures. The Company
      has elected to defer implementation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In November 2002, the FASB issued FIN 45, Guarantors
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others (FIN 45), which requires elaborating
      on the disclosures that must be made by a guarantor in financial statements
      about is obligations under certain guarantees. It also requires that a guarantor
      recognize, at the inception of certain types of guarantees, a liability
      for the fair value of the obligation undertaken in issuing the guarantee.
      The disclosure requirements of FIN 45 are effective for financial statements
      issued after December 15, 2002, and have been applied in the presentation
      of the accompanying consolidated financial statements. The recognition requirements
      of FIN 45 are applicable for guarantees issued or modified after December
      31, 2002 and have not had an effect on the Companys financial position
      or results of operations.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 21 | 
| | -- | 



---





|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|20. | RECONCILIATION
TO UNITED STATES GAAP (Continued)
|--- | ------------------------------------------------





| | (g)  Recent United States Accounting
      Standards
| | ----------------------------------------------------



| |  | In June 2002, the FASB issued SFAS No. 146, Accounting
      for Costs Associated with Exit or Disposal Activities (SFAS 146),
      which is effective for exit or disposal activities initiated after December
      31, 2002. SFAS 146 supersedes Emerging Issues Task Force (EITF)
      Issue No. 94-3 Liability Recognition for Certain Employee Termination
      Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
      in Restructuring) (EITF 94-3). SFAS 146 requires that costs associated
      with an exit or disposal activity be recognized when the liability is incurred,
      whereas EITF 94-3 required recognition of a liability when an entity committed
      to an exit plan. Therefore, the effect of SFAS 146 will be to change the
      timing of recognition of certain liabilities. Plans initiated before December
      31, 2002 continue to be accounted for under EITF 94-3. Plaintree does not
      expect the adoption of SFS 146 to have a material impact on its business,
      results of operations and financial condition.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In June 2001, the FASB issued SFAS No. 143, Accounting
      for Asset Retirement Obligations (SFAS 143), which is effective for
      financial statements issued for fiscal years beginning after June 15, 2002.
      SFAS 143 addresses the recognition and measurement of obligations associated
      with the retirement of tangible long-lived assets. Plaintree does not expect
      the adoption of SFAS 143 to have a material impact on its business, results
      of operations and financial condition.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In April 2003, FASB issued SFAS No. 149, Amendment
      of SFAS No. 133 on Derivative Instruments and Hedging Activities (SFAS
      149). SFAS 149 amends and clarifies accounting for derivative instruments,
      including certain derivative instruments embedded in other contracts, and
      for hedging activities under SFAS No. 133 Accounting for Derivative
      Instruments and Hedging Activities (SFAS 133). In particular,
      it clarifies under what circumstances a contract with an initial net investment
      meets the characteristic of a derivative, clarifies when a derivative contains
      a financing component, amends the definition of an underlying, and amends
      certain other existing pronouncements. SFAS 149 is generally effective for
      contracts entered into or modified after June 30, 2003 and for hedging relationships
      designated after June 30, 2003. The Company does not expect that the adoption
      of SFAS 149 will have a material impact on the results of operation or financial
      conditions.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In May 2003, the FASB issued SFAS No. 150, Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and Equity (SFAS 150). SFAS 150 establishes standards
      for how an issuer 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). Many of those instruments were previously
      classified as equity. Some of the provisions of this Statement are consistent
      with the current definition of liabilities in FASB Concepts Statement No.
      6, Elements of Financial Statements. The remaining provisions of this Statement
      are consistent with the proposal to revise that definition to encompass
      certain obligations that a reporting entity can or must settle by issuing
      its own equity shares, depending on the nature of the relationship established
      between the holder and the issuer. SFAS 150 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 Company does not expect the adoption of SFAS 150 to have a material
      impact on its results of operations results or financial condition.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 22 | 
| | -- | 



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|PLAINTREE SYSTEMS INC. Notes to the Consolidated Financial Statements
|---------------------------------------------------------------------

---



|21. | FINANCIAL
INSTRUMENTS
|--- | ---------------------





| | Concentration
of credit risk
| | ----------------------------



| | Financial
instruments which potentially subject the Company to a  concentration of credit risk
consist principally of cash investments  and trade receivables. The Company invests its
excess cash in  high-quality financial instruments. The Company has credit evaluation,
approval and monitoring processes intended to mitigate potential credit  risks.
Anticipated bad debt loss has been provided for in the allowance  for doubtful accounts.
The carrying amounts for cash, short-term  investments, accounts receivable, investment
tax credits receivable,  loans receivable, amounts due to and from related parties,
accounts  payable and other current liabilities approximate fair market value due  to the
short maturity of these instruments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Interest
risk
| | -------------



| | The
Company is financed through loans from related parties which bear  interest at rates tied
to the Canadian bank prime rate. Consequently,  the Company is exposed to the risk of
increases in the prime rate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|22. | SUBSEQUENT
EVENTS
|--- | -----------------





| | On
July 14, 2003 the Company made a capital contribution of $20 million  in order to acquire
a 49% interest in a manufacturing partnership. In a  related transaction, the Company
obtained a non-recourse credit  facility from a Canadian chartered bank in the amount of
$20.3 million  to finance its capital contribution to the partnership, to cover  related
acquisition expenses, and to finance its payment obligations  under the creditor proposal
described below. The credit facility is  secured by the partnership interest itself and
will be repaid from cash  distributions from the partnership.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | As
part of these transactions, the Company completed an internal  restructuring of its
operations, transferring primarily all of its  business, its tangible assets (other than
its intellectual property and  its partnership interest) to a newly incorporated wholly
owned  subsidiary of the Company. This subsidiary has also assumed all of the
liabilities of the Company, except for its credit facility with a  related party and its
liabilities under the credit facility described  above. This subsidiary will continue to
carry on the former business of  the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Pursuant
to a proposal filed under the Bankruptcy and Insolvency Act  (BIA) on December 18, 2002,
and approved by the Courts on January 29,  2003, the Company will realize a gain of
approximately $375,000 on  settlement of claims and debts. As of the date of these
financial  statements, the Certificate of Completion of the proposal had not been  issued
by the Courts and consequently the gain will be recorded in the  financial statements for
the subsequent year. The Certificate of  Completion was issued on July 31, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|23. | COMPARATIVE
FIGURES
|--- | -------------------





| | Certain
of the 2002 and 2001 comparative figures have been reclassified  to conform to the
current year financial statement presentation.
| | -----------------------------------------------------------------------------------------------------------------------------------------



| | 23 | 
| | -- | 



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|I, David Watson, CEO, certify that:
|-----------------------------------



|1. I have reviewed this annual report on Form
20-F of Plaintree Systems Inc.;
|-----------------------------------------------------------------------------



|2. Based on my knowledge, this annual 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
annual  report;
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. Based on my knowledge, the financial
statements, and other financial  information included in this annual 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 annual report;
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. The registrants other certifying
officers and I are responsible for  establishing and maintaining disclosure controls and
procedures (as defined in  Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) designed
such disclosure controls and procedures 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 annual 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 that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial  reporting.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. The registrants other certifying
officer(s) 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
registrants board of  directors (or persons performing the equivalent function):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) all
significant deficiencies and material weaknesses 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 data 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; and
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6. There are no other certifying officers. I
have indicated in this annual  report whether or not there were significant changes in
internal controls or in  other factors that could significantly affect internal controls
subsequent to  the date of our most recent evaluation, including any corrective actions
with  regard to significant deficiencies and material weaknesses.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: September 30, 2003.
|-------------------------



|/s/ David Watson
      David Watson 
      President
|----------------------------------------------------



| |  | 
| |  | 



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