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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

Amendment No. 1 to Form 10-Q



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(Mark One)



|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



| | For the Quarterly Period Ended June 30, 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 000-30928



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PATH 1 NETWORK TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 13-3989885                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



6215 FERRIS SQUARE,
SUITE 140, SAN DIEGO, CALIFORNIA 92121

(858) 450-4220

(Address, including zip code, and telephone number, including area code, of principal executive offices)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



As of January 20, 2004, 6,640,399 shares of the registrants common stock were outstanding. This includes 3,750,000 shares of common stock comprising
the units that we sold to the public on July 29, 2003, and also gives effect to the 1-for-6 reverse stock split effected July 23, 2003.



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##### Table of Contents

PATH 1 NETWORK TECHNOLOGIES INC.



Amendment No. 1 to Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2003



TABLE OF CONTENTS



|                                                     |  |                                                                                       |  |   
|---------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I 
FINANCIAL INFORMATION                       |  | 3                                                                                    
|                                                     |  |                                                                                      
|ITEM 1.                                              |  | FINANCIAL STATEMENTS (UNAUDITED)                                                      |  | 3 
|                                                     | 
|CONDENSED CONSOLIDATED BALANCE SHEETS                |  | 3                                                                                    
|                                                     | 
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS      |  | 4                                                                                    
|                                                     | 
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      |  | 5                                                                                    
|                                                     | 
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |  | 6                                                                                    
|                                                     |  |                                                                                      
|ITEM 2.                                              |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 14
|                                                     |  |                                                                                      
|ITEM 3.                                              |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 27
|                                                     |  |                                                                                      
|ITEM 4.                                              |  | CONTROLS AND PROCEDURES                                                               |  | 27
|                                                     | 
|PART II 
OTHER INFORMATION                          |  | 28                                                                                   
|                                                     |  |                                                                                      
|ITEM 1.                                              |  | LEGAL PROCEEDINGS                                                                     |  | 28
|                                                     |  |                                                                                      
|ITEM 2.                                              |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |  | 28
|                                                     |  |                                                                                      
|ITEM 3.                                              |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  | 29
|                                                     |  |                                                                                      
|ITEM 4.                                              |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 29
|                                                     |  |                                                                                      
|ITEM 5.                                              |  | OTHER INFORMATION                                                                     |  | 29
|                                                     |  |                                                                                      
|ITEM 6.                                              |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      |  | 29
|                                                     | 
|SIGNATURES                                           |  | 31                                                                                   





2



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##### Table of Contents

PART I 
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS



Path 1 Network
Technologies Inc.

Condensed Consolidated Balance Sheets

(in $ thousands except share data)



|                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                         |  | June 30,2003 |         |   | December 31,2002 |  
|                                                                                                                                                                         |  | (unaudited)  |         |   | (audited)        |  
|ASSETS                                                                                                                                                                   |  |              |         |   |                  |   |         |  
|Current assets                                                                                                                                                           |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                |  | $            | 263     |   |                  | $ | 396     |  
|Accounts receivable, net                                                                                                                                                 |  |              | 554     |   |                  |   | 438     |  
|Inventory                                                                                                                                                                |  |              | 411     |   |                  |   | 393     |  
|Other current assets                                                                                                                                                     |  |              | 505     |   |                  |   | 15      |  
|                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total current assets                                                                                                                                                     |  |              | 1,733   |   |                  |   | 1,242   |  
|Property and equipment, net                                                                                                                                              |  |              | 143     |   |                  |   | 220     |  
|Debt issuance costs, net                                                                                                                                                 |  |              | 312     |   |                  |   | 107     |  
|Other assets                                                                                                                                                             |  |              | 48      |   |                  |   | 64      |  
|                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total Assets                                                                                                                                                             |  | $            | 2,236   |   |                  | $ | 1,633   |  
|                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY                                                                                                                           |  |              |         |   |                  |   |         |  
|Current liabilities                                                                                                                                                      |  |              |         |   |                  |   |         |  
|Accounts payable and accrued liabilities                                                                                                                                 |  | $            | 1,381   |   |                  | $ | 930     |  
|Accrued compensation and benefits                                                                                                                                        |  |              | 208     |   |                  |   | 157     |  
|Current portion of notes payable                                                                                                                                         |  |              | 998     |   |                  |   | 863     |  
|Deferred revenue                                                                                                                                                         |  |              | 5       |   |                  |   | 61      |  
|                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                |  |              | 2,592   |   |                  |   | 2,011   |  
|Notes payable                                                                                                                                                            |  |              | 1,211   |   |                  |   | 161     |  
|                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                        |  |              | 3,803   |   |                  |   | 2,172   |  
|                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Stockholders deficit                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding                                                                         |  |              |        |   |                  |   |        |  
|Common stock, $0.001 par value; 40,000,000 shares authorized; 1,709,814 and 1,583,558 shares issued and outstanding at June 30, 2003, and
December 31, 2002 respectively |  |              | 2       |   |                  |   | 2       |  
|Common stock to be issued                                                                                                                                                |  |              |        |   |                  |   | 12      |  
|Additional paid-in capital                                                                                                                                               |  |              | 31,291  |   |                  |   | 30,134  |  
|Deferred compensation                                                                                                                                                    |  |              |        |   |                  |   | (50     | )
|Accumulated deficit                                                                                                                                                      |  |              | (32,860 | ) |                  |   | (30,637 | )
|                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total stockholders deficit                                                                                                                                              |  |              | (1,567  | ) |                  |   | (539    | )
|                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Total Liabilities and Stockholders Deficit                                                                                                                              |  | $            | 2,236   |   |                  | $ | 1,633   |  
|                                                                                                                                                                         |  |              |         |   |                  |   |         |  





See accompanying notes to these condensed consolidated financial statements.



3



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##### Table of Contents

Path 1 Network Technologies Inc.



Condensed Consolidated Statements of Operations

(in $ thousands except per share data)

(unaudited)



|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------ |  | -------------------------- | ----- | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                   |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                                                   |  | 2003                       |       |   | 2002                     |   |        | 2003 |  |   | 2002   |  
|Revenues                                                           |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Product sales                                                      |  | $                          | 228   |   |                          | $ | 536    |      |  | $ | 826    |   |  | $ | 685    |  
|Contract services                                                  |  |                            | 244   |   |                          |   | 5      |      |  |   | 307    |   |  |   | 11     |  
|License revenue                                                    |  |                            | 235   |   |                          |   |       |      |  |   | 235    |   |  |   |       |  
|Other revenue                                                      |  |                            | 7     |   |                          |   |       |      |  |   | 7      |   |  |   |       |  
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                                                     |  |                            | 714   |   |                          |   | 541    |      |  |   | 1,375  |   |  |   | 696    |  
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenues                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Cost of product sales                                              |  |                            | 154   |   |                          |   | 266    |      |  |   | 492    |   |  |   | 367    |  
|Cost of contract services                                          |  |                            | 62    |   |                          |   | 1      |      |  |   | 80     |   |  |   | 2      |  
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total cost of revenues (exclusive of items shown separately below) |  |                            | 216   |   |                          |   | 267    |      |  |   | 572    |   |  |   | 369    |  
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                       |  |                            | 498   |   |                          |   | 274    |      |  |   | 803    |   |  |   | 327    |  
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses                                                 |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Engineering research and development                               |  |                            | 336   |   |                          |   | 366    |      |  |   | 698    |   |  |   | 903    |  
|Sales and marketing                                                |  |                            | 320   |   |                          |   | 132    |      |  |   | 611    |   |  |   | 325    |  
|General and administrative                                         |  |                            | 478   |   |                          |   | 566    |      |  |   | 1,118  |   |  |   | 1,272  |  
|Stock-based compensation                                           |  |                            | 25    |   |                          |   | 73     |      |  |   | 50     |   |  |   | 173    |  
|Depreciation and amortization                                      |  |                            | 86    |   |                          |   | 57     |      |  |   | 154    |   |  |   | 165    |  
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total operating expense                                            |  |                            | 1,245 |   |                          |   | 1,194  |      |  |   | 2,631  |   |  |   | 2,838  |  
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Operating loss                                                     |  |                            | (747  | ) |                          |   | (920   | )    |  |   | (1,828 | ) |  |   | (2,511 | )
|Other income (expense)                                             |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Interest expense, net                                              |  |                            | (251  | ) |                          |   | (557   | )    |  |   | (395   | ) |  |   | (557   | )
|Loss on sale of securities                                         |  |                            |      |   |                          |   |       |      |  |   |       |   |  |   | (590   | )
|Other income (expense)                                             |  |                            | 1     |   |                          |   |       |      |  |   |       |   |  |   |       |  
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total other expense                                                |  |                            | (250  | ) |                          |   | (557   | )    |  |   | (395   | ) |  |   | (1,147 | )
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Loss from continuing operations                                    |  |                            | (997  | ) |                          |   | (1,477 | )    |  |   | (2,223 | ) |  |   | (3,658 | )
|Discontinued operations                                            |  |                            |      |   |                          |   | (66    | )    |  |   |       |   |  |   | (317   | )
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                                           |  | $                          | (997  | ) |                          | $ | (1,543 | )    |  | $ | (2,223 | ) |  | $ | (3,975 | )
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loss per common share from continuing operations               |  | $                          | (0.62 | ) |                          | $ | (1.05  | )    |  | $ | (1.38  | ) |  | $ | (2.61  | )
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Loss per common share - basic and diluted                          |  | $                          | (0.62 | ) |                          | $ | (1.10  | )    |  | $ | (1.38  | ) |  | $ | (2.83  | )
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding - basic and diluted     |  |                            | 1,615 |   |                          |   | 1,404  |      |  |   | 1,615  |   |  |   | 1,404  |  
|                                                                   |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  



See accompanying
notes to these condensed consolidated financial statements.



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##### Table of Contents

Path 1 Network Technologies Inc.



Condensed Consolidated Statements of Cash Flows

(in $ thousands)

(unaudited)



|                                                                                              |  |                           |        |   |      |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                              |  | Six Months Ended June 30, |       
|                                                                                              |  | 2003                      |        |   | 2002 |  
|Cash flows from operating activities:                                                         |  |                           |        |   |      |   |        |  
|Net loss                                                                                      |  | $                         | (2,223 | ) |      | $ | (3,658 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                   |  |                           |        |   |      |   |        |  
|Depreciation and amortization                                                                 |  |                           | 154    |   |      |   | 165    |  
|Amortization of deferred compensation                                                         |  |                           | 73     |   |      |   | 173    |  
|Accretion of debt discount & debt conversion expense                                          |  |                           | 409    |   |      |   | 557    |  
|Notes issued for salary reduction                                                             |  |                           |       |   |      |   | 33     |  
|Loss on investment                                                                            |  |                           |       |   |      |   | 596    |  
|Changes in assets and liabilities                                                             |  |                           |        |   |      |   |        |  
|Restricted cash                                                                               |  |                           |       |   |      |   | (46    | )
|Accounts receivable                                                                           |  |                           | (116   | ) |      |   | (227   | )
|Inventory                                                                                     |  |                           | (18    | ) |      |   | 6      |  
|Other current assets                                                                          |  |                           | (490   | ) |      |   | 112    |  
|Other assets                                                                                  |  |                           | (260   | ) |      |   | (219   | )
|Accounts payable and accrued liabilities                                                      |  |                           | 450    |   |      |   | 27     |  
|Accrued compensation and benefits                                                             |  |                           | 51     |   |      |   | (142   | )
|Deferred revenue                                                                              |  |                           | (55    | ) |      |   | 74     |  
|                                                                                              |  |                           |        |   |      |   |        |  
|Cash used in operations                                                                       |  |                           | (2,025 | ) |      |   | (2,549 | )
|                                                                                              |  |                           |        |   |      |   |        |  
|Cash flows from investing activities:                                                         |  |                           |        |   |      |   |        |  
|Sale of marketable securities                                                                 |  |                           |       |   |      |   | 578    |  
|Purchase of property and equipment                                                            |  |                           | (6     | ) |      |   | (90    | )
|                                                                                              |  |                           |        |   |      |   |        |  
|Cash provided by (used in) investing activities                                               |  |                           | (6     | ) |      |   | 488    |  
|                                                                                              |  |                           |        |   |      |   |        |  
|Cash flows from financing activities:                                                         |  |                           |        |   |      |   |        |  
|Issuance of common stock                                                                      |  |                           | 576    |   |      |   | 54     |  
|Issuance of convertible notes                                                                 |  |                           | 1,322  |   |      |   | 2,281  |  
|Cash from extinguishment of shareholder notes                                                 |  |                           |       |   |      |   | 86     |  
|                                                                                              |  |                           |        |   |      |   |        |  
|Cash provided by financing activities                                                         |  |                           | 1,898  |   |      |   | 2,421  |  
|                                                                                              |  |                           |        |   |      |   |        |  
|Cash flows from continuing operations                                                         |  |                           | (133   | ) |      |   | 360    |  
|Cash flows from discontinued operations                                                       |  |                           |       |   |      |   | (174   | )
|                                                                                              |  |                           |        |   |      |   |        |  
|Increase (decrease) in cash and cash equivalents                                              |  |                           | (133   | ) |      |   | 186    |  
|Cash and cash equivalents, beginning of period                                                |  |                           | 396    |   |      |   | 1,181  |  
|                                                                                              |  |                           |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                      |  | $                         | 263    |   |      | $ | 1,367  |  
|                                                                                              |  |                           |        |   |      |   |        |  
|Supplemental cash flow disclosures:                                                           |  |                           |        |   |      |   |        |  
|Issuance of common stock in Felber settlement                                                 |  | $                         |       |   |      | $ | 545    |  
|                                                                                              |  |                           |        |   |      |   |        |  
|Capitalized debt issuance costs in connection with beneficial conversion charges and warrants |  | $                         | 439    |   |      | $ | 1,250  |  
|                                                                                              |  |                           |        |   |      |   |        |  
|Conversion of notes to common stock issuable                                                  |  | $                         | 576    |   |      | $ | 9      |  
|                                                                                              |  |                           |        |   |      |   |        |  



See accompanying notes
to these condensed consolidated financial statements.



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##### Table of Contents

Path 1 Network Technologies Inc.



Notes to the Unaudited Condensed Consolidated Financial Statements



Note 1  Basis Of Presentation



The accompanying condensed consolidated balance sheet at June 30, 2003, the condensed consolidated statements of operations for the three and six-month
periods ended June 30, 2003 and 2002, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2003 and 2002, have been prepared by Path 1 Network Technologies Inc. (the Company) and have not been
audited. The condensed consolidated balance sheet at December 31, 2002 has been audited. These consolidated quarterly financial statements, in the opinion of management, include all adjustments, consisting only of normal and recurring adjustments,
necessary to state fairly the financial information set forth therein, in accordance with accounting principles generally accepted in the United States. These condensed quarterly consolidated financial statements should be read in conjunction with
the financial statements and notes thereto for the year ended December 31, 2002 included in the Companys Form 10-K filed March 31, 2003. The interim consolidated financial information contained in this filing is not necessarily indicative of
the results to be expected for any other interim period or for the full year ending December 31, 2003.



In the period from January 30, 1998 (inception) through June 30, 2003, the Company incurred losses totaling $32.9 million. The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Companys assets and the satisfaction of its liabilities in the normal course of
conducting business. On July 30, 2003, the Company raised $13.5 million in a public offering of 1,250,000 units consisting of three shares of the Companys common stock and two publicly traded redeemable warrants.



On July 23, 2003, the Company effected a one-for-six reverse stock split as
part of its $13.5 million public offering and listing on the American Stock Exchange. All per share figures herein reflect such reverse stock split.



Reclassifications



Certain reclassifications have been made to prior periods financial statements to conform to current year presentation.



Recently Issued Accounting Standards



In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. As the Company did not have any goodwill on its balance sheet, the adoption of SFAS No. 142 did not have a material impact on the Companys financial statements.



In October 2001, the FASB issued SFAS No. 144 (FAS 144), Accounting for
the Impairment or Disposal of Long-Lived Assets. FAS 144 establishes a single model to account for impairment of assets to be held or disposed, incorporating guidelines for accounting and disclosure of discontinued operations. FAS 144 is
effective for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. Management re-evaluated its investment in acquired technology, namely Sistolic, and recorded an impairment charge during the
year ended December 31, 2001 of $689,000.



In April 2002, the
FASB issued SFAS No. 145 (SFAS No. 145) Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No.
44, Accounting for Intangible Assets of Motor Carriers, and



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##### Table of Contents

Path 1 Network Technologies Inc.



Notes to the Unaudited Condensed Consolidated Financial
Statements(Continued)



SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 requires, among other things, (i) that the modification
of a lease that results in a change of the classification of the lease from capital to operating under the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction, and (ii) the reporting of gains or losses from the early
extinguishment of debt as extraordinary items only if they met the criteria of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations. The amendment of SFAS No. 13 is effective for transactions occurring on or after May 15,
2002. Although the rescission of SFAS No. 4 is effective January 1, 2003, the FASB has encouraged early application of the provisions of SFAS No. 145. Management has assessed the impact of this interpretation and believes it has no material effect
on the Companys financial position, results of operations, or cash flows.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (effective January 1, 2003). SFAS No. 146 replaces current accounting literature and requires the
recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Management has assessed the impact of this interpretation and believes it has no material
effect on the Companys financial position, results of operations, or cash flows.



In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation
addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. This interpretation also clarifies the requirements related to the recognition of a liability by a guarantor
at the inception of a guarantee for the obligations that the guarantor has undertaken in issuing that guarantee. Management has assessed the impact of this interpretation and believes it has no material effect on the Companys financial
position, results of operations, or cash flows.



In December
2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. This statement amends FASB Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted this statement for the period ended June 30, 2003.



The following table summarizes the impact on the Companys net loss had compensation cost been determined based upon
the fair value at the grant date for awards under the stock option plans consistent with the methodology prescribed under SFAS No. 123 (in thousands, except per share data):



|                                        |  |                            |        |   |      |   |        |  
|--------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                        |  | Three Months EndedJune 30, |       
|                                        |  | 2003                       |        |   | 2002 |  
|Net loss, as reported                   |  | $                          | (997   | ) |      | $ | (1,543 | )
|Less: Stock-based employee compensation |  |                            | 18     |   |      |   | 56     |  
|                                        |  |                            |        |   |      |   |        |  
|Pro forma net loss                      |  | $                          | (1,015 | ) |      | $ | (1,599 | )
|                                        |  |                            |        |   |      |   |        |  
|Basic and diluted loss per share:       |  |                            |        |   |      |   |        |  
|As reported                             |  | $                          | (0.62  | ) |      | $ | (1.10  | )
|                                        |  |                            |        |   |      |   |        |  
|Pro forma                               |  | $                          | (0.63  | ) |      | $ | (1.14  | )
|                                        |  |                            |        |   |      |   |        |  



In January 2003, the
FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling financial



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Path 1 Network Technologies Inc.



Notes to the Unaudited Condensed Consolidated Financial
Statements(Continued)



interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. It further clarifies whether an entity shall be subject to consolidation according to the provisions of this interpretation, if by design, certain conditions exist. Management is assessing the impact of this interpretation.



In May 2003, the FASB issued SFAS NO. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities. This statement establishes standards for how an issuer classifies and measures in its statement of financial position 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) because that financial instrument embodies an obligation of the issuer. Management
has assessed the impact of this statement and believes that it has no material impact.



Note 2  Management Estimates And Assumptions



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



Note 3  Inventory



The Company records inventory, which consists primarily of
raw materials used in the production of video gateways and related products, at the lower of cost or market. Cost is determined principally on the average cost method. Provisions for potentially obsolete or slow-moving inventory are made based on
analysis of inventory levels and future sales forecasts.



Note 4  Revenue Recognition



Product Revenue



Revenue from
product sales is recognized when title and risk of loss transfer to the customer, generally at the time the product is delivered to the customer. Revenue is deferred when customer acceptance is uncertain or when undelivered products or services are
essential to the functionality of delivered products. The estimated cost of warranties is accrued at the time revenue is recognized.



Contract Service Revenue



Revenue from support or maintenance contracts, including extended warranty programs, is recognized ratably over the contractual period. Amounts invoiced
to customers in excess of revenue recognized on support or maintenance contracts are recorded as deferred revenue until the revenue recognition criteria are met. Revenue on engineering design contracts, including technology development agreements,
is recognized on a percentage-of-completion method, based on costs incurred to date compared to total estimated costs, subject to acceptance criteria. Billings on uncompleted contracts in excess of incurred costs and accrued profits are classified
as deferred revenue.



License Revenue



Revenues from license fees are recognized when persuasive
evidence of a sales arrangement exists, delivery and acceptance have occurred, the price is fixed or determinable, and collectability is reasonably assured.



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Path 1 Network Technologies Inc.



Notes to the Unaudited Condensed Consolidated Financial
Statements(Continued)



Allowances for Doubtful Accounts, Returns and Discounts



The Company establishes allowances for doubtful accounts, returns and
discounts based on credit profiles of our customers, current economic trends, contractual terms and conditions and historical payment, return and discount experience, as well as for known or expected events. If there were to be a deterioration of a
major customers creditworthiness, or if actual defaults, returns or discounts were higher than historical experience, the Companys operating results and financial position could be adversely affected.



Warranty Reserves



The Company provides a limited warranty for its products. A provision for
the estimated warranty cost is recorded at the time revenue is recognized. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the related revenue is recognized. The amount of
liability to be recorded is based on managements best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs.



Note 5  Reportable Operating Segments



The Company is a network communications technology company enabling simultaneous delivery of broadcast quality and
interactive video transmissions and other real-time data streams over Internet Protocol (IP) networks. For the purpose of applying SFAS No. 131, management determined that, subsequent to the discontinuance of the Silicon Systems business unit
(Sistolic) in April 2002, it has one operating segment.



Note 6  Discontinued Operations



In March 2002, the Company decided to dispose of its Sistolic business unit. On April 3, 2002, the Company disposed of the assets of this business unit back to Metar ADC SRL, in exchange for the elimination of the remaining obligations by
the Company to Metar ADC SRL and its affiliates, including the payable of $686,000, the return of all stock options granted to an Executive and the Romanian employees, and a confirmation that performance criteria specified in such Executives
employment agreement related to a potential $4 million bonus were never met by him. The Company also received a limited use license to the business units intellectual property. Metar ADC SRL also received 5,833 shares of our common stock. The
Executive resigned on March 27, 2002, as an officer of the Company in anticipation of this transaction.



The results of operations and the loss on disposal for the six months ended June 30, 2002, have been included in discontinued operations. The Company
recorded a loss of $317,000 from discontinued operations for the six months ended June 30, 2002.



Note 7  Stock Options



The Company accounts for stock-based compensation arrangements using the intrinsic value method in accordance with the provisions of Accounting Principles
Board Opinion (APB) 25, Accounting for Stock Issued to Employees, SFAS Interpretation No. 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, and SFAS Interpretation No 38,
Determining the Measurement Date for Stock Option, Purchase, and Award Plans involving Junior Stock. The Company also complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation.



The Company accounts for equity instruments issued to non-employees using the
fair value method in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods



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Path 1 Network Technologies Inc.



Notes to the Unaudited Condensed Consolidated Financial
Statements(Continued)



or Services. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. This
statement amends FASB Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The
Company has made the required disclosure under SFAS No. 148.



Equity instruments issued to non-employees that are fully vested and non-forfeitable are measured at fair value at the issuance date and expensed in the period over which the benefit is expected to be received. Equity instruments issued to
non-employees which are either unvested or forfeitable, for which counter-party performance is required for the equity instrument to be earned, are measured initially at the fair value and subsequently adjusted for changes in fair value until the
earlier of: 1) the date at which a commitment for performance by the counter-party to earn the equity instrument is reached; or, 2) the date on which the counter-partys performance is complete.



During the three-month period ended June 30, 2003 and 2002, the Company
recorded stock-based compensation expense of $25,000 and $73,000, respectively, related to the amortization of options outstanding to employees and consultants. The Company recorded stock-based compensation expense of $50,000 and $173,000 for the
six-months ended June 30, 2003 and 2002, respectively.



Note 8  Notes Payable



In 2002, the Company
received approximately $1,031,000 from a private placement of convertible notes with European investors (the Euro notes) who were existing Company stockholders. The notes carried a 4% annual coupon, paid quarterly in cash or stock, at
the Companys discretion, and were convertible for a one-year conversion term at a price of $7.20 per share. In addition, upon conversion, the note holder was to be issued warrants equal to the number of shares to be issued.



Because the conversion price of the Euro notes was below the trading market
price of stock on the day the Euro notes were issued, this resulted in an embedded, beneficial conversion element. As a result, the Company recorded a debt discount of $301,000 and this sum is being accreted over the life of the debt or sooner in
the event of conversion. Approximately 76% of the note holders had converted their notes into the Companys common stock. Upon conversion, the Company expensed warrants to purchase 112,442 shares of common stock at $9.60 per share for $293,000.
The warrants are fully vested and expire in June 2007. In 2002, the Company recorded non-cash interest expense of $573,000 relating to amortization of debt discount and issuance of common stock warrants related to the Euro notes. Accretion of debt
discount related to these notes for the three and six-months ended June 30, 2003, was $6,000 and $22,000, respectively.



During 2002, the Company issued two convertible notes to The Laurus Master Fund (Laurus). In May 2002, the Company issued to Laurus a 12%,
15-month convertible note in the principal amount of $1,250,000. The note is convertible at a price of $8.40 per share. The Company secured a three-month deferral of principal and interest under the note. In connection with the issuance of the 12%
convertible note in May 2002, the Company issued to Laurus warrants to purchase 20,833 shares of common stock at $10.08 per share. The warrants are fully vested and expire on May 2009.



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##### Table of Contents

Path 1 Network Technologies Inc.



Notes to the Unaudited Condensed Consolidated Financial
Statements(Continued)



On November 7, 2002, the Company issued Laurus a 12% convertible note in the principal amount of
$300,000. The note is initially convertible at a price of $5.10 per share (subject to fluctuations) and is payable on a monthly basis over 18 months. In connection with the issuance of the 12% convertible note in November 2002, the Company issued
warrants to purchase 12,500 shares of common stock at $5.10 per share.



Because the Laurus notes conversion prices were below the trading market prices of the Companys stock on the dates of issue, this resulted in an embedded beneficial conversion element. The Company recorded a debt discount of
$779,000 and this is being accreted over the life of the debt or sooner in the event of conversion. In 2002, the Company recorded non-cash interest expense of $421,000 relating to the accretion of debt discount and conversions related to the Laurus
notes. The price at which these Laurus notes convert into our stock generally varies monthly in proportion to the price of the Companys stock at the time of conversion, and is based generally on a trailing market price. Accretion of debt
discount related to these notes for the three and six-months ended June 30, 2003, was $75,000 and $164,000, respectively.



As part of the November 7, 2002 convertible note transaction, the Company also repriced the conversion price of the May 2002 convertible note and the
20,833 warrants (which had been purchased by the same investor) to $5.10 per share. The term of the May 2002 note was extended to May 7, 2004. The repricing resulted in a non-cash charge of $130,000 in the fourth quarter ended December 31, 2002,
related to debt conversion expense. For the three and six-months ended June 30, 2003, the Company incurred debt conversion expense related to these notes of $43,000 and $107,000, respectively. The Company will incur additional non-cash debt
conversion expense in the future upon the conversion of both notes.



On February 14, 2003, the Company entered into a $1 million revolving line of credit with Laurus. This revolving line of credit (the LOC) is secured by the Companys accounts receivables and other assets, and the Company
has the ability to draw down advances under the LOC subject to limits. Under the terms of the LOC, Laurus can convert advances made to the Company into common stock at a fixed conversion price of $6.78 per share. In connection with the LOC, the
Company issued warrants to purchase 12,500 shares of the Companys Common Stock at $6.78 per share. The Company borrowed an initial $300,000 advance under the LOC. The Company recorded a non-cash debt discount of $23,000 in its quarter ended
March 31, 2003. Accretion of debt discount related to these notes for the three and six-months ended June 30, 2003 was $2,000 and $3,000, respectively.



On March 28, 2003, the Company signed a securities purchase agreement under which the Company could raise up to $1.5 million through the issuance of 7%
convertible debentures with a fixed conversion price of $3.90 per share. In connection with debentures issued under this Agreement, the Company would issue up to 96,153 warrants to purchase the Companys common stock at $6.00 per share.
Pursuant to this Agreement, on March 28, 2003, the Company issued to Palisades Master Fund L.P. (Palisades) a debenture in the amount of $500,000, together with a warrant to purchase up to 32,051 shares of the Companys common
stock. Because the conversion price of this debenture was below the market price of our stock on the date the debenture was issued, this resulted in an embedded beneficial conversion element. The Company recorded non-cash debt discount of $53,000
related to this debenture in our quarter ended March 31, 2003. Accretion of debt discount related to this debenture for the three and six-months ended June 30, 2003, was $13,000. See Note 9, Subsequent Events.



On April 4, 2003, pursuant to the securities purchase agreement dated March
28, 2003 the Company issued to Crescent International Ltd (Crescent) a debenture in the amount of $500,000, together with a warrant to purchase up to 32,051 shares of the Companys common stock. Because the conversion price of this
debenture was below the market price of the Companys stock on the date the debenture was issued, this resulted in an



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Path 1 Network Technologies Inc.



Notes to the Unaudited Condensed Consolidated Financial
Statements(Continued)



embedded beneficial conversion element. The Company recorded non-cash debt discount of $53,000 related to this debenture in our quarter ended June 30, 2003.
Accretion of debt discount related to this debenture for the quarter ended June 30, 2003, was $7,000. See Note 9, Subsequent Events.



On May 12, 2003, pursuant to the securities purchase agreement dated March 28, 2003 the Company issued to Palisades, Crescent, Alpha Capital AG
(Alpha) and Barucha LTD (Barucha) debentures in the amounts of $200,000, $100,000, $100,000 and $100,000, respectively, together with warrants to purchase up to 12,154, 6,410, 6,410, and 6,410 shares of the Companys
common stock, respectively. Because the conversion price of these debentures was below the market price of the Companys stock on the date the these debentures were issued, this resulted in an embedded beneficial conversion element. The Company
recorded non-cash debt discount of $197,000 related to these debentures in our quarter ended June 30, 2003. Accretion of debt discount related to these debentures for the quarter ended June 30, 2003, was $88,000. See Note 9, Subsequent Events.



On May 22, 2003, the Company signed a securities purchase
agreement with investors who participated in the Euro note transaction in 2002 under which the Company raised $228,497.34 through the issuance of 7% convertible notes with a fixed conversion price of $3.90 per share. In connection with notes issued
under this Agreement, the Company issued warrants to purchase 14,647 shares of the Companys common stock at $6.00 per share. Pursuant to this Agreement, on May 22, 2003, the Company issued to Amstgeld Global Custody BV a note in the amount of
$126,902.12 along with a warrant to purchase up to 8,135 shares of the Companys common stock and issued to NV Administratiekantoor opgericht door Bankierskantoor M. van Embden NV a note in the amount of $101,595.22 along with a warrant to
purchase up to 6,512 shares of the Companys common stock. Because the conversion price of these notes was below the market price of the Companys stock on the date the note was issued, this resulted in an embedded beneficial conversion
element. The Company recorded non-cash debt discount of $109,000 related to these notes in our quarter ended June 30, 2003. Accretion of debt discount related to these notes for the quarter ended June 30, 2003, was $5,000.



On August 6, 2003, the Company repurchased its 7% convertible debentures
dated March 27, 2003 and issued to Palisades Master Fund LP (Palisades), Crescent International LTD (Crescent), and HPC Capital Management in the principal amounts of $570,000, $600,000 and $10,000, respectively, for the sum
of $667,406.18, $703,520.55, and $11,500.00, respectively. See Note 9Subsequent Events.



The Companys notes payable at June 30, 2003, are as follows (in thousands of dollars):



Short-term notes payable consist of the following at June 30, 2003:



|                                                                     |  |   |    
|-------------------------------------------------------------------- |  | - | ---
|European investors1                                                  |  | $ | 16 
|Laurus Master Funds Ltd (less unamortized debt discount of 184,000)2 |  |   | 729
|Laurus Master Funds Ltd (less unamortized debt discount of $20,000)3 |  |   | 253
|                                                                     |  |   |    
|                                                                     |  | $ | 998
|                                                                     |  |   |    

---

|1 | Notes payable to European investors bear interest at 4.0% and are convertible into the Companys stock at a rate of $7.20 per share.
|- | ------------------------------------------------------------------------------------------------------------------------------------

|2 | Notes payable to Laurus Master Funds Ltd bear interest at 12.0% and are convertible into the Companys stock at a variable rate not to exceed $5.10 per share.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | Notes payable to Laurus Master Funds Ltd 2 is a $1 million A/R secured revolving line of credit expiring in February, 2006 that bears interest at Prime + 1.75% and drawn-down
amounts are convertible into the Companys stock at a rate of $6.78 per share.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Path 1 Network Technologies Inc.



Notes to the Unaudited Condensed Consolidated Financial
Statements(Continued)



Long-term notes payable consist of the following at June 30, 2003:



|                                                                                                                                                       |  |   |       |    
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | ----- | ---
|4% Euro notes due May, 2003 (convertible into 2,179 shares of common stock)                                                                            |  | $ | 16    | (1)
|12% Laurus Master Funds notes due May, 2004 (less unamortized debt discount of $194,000) (convertible into a minimum of 189,087 share of
common stock) |  |   | 770   |    
|Laurus Master Funds $1 million line of credit (less unamortized debt discount of $20,000) (convertible into 40,265 shares of common
stock)             |  |   | 253   |    
|7% debentures due March, 2005 (less unamortized debt discount of $199,000) (convertible into 319,231 shares of common stock)                           |  |   | 1,046 | (2)
|7% Euro notes due May, 2005 (less unamortized debt discount of $104,000) (convertible into 58,589 shares of common stock)                              |  |   | 124   |    
|Less: Current maturities included in current liabilities                                                                                               |  |   | (998  | )  
|                                                                                                                                                       |  |   |       |    
|                                                                                                                                                       |  | $ | 1,211 |    
|                                                                                                                                                       |  |   |       |    



At June 30, 2003, the
maturities of long-term debt are as follows:



|     |  |   |       |    
|---- |  | - | ----- | ---
|2003 |  | $ | 478   |    
|2004 |  |   | 775   |    
|2005 |  |   | 1,473 |    
|     |  |   |       |    
|     |  | $ | 2,726 | (3)
|     |  |   |       |    

---

|(1) | Matured.
|--- | --------

|(2) | Redeemed. See Note 9  Subsequent Events.
|--- | -----------------------------------------

|(3) | $1,180,000 redeemed. See Note 9  Subsequent Events.
|--- | ----------------------------------------------------



Note 9  Subsequent Events



On July 23, 2003, the Company effected a 1-for-6 reverse stock split of its outstanding shares of common stock.



On July 22, 2003, the Company borrowed an additional $200,000 under its Line
of Credit with The Laurus Master Fund.



On July 30, 2003, the
Company completed its $13.5 million public offering of 1,250,000 units, each unit consisting of three shares of the Companys Common Stock and two redeemable public warrants. The Companys common stock and units commenced trading on the
American Stock Exchange on July 31, 2003. The Companys net offering proceeds, to date, are approximately $11.4 million.



On August 6, 2003, the Company repurchased its 7% convertible debentures issued to Palisades, Crescent and HPC Capital Management in the principal amounts
of $570,000, $600,000 and $10,000, respectively, for the sum of $667,406.18, $703,520.55, and $11,500.00, respectively. The remaining $330,000 of convertible debentures issued were converted into 68,579 shares of our common stock.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Forward Looking Statements



This document may contain forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict,
potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.



Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.
Except to the extent required by federal law, we disclaim any duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.



You are also urged to carefully review and consider the various disclosures
made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in this Item 2 or in our annual report on Form 10-K and other reports and filings made with the
Securities and Exchange Commission.



Reverse
Stock Split



On July 23, 2003, we effected a 1-for-6 reverse
split of our common stock. All share amounts and per share amounts in this Form 10-Q are shown on a post reverse-split basis.



OVERVIEW



We are an industry leader in developing and supplying products that enable the transportation and distribution of real-time, high-quality video over
Internet Protocol (IP) networks, such as the networks that comprise the Internet. Our products are currently used in two different segments of the video market. Our products are used by a variety of providers to transmit high-quality, real-time
video to one or more locations throughout the United States or the world (which we refer to as long-haul transmission). Since our products transmit video content using IP communication networks, our customers can use existing
infrastructure, thus lowering their costs and permitting them greater flexibility in the delivery of video content. Our products are also used by cable companies to supply video-on-demand services. Our customers include cable, broadcast and
satellite companies, movie studios, carriers and government and educational institutions. Collectively, we refer to these customers as communication service providers, or simply as providers.



Long Haul Customers



Our long haul customers use our products to transmit high-quality, real-time
video to one or a number of locations over existing IP networks. This ability to send video over IP networks significantly reduces the current need of long haul providers to rent dedicated high bandwidth connections to service the specified
locations. Our products not only provide a cost advantage to our customers, but also enable them increased flexibility in terms of where and when the video is transmitted.



Customers using our products for long-haul transmission include DreamWorks LLC, a major film production studio, for
domestic and international creative collaborations using high-definition video cameras. C-Span uses our products to televise real-time, interactive classrooms between Washington, D.C. and the University of Denver. PanAmSat, a major satellite
communications provider, uses our Cx1000 product to interconnect earth stations for video routing with the least delay. RTVI, a Russian television network, runs live



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broadcast- quality Russian language programming between Moscow and New York using our long haul product, and is expanding its network internationally.
Wiltel/Vyvx has moved video operations centers into networking facilities to merge IP video, voice and data services that use our Cx1000 product for video.



Cable Company Customers



Our Chameleon vidX product line is designed for cable television companies to use existing digital set-top boxes already in consumer homes to provide
video-on-demand services, a significant competitive advantage over satellite providers. The more efficient use of existing bandwidth (both into the home and within the network) allows cable companies to increase the volume of content (whether
movies, television or live events) available for delivery whenever requested by the cable subscriber, or to increase the number of subscribers served with existing content volume. We believe that the desire for video-on-demand  indeed, all
content-on-demand-will continue to rise as consumers become increasingly aware of its availability and benefits, and as IP networks enabled by our products provide access to significant amounts of interactive programming previously unavailable.
Cable companies currently using our products include companies such as Time-Warner and Cablevision.



Additionally, our products will provide cable companies with flexibility to deliver high definition television, which could potentially overwhelm the
bandwidth capacity of current delivery technologies. High definition television requires at least five times the bandwidth currently required for standard television transmissions. Using our products, providers can avoid incurring significant
capital expenditures to increase the capacity of existing infrastructure, and can avoid significant recurring costs to maintain and support the expanded networks resulting from high definition television and increased numbers of channels. Should
these providers use existing methods of transmission, they might eventually be forced to decrease programming or other services to conserve bandwidth.



Company Information



We were incorporated in Delaware in January 1998. Our principal executive offices are located at 6215 Ferris Square, Suite 140, San Diego, California
92121. Our telephone number is (858) 450-4220. Our website is located at www.path1.com.



Liquidity And Capital Resources



Since
our inception on January 30, 1998, we have financed our operations primarily through the sale of common equity securities to investors and strategic partners, as well as from the issuance of convertible notes. On July 31, 2003, we effected a public
offering of $13.5 million of units consisting of common stock and warrants; our net proceeds from the public offering were approximately $11.4 million.



From January 30, 1998 through June 30, 2003, we incurred losses totaling $32.9 million. In light of our $13.5 million public offering effected in July
2003, we believe that our existing capital resources will enable us to fund operations for at least the next twelve months. At June 30, 2003, we had negative working capital of $859,000, and a $133,000 decrease in cash and cash equivalents compared
to December 31, 2002.



In 2002, we received approximately
$1,031,000 from a private placement of convertible notes with European investors (the Euro notes) who, at the time, were existing Company stockholders. Euro notes with aggregate principal and interest of $228,497 matured in May 2003, and
new notes for this sum were issued to these investors. Euro notes with an aggregate principal amount of $15,692 remain outstanding.



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During 2002, we issued two 12% convertible notes to The Laurus Master Fund (Laurus) with an
aggregate principal amount of $1.55 million. These notes remain outstanding.



On February 14, 2003, we entered into a $1 million revolving line of credit with Laurus. At June 30, 2003, the outstanding balance on this line of credit was $273,000.



In March and May 2003, we raised $1.5 million through the issuance of 7%
convertible notes with a fixed conversion price of $3.90 per share. On August 6, 2003, we spent $1.38 million of the public offering proceeds to repurchase $1.18 million of these notes, and the remaining balance of the notes converted into common
stock.



In connection with all debt financings discussed above,
we issued warrants to purchase a total of up to 273,408 shares of our common stock.



For the foreseeable future, we expect our use of proceeds from the public offering to include substantial additional expenditures associated with cost of sales and with research and development, in addition to
increased costs associated with staffing for management, manufacturing, sales and marketing and administration functions. Additional capital could be required to implement our business strategies and fund our plan for future growth and business
development.



At June 30, 2003, we had no material commitments
other than our operating leases. Our future capital requirements will depend upon many factors, including the timing of research and product development efforts, the possible need to acquire new technology, the expansion of our sales and marketing
efforts, and our expansion internationally. We expect to continue to expend significant amounts in all areas of our operations.



Cash used in operations was $2.0 million and $2.5 million for the six months ended June 30, 2003 and 2002, respectively. The decrease in cash used in
operations for the six months ended June 30, 2003, was due primarily to a lower net loss and an increase in trade payables partially offset by increases in trade receivables and other assets.



Cash used in investing activities for the six months ended June 30, 2003, was
$6,000, compared to cash provided of $488,000 as of June 30, 2002. Cash provided for the six months ended June 30, 2002, was primarily the result of our sale of marketable portfolio securities in early 2002.



Cash provided by financing activities for the six months ended June 30, 2003,
was $1,898,000, compared to cash provided of $2,421,000 at June 30, 2002. In both periods, we raised cash by issuing convertible notes.



Results Of Operations



Three and Six Months Ended June 30, 2003 vs. Three and Six Months Ended June 30, 2002



For the quarter ended June 30, 2003, net revenue increased $173,000 or nearly 32% to $714,000, compared to $541,000 during
the three-month period ended June 30, 2002. Product revenues in the second quarter ended June 30, 2003, totaled $228,000, including $38,000 from the sale of third party equipment that was resold at cost to fulfill a customer order. Product revenues
in the year-earlier quarter were $536,000. License revenues of $235,000 in the second quarter ended June 30, 2003, were derived from software upgrades for our video gateway products sold to cable customers; we had no license revenues in the
year-earlier period. In the quarter ended June 30, 2003, revenue of $244,000 was generated from contract services, versus only $5,000 in the year-earlier quarter. Sales of our products declined 65% from the prior-year quarter as we focused heavily
on reorganizing our sales and marketing organization and building channel partners. In the six months ended June 30, 2003, revenue totaled $1,375,000, compared to revenue of $696,000 in the same period ended June 30, 2002, representing a nearly 98%
increase year-on-year. The increase was primarily due to $542,000 of contract services and license revenue for the six months ended June 30, 2003, versus only $11,000 for the six months ended June 30, 2002.



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Cost of revenues declined by $51,000 or nearly 19% to $216,000 in the quarter ended June 30, 2003, from
$267,000 in the quarter ended June 30, 2002, primarily due to lower costs resulting from outsourcing the manufacturing of our products. Cost of revenues for products consists primarily of raw material costs, warranty costs and labor associated with
manufacturing our products. Our product cost of revenues in the second quarter ended June 30, 2003, includes the cost of third party equipment resold at cost to fulfill a customer order. Cost of revenues for contract services consists primarily of
engineering payroll costs. For the six months ended June 30, 2003, cost of revenues totaled $572,000, compared to $369,000 for the six months ended June 30, 2002.



Gross profit increased nearly 82% to $498,000 from $274,000 for the quarters ended June 30, 2003 and 2002, respectively.
Gross profit in the second quarter ended June 30, 2003, from product sales, including the sale of third party equipment to one customer, was $74,000, or 32%. Gross profit from contract services was $182,000 in the second quarter ended June 30, 2003.
Approximately 47% of our total gross profit for the second quarter ended June 30, 2003, resulted from the license of software upgrades to our video gateway products. There was virtually no gross profit in 2002 from contract services and licenses.
For the six months ended June 30, 2003, gross profit increased nearly 146% to $803,000, from $327,000 for the six months ended June 30, 2002, for the same reasons.



Engineering research and development expenses for the quarter ended June 30, 2003 decreased 8% to $336,000 from $366,000 in
the quarter ended June 30, 2002. The decrease is due primarily to reduced cost of R&D personnel, and reduced expenditures to acquire development services and tools for our new products. For the six months ended June 30, 2003, engineering
research and development expenses decreased nearly 23% to 698,000, compared to $903,000 for the six months ended June 30, 2002.



Selling, marketing, and general and administrative expenses for the quarter ended June 30, 2003 increased 14% to $798,000 from $698,000 for the quarter
ended June 30, 2002. The increase is primarily due to significantly increased sales and marketing expenses for sales and marketing headcount, trade shows and travel, channel partner programs and other marketing initiatives. For the six month period
ended June 30, 2003, selling, marketing and general and administrative expenses totaled $1,729,000, compared to $1,597,000 for the six month period ended June 30, 2002, with the increase primarily due to the same reasons.



Stock-based compensation expense is a non-cash expense item that is
recognized as a result of stock options having exercise prices below estimated fair value. Stock-based compensation expense is calculated as the difference between exercise prices and estimated fair market value on the date of grant. We record
compensation expense related to the outstanding options to consultants and some employees for the amount of options that vest in that period. Stock-based compensation has been diminishing steadily since we changed our stock option program and
policies in 2001.



Interest expense for the quarter ended June
30, 2003, was $251,000 versus $557,000 of expense in the quarter ended June 30, 2002. Interest expense for the six months ended June 30, 2003, was $395,000 versus $557,000 for the six months ended June 30, 2002. The higher 2002 interest expense is
due predominantly to deferred interest and debt discount related to our convertible note borrowings in 2002.



We neither held nor sold portfolio securities in the quarter ended June 30, 2003. In the quarter ended June 30, 2002, we recorded a loss on sale of
securities totaling $590,000, reflecting our sale of securities that we held in various companies, especially Leitch Technology Corporation.



We expect our results of operations to improve in the second half of 2003. The proceeds of our public offering will enable us to finance sales and
marketing programs and operations initiatives, while also increasing our investment in research and development. Customers are expected to be more willing to buy from us because they will perceive us to be a more financially stable supplier. In
addition, managing tight cash positions and fundraising efforts is a significant drain on managements focus, which can now be returned to our operating business.



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Discontinued Operations



We decided to dispose of our Silicon Systems business unit (Sistolic) after a large semiconductor company, with
whom we entered into a non-exclusive licensing agreement and an engineering services agreement related to Sistolics technology, informed us that they were terminating their agreements in March 2002. Due to this material and adverse turn of
events, we decided that we could no longer sustain the negative cash flow from Sistolic. On April 3, 2002, we disposed of the assets of this business unit back to Metar ADC SRL and its President (Executive) in exchange for the
elimination of our remaining obligations to Metar ADC SRL and its affiliates, including the payable of $686,000, the return of all stock options granted to the Executive and the Romanian employees, and a confirmation that performance criteria
specified in the Executives employment agreement with us related to a potential $4 million bonus were never met by him. We also received a limited use license to the business units intellectual property. In addition, the Romanian
facility lease was transferred to Metar ADC SRL and the Romanian employment contracts were terminated. Metar ADC SRL was permitted to hire any and all Romanian employees. Metar ADC SRL also received 5,833 shares of our common stock. The Executive
resigned on March 27, 2002, as an officer of the Company in anticipation of this transaction.



Sistolics results of operations for the quarter ended June 30, 2002 have been included in discontinued operations. We recorded a loss of $66,000 from discontinued operations for the quarter ended June 30, 2002
and a loss of $317,000 from discontinued operations for the six months ended June 30, 2002.



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RISK FACTORS



Investment in our common stock involves a high degree of risk. You should carefully consider the risks described below
together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business,
financial condition or results of operations could suffer.



Risks Related to
Our Business



OUR LIMITED SALES HISTORY MAKES IT DIFFICULT TO EVALUATE
OUR PROSPECTS.



We were founded in January 1998 and have
only been selling our products commercially since 2002, which makes an evaluation of our prospects difficult. Because of our limited sales history, we have limited insight into trends that may emerge and affect our business. In addition, the
revenues and income potential of our business and market are unproven. An investor in our securities must consider the challenges, expenses and difficulties we face as our sales and marketing efforts mature.



WE RECENTLY LAUNCHED OUR INITIAL COMMERCIAL PRODUCTS AND SERVICES AND THEY MAY NOT GAIN
CUSTOMER ACCEPTANCE.



In 2002, we launched our two primary
commercial products into the video transport market and announced the deployment of our Chameleon vidX video gateway product line in our first quarter of 2003. These products are in the early stages of commercial deployment or are still in
development. We may not be able to gain customer acceptance of any of our products due to our lack of an established track record, our financial condition, competition, price or a variety of other factors. If our products and services are not
accepted by potential customers, or if these customers do not purchase our products and services at the levels we anticipate, our operating results may be materially adversely affected.



WE FACE COMPETITION FROM ESTABLISHED AND DEVELOPING COMPANIES, MANY OF WHICH HAVE SIGNIFICANTLY GREATER RESOURCES, AND WE EXPECT SUCH
COMPETITION TO GROW.



The markets for our products, future
products and services are intensely competitive. We face direct and indirect competition from a number of established companies, including Scientific-Atlanta, as well as development stage companies, and we anticipate that we will face increased
competition in the future as existing competitors seek to enhance their product offerings and new competitors emerge. Many of our competitors have greater resources, higher name recognition, more established reputations within the industry and
stronger manufacturing, distribution, sales and customer service capabilities than we do.



The technologies that our competitors and we offer are expensive to design, develop, manufacture and distribute. Competitive technologies may be owned and distributed by established companies that possess
substantially greater financial, technical and other resources than we do and, as a result, such companies may be able to develop their products more rapidly and market their products more extensively than we can.



Competitive technologies that offer a similar or superior capacity to
converge and transmit audio, video and telephonic data on a real-time basis over existing networks may currently exist or may be developed in the future. We cannot assure you that any technology currently being developed by us is not being developed
by others or that our technology development efforts will result in products that are competitive in terms of price or performance. If our competitors develop products or services that offer significant price or performance advantages as compared to
our current and proposed products and services, or if we are unable to improve our technology or develop or acquire more competitive technology, our business could be adversely affected. In addition, competitors with greater financial and other
resources than we have may be able to leverage such resources to gain wide acceptance of products inferior to ours.



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OUR CUSTOMER BASE IS CONCENTRATED AND THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS WOULD HARM OUR BUSINESS.



Historically, a significant majority of our sales have
been to relatively few customers, including Scientific-Atlanta. We expect that sales to relatively few customers will continue to account for a significant percentage of our net sales for the foreseeable future. Almost all of our sales are made on a
purchase order basis, and none of our customers has entered into a long-term agreement requiring it to purchase our products. The loss of, or any reduction in orders from, a significant customer would harm our business.



OUR CRITICAL RELATIONSHIP WITH SCIENTIFIC-ATLANTA AS BOTH A CUSTOMER AND AS A COMPETITOR
MAY JEOPARDIZE OUR SUCCESS.



In 2002, approximately 66% of
our revenues were from sales to Scientific-Atlanta and its subsidiary, BarcoNet N.V. Our revenues from Scientific-Atlanta, as a percentage of our total revenues, have declined for the six months ended June 30, 2003, and we anticipate that our 2003
revenues from Scientific-Atlanta will, as a percentage of our total revenues, be lower than in previous periods. Should our level of business with Scientific-Atlanta change, our results could be negatively impacted.



Our technology uses non-proprietary industry standard interfaces and designs
for video transport (known as IP/gigabit Ethernet). We are aware that Scientific-Atlanta has developed a product line that operates with an alternative to the open industry standard of IP/gigabit Ethernet.



We believe transporting video directly over a proprietary standard eliminates
the flexibility offered through open standards such as IP/gigabit Ethernet. Nonetheless, Scientific-Atlantas development, marketing and sale of its proprietary standard-based products may compete directly with our development, marketing and
sales efforts. Since Scientific-Atlanta has greater financial and other resources than we do, Scientific-Atlanta may be able to develop its products more rapidly and market its products more extensively than we can. Because of
Scientific-Atlantas name recognition, industry-reputation and other reasons, Scientific-Atlantas products could become the standard for delivery of real-time, broadcast-quality video, in which case the sale of our products could
materially suffer. Scientific-Atlantas products may be superior to ours in terms of price or performance, or inferior to ours but backed by superior marketing and support capabilities. As a result, we may not be able to compete successfully
with Scientific-Atlanta, and our ability to gain market share for our products could be adversely affected.



Our relationship with Scientific Atlanta, as both a significant customer and a significant competitor, may have adverse consequences to our business.
While general risks are associated with any competitor and any customer, the conflicting interests of Scientific-Atlanta (as a result of being both) magnifies these risks with respect to Scientific-Atlanta as both a customer and competitor.
Scientific-Atlanta may decide to pursue its proprietary standard based products and discontinue its relationship with us, as both a reseller and an outside manufacturer. Loss of sales to Scientific-Atlanta and its distribution network to
communication service providers could adversely affect our business.



WE
HAVE INCURRED LOSSES SINCE INCEPTION AND WILL LIKELY NOT BE PROFITABLE FOR THE NEXT SEVERAL QUARTERS.



We have incurred operating losses since our inception in January 1998, and we expect to incur losses and negative cash flow for at least the next several
quarters. As of June 30, 2003, our accumulated deficit was approximately $32.8 million. We expect to continue to incur significant operating, sales, marketing, research and development and general and administrative expenses and, as a result, we
will need to generate significant revenues to achieve profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future.



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OUR QUARTERLY FINANCIAL RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.



Our quarterly operating results are difficult to predict and may fluctuate
significantly from period to period, particularly because our sales prospects are uncertain and our sales are made on a purchase order basis. In addition, we have not proven our ability to execute our business strategy with respect to establishing
and expanding sales and distribution channels. Fluctuations may result from:



| |  | decreased spending on new products such as ours by communication service providers or their suppliers;
| | - | ------------------------------------------------------------------------------------------------------



| |  | the timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | our ability to establish a productive sales force or partner with communication service providers or their suppliers;
| | - | ---------------------------------------------------------------------------------------------------------------------



| |  | demand and pricing of the products we offer;
| | - | --------------------------------------------



| |  | consumer acceptance of the services our products enable; and
| | - | ------------------------------------------------------------



| |  | interruption in the manufacturing or distribution of our products and general economic and market conditions, including war, and other conditions specific to the telecommunications
industry.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result, we may experience
significant, unanticipated quarterly losses.



THE SUCCESS OF OUR BUSINESS IS
DEPENDENT ON ESTABLISHING AND EXPANDING SALES AND DISTRIBUTION CHANNELS FOR OUR PRODUCTS.



Third-Party Collaborations. We intend to partner with the leading suppliers to communication service providers, including Scientific-Atlanta, to promote and distribute our products, both as an outside equipment
manufacturer to suppliers and with suppliers acting as resellers of our products. We may not be able to identify adequate partners, and even if identified, we may not be able to enter into agreements with these entities on commercially reasonable
terms, or at all. To the extent that we enter into any such agreements with third parties, any revenues we receive from sales of our products in those markets will depend upon the efforts of such third parties, which in most instances will not be
within our control. If we are unable to effectively leverage a partner to market our products more broadly than we can through our internal sales force, our business could be adversely affected.



Internal Sales Force. We have limited experience in marketing and
selling our products. We intend to expand our direct and indirect sales force and independent channel partners domestically and internationally for the promotion of each of our Cx1000, Cx1410 and Chameleon vidX product lines and other future
products to suppliers to and communication service providers of all kinds. Competition for quality sales and marketing personnel and channel partners is intense. In addition, new employees, particularly new sales and marketing employees, will
require training and education concerning our products and will also increase our operating expenses. There can be no assurance that we will be successful in attracting or retaining qualified sales and marketing personnel and partners. As a result,
there can be no assurance that the sales force we are able to build will be of a sufficient size or quality to effectively market our products.



THE RATE OF MARKET ADOPTION OF OUR TECHNOLOGY IS UNCERTAIN AND WE COULD EXPERIENCE LONG AND UNPREDICTABLE SALES CYCLES, ESPECIALLY IF THE SLOWDOWN IN THE
TELECOMMUNICATIONS INDUSTRY PERSISTS.



Our products are
based on new technology and, as a result, it is extremely difficult to predict the timing and rate of market adoption of our products, as well the rate of market adoption of applications enhanced by our products such as video-on-demand. Accordingly,
we have limited visibility into when we might realize



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substantial revenue from product sales. We are providing new and highly technical products and services to enable new applications. Thus, the duration of our
sales efforts with prospective customers in all market segments is likely to be lengthy as we seek to educate them on the uses and benefits of our products. This sales cycle could be lengthened even further by potential delays related to product
implementation as well as delays over which we have little or no control, including:



| |  | the length or total dollar amount of our prospective customers planned purchasing programs in regard to our products;
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | changes in prospective customers capital equipment budgets or purchasing priorities;
| | - | -------------------------------------------------------------------------------------



| |  | prospective customers internal acceptance reviews; and
| | - | -------------------------------------------------------



| |  | the complexity of prospective customers technical needs.
| | - | ---------------------------------------------------------



These uncertainties, combined with the worldwide slowdown in the telecommunications business that began in 2001, and the slowdown in corporate spending on
technology generally as well as new technologies such as ours, substantially complicate our planning and may reduce prospects for sales of our products. If our prospective customers curtail or eliminate their purchasing programs, decrease their
budgets or reduce their purchasing priority, our results of operations could be adversely affected.



WE WILL DEPEND ON CABLE, BROADCASTING AND SATELLITE INDUSTRY SPENDING FOR A SUBSTANTIAL PORTION OF OUR REVENUE AND ANY DECREASE OR DELAY IN SPENDING IN THESE INDUSTRIES WOULD NEGATIVELY IMPACT OUR RESOURCES,
OPERATING RESULTS AND FINANCIAL CONDITION.



Demand for our
products will depend on the magnitude and timing of spending by cable television operators, broadcasters, satellite operators and carriers for adopting new products for installation with their networks.



These spending patterns are dependent on a variety of factors, including:



| |  | access to financing;
| | - | --------------------



| |  | annual budget cycles;
| | - | ---------------------



| |  | the status of federal, local and foreign government regulation of telecommunications and television broadcasting;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | overall demand for communication services and the acceptance of new video, voice and data services;
| | - | ---------------------------------------------------------------------------------------------------



| |  | evolving industry standards and network architectures;
| | - | ------------------------------------------------------



| |  | competitive pressures;
| | - | ----------------------



| |  | discretionary customer spending patterns;
| | - | -----------------------------------------



| |  | general economic conditions.
| | - | ----------------------------



Recent developments in capital markets have reduced access to funding for potential and existing customers causing delays in the timing and scale of
deployments of our equipment, as well as the postponement of certain projects by our customers. The timing of deployment of our equipment can be subject to a number of other risks, including the availability of skilled engineering and technical
personnel.



WE NEED TO DEVELOP AND INTRODUCE NEW AND ENHANCED PRODUCTS IN A
TIMELY MANNER TO REMAIN COMPETITIVE.



Broadband
communications markets are characterized by continuing technological advancement, changes in customer requirements and evolving industry standards. To compete successfully, we must design, develop,



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manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability. However, we may not be able to
successfully develop or introduce these products if our products:



| |  | are not cost effective,
| | - | -----------------------



| |  | are not brought to market in a timely manner,
| | - | ---------------------------------------------



| |  | are not in accordance with evolving industry standards and architectures, or
| | - | ----------------------------------------------------------------------------



| |  | fail to achieve market acceptance.
| | - | ----------------------------------



In order to successfully develop and market certain of our planned products for digital applications, we may be required to enter into technology
development or licensing agreements with third parties. We cannot assure you that we will be able to enter into any necessary technology development or licensing agreement on terms acceptable to us, or at all. The failure to enter into technology
development or licensing agreements when necessary could limit our ability to develop and market new products and, accordingly, could materially and adversely affect our business and operating results.



DELIVERY OF REAL-TIME, BROADCAST-QUALITY VIDEO VIA IP NETWORKS IS A NEW MARKET AND SUBJECT
TO EVOLVING STANDARDS.



Delivery of real-time,
broadcast-quality video over IP networks is novel and evolving and it is possible that communication service providers or their suppliers will adopt alternative architectures and technologies for delivering real-time, broadcast-quality video over IP
networks that are in compatible with our current or future products. If we are unable to design, develop, manufacture and sell products that incorporate or are compatible with these new architectures or technologies, our business could suffer.



CHANGES IN THE MIX OF OUR PRODUCT SALES, PRODUCT DISTRIBUTION MODEL OR
CUSTOMER BASE COULD NEGATIVELY IMPACT OUR SALES AND MARGINS.



We may encounter a shift the mix of the various products that we sell  products that have varying selling prices based in part on the type of product sold, applicable sales discounts, licensed product feature sets, whether we sell our
products as an OEM, and whether the sale is a direct sale or an indirect channel sale through our VARs and resellers. Any change in any of these variables could result in a material adverse impact on our gross sales, gross margins and operating
results.



WE MAY BE UNABLE TO OBTAIN FULL PATENT PROTECTION FOR OUR CORE
TECHNOLOGY AND THERE IS A RISK OF INFRINGEMENT.



On
January 16, 2001, May 8, 2001, and May 31, 2001, we submitted additional patent applications on topics surrounding our core technologies to supplement our existing patent portfolio. There can be no assurance that these or other patents will be
issued to us, or, if additional patents are issued, that they or our three existing patents will be broad enough to prevent significant competition or that third parties will not infringe upon or design around such patents to develop competing
products. In addition, we have filed patent applications in several foreign countries. There is no assurance that these or any future patent applications will be granted, or if granted, that they will not be challenged, invalidated or circumvented.



In addition to seeking patent protection for our products, we
intend to rely upon a combination of trade secret, copyright and trademark laws and contractual provisions to protect our proprietary rights in our products. There can be no assurance that these protections will be adequate or that competitors have
not or will not independently develop technologies that are substantially equivalent or superior to ours.



There has been a trend toward litigation regarding patent and other intellectual property rights in the telecommunications industry. Although there are
currently no lawsuits pending against us regarding possible



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infringement claims, there can be no assurance such claims will not be asserted in the future or that such assertions will not materially adversely affect
our business, financial conditions and results of operations. Any such suit, whether or not it has merit, would be costly to us in terms of employee time and defense costs and could materially adversely affect our business.



If an infringement or misappropriation claim is successfully asserted against
us, we may need to obtain a license from the claimant to use the intellectual property rights. There can be no assurance that such a license will be available on reasonable terms if at all.



WE RELY ON SEVERAL KEY SUPPLIERS OF COMPONENTS, SUB-ASSEMBLIES AND MODULES THAT WE USE TO
MANUFACTURE OUR PRODUCTS, AND WE ARE SUBJECT TO MANUFACTURING AND PRODUCT SUPPLY CHAIN RISKS.



We purchase components, sub-assemblies and modules from a limited number of vendors and suppliers that we use to manufacture and test our products. Our
reliance on these vendors and suppliers involves several risks including, but not limited to, the inability to purchase or obtain delivery of adequate supplies of such components, sub-assemblies or modules, increases in the prices of such items,
quality, and overall reliability of our vendors and suppliers. Although in many cases we use standard parts and components for our products, certain components are presently available only from a single source or limited sources. Some of the
materials used to produce our products are purchased from foreign suppliers. We do not generally maintain long-term agreements with any of our vendors or suppliers. Thus we may thus be unable to procure necessary components, sub-assemblies or
modules in time to manufacture and ship our products, thereby harming our business.



We also recently signed an agreement with a leading parts vendor to provide turnkey outsourced manufacturing services. To reduce manufacturing lead times and to ensure adequate component supply, we may instruct our
vendor to procure inventory based on criteria and forecasts as defined by us. If we fail to anticipate customer demand properly, an oversupply of parts, obsolete components or finished goods could result, thereby adversely affecting our gross
margins and results of operations.



We may also be subject to
disruptions in our manufacturing and product-testing operations that could have a material adverse affect on our operating results.



UNANTICIPATED DELAYS OR PROBLEMS ASSOCIATED WITH OUR PRODUCTS AND IMPROVEMENTS MAY CAUSE CUSTOMER DISSATISFACTION OR DEPRIVE US OF ANY FIRST TO MARKET
ADVANTAGE WE MIGHT OBTAIN.



Delays in developing and
releasing products and improvements are not uncommon in the industry in which we compete. In the event of performance problems with our product offerings, delays of more than a few months in releasing improvements could result in decreased demand
for a particular product and adverse publicity, which could further reduce demand for particular products or our products generally.



PRODUCT QUALITY PROBLEMS MAY NEGATIVELY AFFECT OUR REVENUES AND RESULTS FROM OPERATIONS.



We produce highly complex products that incorporate leading edge technology including hardware, software and embedded
firmware. Our software and other technology may contain bugs that can prevent our products from performing as intended. There can be no assurance that our pre-shipment testing programs will be adequate to detect all defects either in
individual products or which could affect numerous shipments that, in turn, could create customer dissatisfaction, reduce sales opportunities, or affect gross margins if the cost of remedying the problems exceed our reserves established for this
purpose. Our inability to cure a product defect may result in the failure of a product line, serious damage to our reputation, and increased engineering and product re-engineering costs that individually or collectively would have a material adverse
impact on our revenues and operating results.



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WE MAY NOT BE ABLE TO PROFIT FROM GROWTH IF WE ARE UNABLE TO EFFECTIVELY MANAGE THE GROWTH.



We anticipate that we will need to grow in the future. This anticipated
growth will place strain on our managerial, financial and personnel resources. The pace of our anticipated expansion, together with the complexity of the technology involved in our products and the level of expertise and technological sophistication
incorporated into the provision of our design, engineering, implementation and support services, demands an unusual amount of focus on the operational needs of our future customers for quality and reliability, as well as timely delivery and
post-installation and post-consultation field and remote support. In addition, new customers, especially customers that purchase novel and technologically sophisticated products such as ours, generally require significant engineering support.
Therefore, adoption of our platforms and products by customers would increase the strain on our resources. To reach our goals, we will need to hire rapidly, while, at the same time investing in our infrastructure. We expect that we will also have to
expand our facilities. In addition, we will need to successfully train, motivate and manage new employees; expand our sales and support organization; integrate new management and employees into our overall operations; and establish improved
financial and accounting systems.



We may not succeed in
anticipating all of the changing demands that growth would impose on our systems, procedures and structure. If we fail to effectively manage our expansion, if any, our business may suffer.



WE MAY NOT BE ABLE TO HIRE AND ASSIMILATE KEY EMPLOYEES.



Our future success will depend, in part, on our ability to attract and
retain highly skilled employees, including management, technical and sales personnel. Despite the recent economic slowdown, significant competition exists for employees in our industry and in our geographic region. We may be unable to identify and
attract highly qualified employees in the future. In addition, we may not be able to successfully assimilate these employees or hire qualified personnel to replace them. The loss of services of any of our key personnel, the inability to attract or
retain key personnel in the future, or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives such as timely and effective product introductions.



WE ARE DEPENDENT ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS.



Our success depends on the efforts and abilities of our senior management
and certain other key personnel. If any of these key employees leaves or is seriously injured and unable to work and we are unable to find a qualified replacement, then our business and results of operations could be materially harmed.



WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL IN THE FUTURE WHEN NEEDED, WHICH COULD
PREVENT US FROM GROWING.



We may in the future need to
raise additional capital to fund our operations and planned growth. We cannot be certain that any such financing will be available on acceptable terms, or at all, and our failure to raise capital when needed could seriously harm our business. In
addition, additional equity financing may dilute our stockholders interest, and debt financing, if available, may involve restrictive covenants and could result in a substantial portion of our operating cash flow being dedicated to the payment
of principal and interest on debt.



WE ARE SUBJECT TO LOCAL, STATE AND
FEDERAL REGULATION.



Legislation affecting us (or the
markets in which we compete) could adversely impact our ability to implement our business plan on a going-forward basis. The telecommunications industry in which we operate is heavily regulated and these regulations are subject to frequent change.
Future changes in local, state, federal or foreign regulations and legislation pertaining to the telecommunications field may adversely affect prospective purchasers of telecommunications equipment, which in turn would adversely affect our business.



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Risks Related to Investment in Our Securities



THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE AND YOUR INVESTMENT COULD SUFFER A DECLINE IN VALUE.



The market prices for our common stock and units are likely to be volatile
and could be susceptible to wide price fluctuations due to a number of internal and external factors, many of which are beyond our control, including:



| |  | quarterly variations in operating results and overall financial condition;
| | - | --------------------------------------------------------------------------



| |  | economic and political developments affecting technology spending generally and adoption of new technologies and products such as ours;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | customer demand or acceptance of our products and solutions;
| | - | ------------------------------------------------------------



| |  | short-selling programs;
| | - | -----------------------



| |  | changes in IT spending patterns and the rate of consumer acceptance of video-on-demand;
| | - | ---------------------------------------------------------------------------------------



| |  | product sales progress, both positive and negative;
| | - | ---------------------------------------------------



| |  | the stock markets perception of the telecommunications equipment industry as a whole;
| | - | --------------------------------------------------------------------------------------



| |  | technological innovations by others;
| | - | ------------------------------------



| |  | cost or availability of components, sub-assemblies and modules used in our products;
| | - | ------------------------------------------------------------------------------------



| |  | the introduction of new products or changes in product pricing policies by us or our competitors;
| | - | -------------------------------------------------------------------------------------------------



| |  | proprietary rights disputes or litigation;
| | - | ------------------------------------------



| |  | initiation of or changes in earnings estimates by analysts;
| | - | -----------------------------------------------------------



| |  | additions or departures of key personnel; and
| | - | ---------------------------------------------



| |  | sales of substantial numbers of shares of our common stock or securities convertible into or exercisable for our common stock.
| | - | ------------------------------------------------------------------------------------------------------------------------------



These and other factors may make it difficult for our stockholders to sell
their shares into the open market if and when eligible to do so. In addition, stock prices for many technology companies, especially early-stage companies such as us, fluctuate widely for reasons that may be unrelated to operating results. These
fluctuations, as well as general economic, market and political conditions such as interest rate increases, recessions or military or political conflicts, may materially and adversely affect the market price of our common stock, thereby causing you
to lose some or all of your investment.



OUR EXECUTIVE OFFICERS, DIRECTORS
AND 5% STOCKHOLDERS WILL BE ABLE TO EXERCISE SUBSTANTIAL CONTROL OVER ALL MATTERS REQUIRING SHAREHOLDER APPROVAL.



As of July 30, 2003, a small number of our executive officers, directors and 5% stockholders, beneficially own, in the aggregate, approximately 17% of our
outstanding common stock. As a result, these stockholders (or subgroups of them) retain substantial control over matters requiring approval by our stockholders, such as the election of directors and approval of significant corporate transactions.



WE OFFER STOCK OPTIONS TO OUR EMPLOYEES, NON-EMPLOYEE DIRECTORS,
CONSULTANTS AND ADVISORS, WHICH COULD RESULT IN ONGOING DILUTION TO ALL STOCKHOLDERS, INCLUDING INVESTORS IN THIS OFFERING.



We maintain two equity compensation plans: (i) the 2000 Stock Option/Stock Issuance Plan (the 2000 Plan), pursuant to which we may issue
options and common stock to employees, officers, directors, consultants



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and advisors, and (ii) the 2001 Employee Stock Purchase Plan (the Purchase Plan), approved by our stockholders in February 2002, pursuant to
which our employees are provided the opportunity to purchase our stock through payroll deductions. As of June 30, 2003, there were options outstanding to purchase 600,377 shares of common stock under our 2000 Plan; 109,623 shares of common stock
remain available for issuance under the 2000 Plan. A maximum of 41,667 shares of common stock have been authorized for issuance under the Purchase Plan.



In addition, as of June 30, 2003, there were 89,952 shares of common stock subject to outstanding options granted other than under the 2000 Plan or
Purchase Plan. These non-plan options were granted to various employees, directors, consultants and advisors.



We plan to continue to provide our employees opportunities to participate in the Purchase Plan. We also plan to issue options, either under the 2000 Plan
or otherwise, to purchase sizable numbers of shares of common stock to new and existing employees, officers, directors, advisors, consultants or other individuals as we deem appropriate and in our best interests. These ongoing purchases of our
common stock (as well as future option grants by us and subsequent exercises of options) could result in substantial dilution to all stockholders and increased control by management.



WE DO NOT INTEND TO PAY CASH DIVIDENDS.



We have never paid cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We would be exposed to changes in interest rates primarily from any marketable securities and investments in certain available-for-sale securities. Under
our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. At June 30, 2003, we did not have any marketable securities or investments in available-for-sale securities, nor did we have any
sales denominated in a currency other than the United States dollar. We will invest most of the proceeds from our public offering in short term government obligations which would not be materially affected by changes in interest rates; however, when
we roll over these securities as they mature, our interest income in the future would be affected if interest rates had risen or fallen since our initial investments. Also, our $1 million revolving line of credit from Laurus has a floating interest
rate, so if we borrowed the full $1 million, a 1% changes in interest rates would have an annual effect of $10,000.



ITEM 4. CONTROLS AND PROCEDURES



(a)
Evaluation of disclosure controls and procedures



Our
chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the rules under the Securities Exchange Act of 1934) as of a date (the Evaluation
Date) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective and designed to ensure that material information relating to us and our
consolidated subsidiaries would be made known to them by others within those entities.



(b) Changes in internal controls



There were
no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the Evaluation Date.



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PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



We are not
a defendant in any material legal proceedings.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



On March 28, 2003, we signed a securities purchase agreement for the issuance of 7% convertible notes with a fixed conversion price of $3.90 per share. We agreed to issue in connection with notes issued under this
Agreement warrants to purchase our common stock at $6.00 per share. Pursuant to this Agreement, on April 4, 2003, we issued in favor of Crescent International Ltd. (and in exchange for $500,000 cash) a convertible note in the amount of $500,000,
together with warrants to purchase up to 32,051 shares of our common stock. The issuance of the Securities was exempt from the Securities Act registration requirement, by virtue of Section 4(2) of the Securities Act.



On May 12, 2003, pursuant to the securities purchase agreement dated March
28, 2003, the Company issued to Palisades, Crescent, Alpha Capital AG (Alpha) and Barucha Ltd (Barucha) debentures in the amounts of $200,000, $100,000, $100,000 and $100,000, respectively, together with warrants to purchase
up to 12,154, 6,410, 6,410, and 6,410 shares of the Companys common stock, respectively. The issuance of the Securities was exempt from the Securities Act registration requirement, by virtue of Section (2) of the Securities Act.



On May 22, 2003, the Company signed a securities purchase agreement under
which it raised $228,497.34 through the issuance of 7% convertible notes with a fixed conversion price of $3.90 per share. In connection with notes issued under this Agreement, the Company issued warrants to purchase 14,647 shares of the
Companys common stock at $6.00 per share. Pursuant to this Agreement, on May 22, 2003, the Company issued to Amstgeld Global Custody BV a note in the amount of $126,902.12 along with a warrant to purchase up to 8,135 shares of the
Companys common stock and issued to NV Administraitiekantoor opgericht door Bankierskantoor M. van Embden NV a note in the amount of $101,595.22 along with a warrant to purchase up to 6,512 shares of the Companys common stock. The
issuance of the Securities was exempt from the Securities Act registration requirement, by virtue of Section (2) of the Securities Act.



On July 30, 2003, the SEC declared effective the registration statement (SEC File no. 333-105638) for our initial public offering units through
underwriters led by Paulson Investment Company, Inc. The units, each consisting of three shares of our common stock and two warrant, each to purchase one share of our commons stock, began trading on the American Stock Exchange on July 31, 2003, and
on August 5, 2003, we closed the sale of 1,250,000 units (including 3,750,000 shares of common stock and 2,500,000 common stock warrants) to the underwriters for an aggregate offering price to the public of $13,500,000. The underwriters
over-allotment option remains outstanding.



In total, we
registered the initial issuance of up to 1,562,500 units, 7,812,500 shares of common stock and 3,125,000 common stock warrants. The aggregate offering amount of the units is $17,145,000, not including the $16,875,000 aggregate exercise of the
warrants included within the units. Accordingly, the aggregate offering amount of all the common stock included within the units (also including the common stock underlying the warrants) is $34,020,000. Expenses against the $13,500,000 sold to date
include $1,012,500 of underwriting discounts, a managing underwriters nonaccountable expense allowance of $303,750, other expenses paid for underwriters of $45,500 and other expenses of $750,000. None of these payments went directly or
indirectly to our directors, officers, general partners, affiliates, 10% owners, or any of their associates. Accordingly, our net offering proceeds to date are $11,388,250.



To date we have used such net proceeds to pay accrued accounts payable ($606,000) and to repurchase $1,180,000 principal
amount of our 7% convertible debentures. None of these payments went directly or indirectly to our directors, officers, general partners, affiliates, 10% owners, or any of their associates. Pending



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use for working capital, research and development efforts and marketing and sales programs, we intend to invest the remaining $9,602,250 of net proceeds in
short-term government obligations.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



Not applicable.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



We began, in the second quarter of 2003, the solicitation from our stockholders of written consents for amendments to our Certificate of Incorporation to reverse split our common stock. This solicitation was
successfully concluded in the third quarter of 2003, and we amended our Certificate of Incorporation to effect a 1-for-6 reverse split of our common stock effective July 23, 2003. In our Form 10-Q report for the third quarter of 2003, we will
provide full details regarding this stockholder action by written consent.



ITEM 5. OTHER INFORMATION



No
applicable.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



A. Exhibits. The following exhibits are included as part of this report. References to Path 1 or us in this Exhibit List mean Path 1 Network Technologies Inc., a Delaware corporation.



|              |  |                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                  
|              | 
|10.67         |  | Additional Funding Agreement, dated May 12, 2003, with Palisades Master Fund, L.P., Crescent International Ltd., Alpha Capital AG and Barucha, Ltd. (1)                      
|              | 
|10.68         |  | Form of 7% Convertible Debenture Due 2005. (1)                                                                                                                               
|              | 
|10.69         |  | Form of Stock Purchase Warrant to Purchase Shares of Common Stock. (1)                                                                                                       
|              | 
|10.72         |  | Securities Purchase Agreement, dated May 21, 2003, among Path 1, Amstgeld Global Custody BV, and NV Administratiekantoor opgericht door Bankierskantoor M. van Embden NV. (1)
|              | 
|10.73         |  | Registration Rights Agreement, dated May 21, 2003, among Path 1, Amstgeld Global Custody BV, and NV Administratiekantoor opgericht door Bankierskantoor M. van Embden NV. (1)
|              | 
|10.74         |  | Form of 7% Convertible Debenture Due May 21, 2005. (1)                                                                                                                       
|              | 
|10.75         |  | Form of Stock Purchase Warrant. (1)                                                                                                                                          
|              | 
|10.76+        |  | OEM Agreement, dated May 6, 2003, between us and Scientific-Atlanta, Inc. (2)                                                                                                
|              | 
|10.77+        |  | OEM Agreement, dated May 8, 2003 between us and Aurora Networks, Inc. (3)                                                                                                    
|              | 
|10.78+        |  | Agreement, dated May 27, 2003 between us and Aurora Networks, Inc. (3)                                                                                                       
|              | 
|10.79         |  | Securities Repurchase Agreement                                                                                                                                              
|              | 
|31.1  *       |  | Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002                                                                             
|              | 
|31.2  *       |  | Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002                                                                             
|              | 
|32     *      |  | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          



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---

|* | Filed herewith.
|- | ---------------



|+ | Certain portions of this Exhibit were omitted pursuant to an application for confidential treatment.
|- | ----------------------------------------------------------------------------------------------------



|(1) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Registration Statement on Form SB-2, filed with the Commission on May 22, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Registration Statement on Form SB-2, filed with the Commission on May 29, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Amendment No. 1 to Registration Statement on Form SB-2, filed with the Commission on
June 13, 2003
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



B. Reports on Form 8-K. A
Form 8-K was filed by Path 1 on May 23, 2003 which attached a press release setting forth certain unaudited financial information with respect to our quarter ended March 31, 2003.



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Path 1 Network Technologies Inc.



|    |  |                                                        
|--- |  | -------------------------------------------------------
|By: |  | /s/    FREDERICK A. CARY                               
|    |  |                                                        
|    |  | Frederick A. Cary President and Chief Executive Officer



|    |  |                                                                                
|--- |  | -------------------------------------------------------------------------------
|By: |  | /s/    JOHN R. ZAVOLI                                                          
|    |  |                                                                                
|    |  | John R. Zavoli Chief Financial Officer, General Counsel and Corporate Secretary



Date: January 26, 2004



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Exhibits.    The following exhibits are included as part of this report.
References to us or Path 1 in this Exhibit List mean Path 1 Network Technologies inc., a Delaware corporation.



|              |  |                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                  
|              | 
|10.67         |  | Additional Funding Agreement, dated May 12, 2003, with Palisades Master Fund, L.P., Crescent International Ltd., Alpha Capital AG and Barucha, Ltd. (1)                      
|              | 
|10.68         |  | Form of 7% Convertible Debenture Due 2005. (1)                                                                                                                               
|              | 
|10.69         |  | Form of Stock Purchase Warrant to Purchase Shares of Common Stock. (1)                                                                                                       
|              | 
|10.72         |  | Securities Purchase Agreement, dated May 21, 2003, among Path 1, Amstgeld Global Custody BV, and NV Administratiekantoor opgericht door Bankierskantoor M. van Embden NV. (1)
|              | 
|10.73         |  | Registration Rights Agreement, dated May 21, 2003, among Path 1, Amstgeld Global Custody BV, and NV Administratiekantoor opgericht door Bankierskantoor M. van Embden NV. (1)
|              | 
|10.74         |  | Form of 7% Convertible Debenture Due May 21, 2005. (1)                                                                                                                       
|              | 
|10.75         |  | Form of Stock Purchase Warrant. (1)                                                                                                                                          
|              | 
|10.76+        |  | OEM Agreement, dated May 6, 2003, between us and Scientific-Atlanta, Inc. (2)                                                                                                
|              | 
|10.77+        |  | OEM Agreement, dated May 8, 2003 between us and Aurora Networks, Inc. (3)                                                                                                    
|              | 
|10.78+        |  | Agreement, dated May 27, 2003 between us and Aurora Networks, Inc. (3)                                                                                                       
|              | 
|10.79         |  | Securities Repurchase Agreement                                                                                                                                              
|              | 
|31.1  *       |  | Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002                                                                             
|              | 
|31.2  *       |  | Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002                                                                             
|              | 
|32     *      |  | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          

---

|* | Filed herewith.
|- | ---------------



|+ | Certain portions of this Exhibit were omitted pursuant to an application for confidential treatment.
|- | ----------------------------------------------------------------------------------------------------



|(1) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Registration Statement on Form SB-2, filed with the Commission on May 22, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Registration Statement on Form SB-2, filed with the Commission on May 29, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Amendment No. 1 to Registration Statement on Form SB-2, filed with the
Commission on June 13, 2003
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------