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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2005.



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 001-15609



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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 Exchange Act Rule 12b-2).    Yes ̈No  x



As of July 29, 2005, 6,938,877 shares of the registrants common stock were outstanding.



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##### Table of Contents

PATH 1 NETWORK TECHNOLOGIES INC.



Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2005



TABLE OF CONTENTS



|                                                                                               |  |   
|---------------------------------------------------------------------------------------------- |  | --
|PART IFINANCIAL INFORMATION                                                                   |  | 3 
|ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)                                                      |  | 3 
|CONSOLIDATED BALANCE SHEETS                                                                    |  | 3 
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                          |  | 4 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                          |  | 5 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                     |  | 6 
|ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 13
|ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 29
|ITEM 4.  CONTROLS AND PROCEDURES                                                               |  | 29
|PART IIOTHER INFORMATION                                                                      |  | 30
|ITEM 1.  LEGAL PROCEEDINGS                                                                     |  | 30
|ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 30
|ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                       |  | 30
|ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 30
|ITEM 5.  OTHER INFORMATION                                                                     |  | 30
|ITEM 6.  EXHIBITS                                                                              |  | 31
|SIGNATURES                                                                                     |  | 32



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##### Table of Contents

PART IFINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------



Path 1 Network Technologies Inc.



Consolidated Balance Sheets

(in thousands, except shares data)



|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                                                                |  | June 30, 2005 |         |   | December 31, 2004 |  
|                                                                                                                                                                                                                                                |  | (unaudited)   |         |   | (audited)         |  
|ASSETS                                                                                                                                                                                                                                          |  |               |         |   |                   |   |         |  
|Current assets                                                                                                                                                                                                                                  |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                       |  | $             | 2,852   |   |                   | $ | 929     |  
|Accounts receivable, net                                                                                                                                                                                                                        |  |               | 985     |   |                   |   | 810     |  
|Inventory                                                                                                                                                                                                                                       |  |               | 312     |   |                   |   | 541     |  
|Other current assets                                                                                                                                                                                                                            |  |               | 238     |   |                   |   | 468     |  
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                                                                                                                                            |  |               | 4,387   |   |                   |   | 2,748   |  
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Property and equipment, net                                                                                                                                                                                                                     |  |               | 299     |   |                   |   | 352     |  
|Issuance costs for debt and mandatorily-redeemable preferred stock, net                                                                                                                                                                         |  |               | 535     |   |                   |   | 4       |  
|Other assets                                                                                                                                                                                                                                    |  |               | 133     |   |                   |   | 60      |  
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total assets                                                                                                                                                                                                                                    |  | $             | 5,354   |   |                   | $ | 3,164   |  
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                            |  |               |         |   |                   |   |         |  
|Current liabilities                                                                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Accounts payable and accrued liabilities                                                                                                                                                                                                        |  | $             | 630     |   |                   | $ | 752     |  
|Accrued compensation and benefits                                                                                                                                                                                                               |  |               | 129     |   |                   |   | 176     |  
|Deferred revenue                                                                                                                                                                                                                                |  |               | 104     |   |                   |   | 256     |  
|Current portion of leases payable                                                                                                                                                                                                               |  |               | 11      |   |                   |   | 21      |  
|Current portion of notes payable, net                                                                                                                                                                                                           |  |               |        |   |                   |   | 78      |  
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                                                                                       |  |               | 874     |   |                   |   | 1,283   |  
|Mandatorily-redeemable preferred shares, net (note 11)                                                                                                                                                                                          |  |               | 2,071   |   |                   |   |        |  
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                                                                               |  |               | 2,945   |   |                   |   | 1,283   |  
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Stockholders equity                                                                                                                                                                                                                            |  |               |         |   |                   |   |         |  
|Preferred stock, $0.001 par value; 10,000,000 shares authorized; 1,656,535 and nil shares issued and outstanding at June 30, 2005 and December
31, 2004, respectively (note 11)                                                                 |  |               | 2       |   |                   |   |        |  
|Common stock, $0.001 par value; 40,000,000 shares authorized; 6,931,604 and 6,820,606 shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively; 2,777 shares held in treasury at June 30, 2005, and December 31, 2004 |  |               | 7       |   |                   |   | 7       |  
|Additional paid in capital                                                                                                                                                                                                                      |  |               | 52,678  |   |                   |   | 48,743  |  
|Deferred compensation                                                                                                                                                                                                                           |  |               | (550    | ) |                   |   | (1,357  | )
|Accumulated deficit                                                                                                                                                                                                                             |  |               | (49,728 | ) |                   |   | (45,512 | )
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                                                                                      |  |               | 2,409   |   |                   |   | 1,881   |  
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                                      |  | $             | 5,354   |   |                   | $ | 3,164   |  
|                                                                                                                                                                                                                                                |  |               |         |   |                   |   |         |  



See accompanying notes
to these consolidated financial statements.



3



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##### Table of Contents

Path 1 Network Technologies Inc.



Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)



|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                           |  | Three Months Ended June 30, |        |   | Six Months EndedJune 30, |  
|                                                           |  | 2005                        |        |   | 2004                     |   |        | 2005 |  |   | 2004   |  
|Revenues                                                   |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Product revenue                                            |  | $                           | 1,139  |   |                          | $ | 1,508  |      |  | $ | 1,969  |   |  | $ | 1,859  |  
|License revenue                                            |  |                             |       |   |                          |   | 1      |      |  |   |       |   |  |   | 21     |  
|Contract revenue                                           |  |                             |        |   |                          |   |       |      |  |   | 16     |   |  |   |       |  
|Other revenue                                              |  |                             | 3      |   |                          |   |       |      |  |   | 21     |   |  |   | 18     |  
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                                             |  |                             | 1,142  |   |                          |   | 1,509  |      |  |   | 2,006  |   |  |   | 1,898  |  
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenues                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Cost of product revenues                                   |  |                             | 507    |   |                          |   | 1,222  |      |  |   | 773    |   |  |   | 1,595  |  
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                               |  |                             | 635    |   |                          |   | 287    |      |  |   | 1,233  |   |  |   | 303    |  
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses                                         |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Engineering, research and development                      |  |                             | 1,065  |   |                          |   | 770    |      |  |   | 2,005  |   |  |   | 1,250  |  
|Sales and marketing                                        |  |                             | 636    |   |                          |   | 830    |      |  |   | 1,444  |   |  |   | 1,993  |  
|General and administrative                                 |  |                             | 408    |   |                          |   | 340    |      |  |   | 755    |   |  |   | 1,516  |  
|Stock-based compensation                                   |  |                             | 892    |   |                          |   | 272    |      |  |   | 892    |   |  |   | 272    |  
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                   |  |                             | 3,001  |   |                          |   | 2,212  |      |  |   | 5,096  |   |  |   | 5,031  |  
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Operating loss                                             |  |                             | (2,366 | ) |                          |   | (1,925 | )    |  |   | (3,863 | ) |  |   | (4,728 | )
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Other expenses                                             |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Interest expense, net                                      |  |                             | (167   | ) |                          |   | (20    | )    |  |   | (255   | ) |  |   | (50    | )
|Other expense                                              |  |                             | (1     | ) |                          |   |       |      |  |   | (4     | ) |  |   | (3     | )
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total other expenses                                       |  |                             | (168   | ) |                          |   | (20    | )    |  |   | (259   | ) |  |   | (53    | )
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                                   |  | $                           | (2,534 | ) |                          | $ | (1,945 | )    |  | $ | (4,122 | ) |  | $ | (4,781 | )
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Accumulated preferred dividends                            |  | $                           | (94    | ) |                          |   |       |      |  | $ | (94    | ) |  |   |       |  
|Net loss available to common shareholders                  |  | $                           | (2,628 | ) |                          | $ | (1,945 | )    |  | $ | (4,216 | ) |  | $ | (4,781 | )
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loss per share                                         |  | $                           | (0.38  | ) |                          | $ | (0.29  | )    |  | $ | (0.61  | ) |  | $ | (0.72  | )
|                                                           |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares used in loss per share calculation |  |                             | 6,898  |   |                          |   | 6,684  |      |  |   | 6,891  |   |  |   | 6,684  |  



See accompanying notes
to these consolidated financial statements.



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Path 1 Network Technologies Inc.



Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                             |  |                          |        |   |      |   |        |  
|---------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                             |  | Six Months EndedJune 30, |       
|                                                                             |  | 2005                     |        |   | 2004 |  
|Cash flows from operating activities:                                        |  |                          |        |   |      |   |        |  
|Net loss                                                                     |  | $                        | (4,216 | ) |      | $ | (4,781 | )
|Adjustments to reconcile net loss to net cash used in operating activities:  |  |                          |        |   |      |   |        |  
|Depreciation and amortization                                                |  |                          | 121    |   |      |   | 172    |  
|Stock-based compensation                                                     |  |                          | 892    |   |      |   | 272    |  
|Bad debt expense                                                             |  |                          | (62    | ) |      |   |       |  
|Accretion of debt discount & debt conversion expense                         |  |                          | 263    |   |      |   | 77     |  
|Changes in assets and liabilities                                            |  |                          |        |   |      |   |        |  
|Accounts receivable                                                          |  |                          | (113   | ) |      |   | (613   | )
|Inventory                                                                    |  |                          | 229    |   |      |   | 76     |  
|Other current assets                                                         |  |                          | 230    |   |      |   | (111   | )
|Other assets                                                                 |  |                          | (525   | ) |      |   |       |  
|Accounts payable and accrued liabilities                                     |  |                          | (122   | ) |      |   | 167    |  
|Accrued compensation and benefits                                            |  |                          | (47    | ) |      |   | 215    |  
|Deferred revenue                                                             |  |                          | (152   | ) |      |   | 113    |  
|                                                                             |  |                          |        |   |      |   |        |  
|Cash used in operations                                                      |  |                          | (3,502 | ) |      |   | (4,413 | )
|                                                                             |  |                          |        |   |      |   |        |  
|Cash flows from investing activities:                                        |  |                          |        |   |      |   |        |  
|Purchase of property and equipment                                           |  |                          | (57    | ) |      |   | (171   | )
|Capitalization of software development costs                                 |  |                          | (112   | ) |      |   |       |  
|                                                                             |  |                          |        |   |      |   |        |  
|Cash used in investing activities                                            |  |                          | (169   | ) |      |   | (171   | )
|                                                                             |  |                          |        |   |      |   |        |  
|Cash flows from financing activities:                                        |  |                          |        |   |      |   |        |  
|Exercise of options                                                          |  |                          | 221    |   |      |   |       |  
|Issuance of common stock                                                     |  |                          |       |   |      |   | 239    |  
|Repayment of notes                                                           |  |                          | (10    | ) |      |   |       |  
|Issuance of preferred stock                                                  |  |                          | 5,383  |   |      |   | (7     | )
|                                                                             |  |                          |        |   |      |   |        |  
|Cash provided by financing activities                                        |  |                          | 5,594  |   |      |   | 232    |  
|                                                                             |  |                          |        |   |      |   |        |  
|Increase (decrease) in cash                                                  |  |                          | 1,923  |   |      |   | (4,352 | )
|Cash and cash equivalents, beginning of period                               |  |                          | 929    |   |      |   | 7,807  |  
|                                                                             |  |                          |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                     |  | $                        | 2,852  |   |      | $ | 3,455  |  
|                                                                             |  |                          |        |   |      |   |        |  
|Supplemental cash flow disclosures:                                          |  |                          |        |   |      |   |        |  
|Non-cash, reconciling items                                                  |  |                          |        |   |      |   |        |  
|Capitalized costs associated with beneficial conversion charges and warrants |  | $                        | 3,556  |   |      | $ |       |  
|                                                                             |  |                          |        |   |      |   |        |  
|Conversion of notes and accrued interest to common stock                     |  | $                        | 102    |   |      | $ | 331    |  
|                                                                             |  |                          |        |   |      |   |        |  
|Acquisition of equipment                                                     |  |                          |       |   |      | $ | 9      |  
|                                                                             |  |                          |        |   |      |   |        |  
|Issuance of restricted stock to executives                                   |  |                          | 85     |   |      | $ |       |  
|                                                                             |  |                          |        |   |      |   |        |  



See accompanying notes
to these consolidated financial statements.



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Path 1 Network Technologies Inc.



Notes to the Unaudited Consolidated Financial Statements



Note 1Basis of Presentation



The
accompanying consolidated balance sheet at June 30, 2005, the consolidated statements of operations for the three-month and six-month periods ended June 30, 2005 and 2004, and the consolidated statements of cash flows for the six-month periods ended
June 30, 2005 and 2004, have been prepared by Path 1 Network Technologies Inc. (the Company) and have not been audited. The consolidated balance sheet at December 31, 2004 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 quarterly consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2004. 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, 2005.



Reclassifications



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



Recently Issued Accounting Standards



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, applying to all voluntary accounting principle changes as well as the accounting for and reporting of such changes. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect SFAS No. 154 to affect the Companys
financial condition or results of operations.



In March 2005,
the FASB issued Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations. FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of
the obligation can be reasonably estimated. The provision is effective no later than the end of fiscal years ending after December 15, 2005. We have not determined what effect, if any, FIN 47 will have on our financial condition or results of
operations.



On December 16, 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004), or SFAS 123(R), Share-Based Payment, which is a revision of SFAS 123. SFAS 123(R) supersedes APB Opinion No. 25, and amends SFAS 95, Statement of Cash Flows. Generally, the
approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair
values and pro forma disclosure will no longer be an alternative. The Company has not yet quantified the impact that adoption of SFAS 123(R) will have on its financial statements, but expects such impact to be material. On April 14, 2005, the U.S.
Securities and Exchange Commission announced, in Staff Accounting Bulletin No. 107, a deferral of the effective date of SFAS 123(R) until the first interim period beginning after December 15, 2005. The Company expects to adopt SFAS 123(R) effective
in its first fiscal quarter beginning January 1, 2006. The Company is currently determining how or if the adoption of SFAS 123(R) will impact the magnitude or form of its share-based compensation to employees.



In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period
charges and requires the allocation of fixed production overhead to inventory based on the normal capacity of the



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Path 1 Network Technologies Inc.



Notes to the Unaudited Consolidated Financial Statements(Continued)



production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Adoption of SFAS 151 is not
expected to have a material impact on the Companys financial condition, results of operations or cash flows.



In November 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets, an Amendment of APB No. 29
(SFAS 153). SFAS 153 requires that exchanges of productive assets for similar productive assets should be measured based on the fair value of the assets exchanged except in those instances in which the exchanges of non-monetary assets do not have
commercial substance. SFAS 153 is effective prospectively for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Adoption of SFAS 153 is not expected to have a material impact on the Companys financial
condition, results of operations or cash flows.



Note 2Stock-based
Compensation



The Company currently 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 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 123 and Emerging
Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 48), Accounting for Stock-Based CompensationTransition and Disclosure. This statement amends SFAS 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 SFAS 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 makes the following required disclosure under SFAS 148. The table below provides, on a pro forma basis, the effect employee stock-based compensation
would have had on the Companys operating results had the Company used the fair value method of accounting for stock-based compensation arrangements in conformity with SFAS 123 (in thousands, except per share amounts):



|                                                                                             |  |                          |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                             |  | Six Months EndedJune 30, |       
|                                                                                             |  | 2005                     |        |   | 2004 |  
|Net loss, as reported                                                                        |  | $                        | (4,216 | ) |      | $ | (4,781 | )
|Unrecorded stock-based employee compensation resulting from options vested during the period |  |                          | 143    |   |      |   | 10     |  
|                                                                                             |  |                          |        |   |      |   |        |  
|Pro forma net loss                                                                           |  | $                        | (4,359 | ) |      | $ | (4,791 | )
|                                                                                             |  |                          |        |   |      |   |        |  
|Basic and diluted loss per share:                                                            |  |                          |        |   |      |   |        |  
|As reported                                                                                  |  | $                        | (0.61  | ) |      | $ | (0.72  | )
|                                                                                             |  |                          |        |   |      |   |        |  
|Pro forma                                                                                    |  | $                        | (0.63  | ) |      | $ | (0.72  | )
|                                                                                             |  |                          |        |   |      |   |        |  



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



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Path 1 Network Technologies Inc.



Notes to the Unaudited Consolidated Financial Statements(Continued)



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 and six-month periods ended June 30, 2005 and 2004, the Company recorded no stock-based compensation expense related to the amortization of options outstanding to employees and consultants, but during the three and
six-month periods ended June 30, 2005, the Company recorded non-cash compensation related to the vesting of restricted stock issued to Mr. Fred Cary, a board member, Mr. David Carnevale, Vice President of Corporate Development, and Mr. Les Briney,
Vice President, Engineering. Stock-based compensation expense may be higher in future quarters due to the planned vesting dates for restricted stock awards granted in earlier periods to company executives.



Note 3Private Offering



On January 26, 2005, the Company entered into a Securities Purchase
Agreement (the Agreement) and a related Registration Rights Agreement, with certain accredited investors. On January 27, 2005, pursuant to the Agreement, the Company sold to a group of accredited investors 556,538 shares of the
Companys mandatorily-redeemable 7% Convertible Preferred Stock (the Series A Preferred Stock), and issued to those investors warrants to purchase up to 278,268 shares of the Companys Common Stock (the Series A
Warrants). The per share purchase price of the Series A Preferred Stock (with 0.5 Series A Warrant) was $3.25, and the Series A Warrants initially carried an exercise price of $4.20 per share. The Companys gross receipts from the January
27, 2005, sale of Series A Preferred Stock (with Series A Warrants) were $1,808,750. On February 18, 2005, under the Agreement, the Company sold to other accredited investors at a second closing a total of 307,691 shares of Series A Preferred Stock
and 153,847 Series A Warrants, for $1,000,000. In total, under the two closings, the Company sold 864,229 shares of Series A Preferred Stock and 432,115 Series A Warrants, for gross receipts of $2,808,750.



The Series A Preferred Stock accrues dividends at the rate of $0.2275 per
share per year, and dividends are cumulative. The Series A Preferred Stock is convertible at the option of the holder into shares of Common Stock at a conversion price of $3.25 per share, subject to specified anti-dilution adjustments. The preferred
stock shall be automatically redeemed on January 27, 2009 for $3.25 per share plus accumulated but unpaid dividends. The Company has the right to redeem the preferred stock earlier upon certain conditions.



The financing was led by investor Gryphon Master Fund, L.P. The Company paid
Gryphon Master Fund, L.P. a fee of $30,000 to cover its expenses incurred in connection with this financing.



On June 1, 2005, pursuant to a Securities Purchase Agreement dated April 26, 2005, the Company sold to accredited investors led by Castle Creek Technology
Partners LLC, for $2,575,000, a total of 792,306 shares of Series B 7% Convertible Preferred Stock (Series B Preferred Stock) and five-year warrants to purchase up to a total of 396,155 shares of the Companys Common Stock. The
purchase price for each combination of one share and 0.5 warrants was $3.25 and the warrants carry an exercise price of $3.25 per share.



In connection with the sales of Series A Preferred Stock and Series B Preferred Stock, the Company paid cash fees of approximately $380,000 and
approximately 84,000 common stock warrants to the Companys placement agent or the placement agents designees. The Company paid Castle Creek Technology Partners LLC fees totaling $25,000 to cover its expenses.



The Series B Preferred Stock accrues dividends at the rate of $0.2275 per
share per year, and dividends are cumulative. The Preferred Stock is convertible at the option of the holder into shares of Common Stock at a conversion price of $3.25 per share, subject to specified anti-dilution adjustments. The preferred stock
shall be automatically redeemed by the Company if for 10 consecutive trading days the common stock closes at a price above $9.04. The holders of the Series B Preferred Stock would be able to convert their shares into shares of common stock at any
time before such redemption.



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Path 1 Network Technologies Inc.



Notes to the Unaudited Consolidated Financial Statements(Continued)



The conversion price of the Series B Preferred Stock is $3.17424, subject to any future weighted
average antidilution provisions. This conversion price was established by a one-time Special Re-Set, calculated by a formula based on Current Market Price at the time of the June 1, 2005 Closing. This also had the effect of reducing the conversion
prices of the Series A Preferred Stock to $3.17424 as of June 1, 2005. Also, by private agreements, the exercise price of the 432,115 Series A Warrants was specially reduced from $4.20 to $3.25 upon consummation of the Series B Preferred Stock
financing. (See Note 11)



Note 4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 5Inventory



The Company records
inventory, which consists primarily of raw materials used in the production of video gateways and related products and finished goods, 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 an analysis of inventory levels and future sales forecasts. The provision is re-measured at each balance sheet date. At June 30, 2005, the Company had accrued approximately $127,000 for
potentially obsolete or slow-moving inventory.



Note 6Revenue
Recognition



The Company generates revenue primarily from
the sale of its video gateway products. The Company sells its products through direct sales channels and through distributors or resellers. The Company also derives revenue from contract services and license fees.



Product Revenue



The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collection is reasonably assured. Significant management judgments and estimates must be made in connection with the measurement of revenue in a given period. The Company follows specific and detailed guidelines for
determining the timing of revenue recognition. At the time of the transaction, the Company assesses a number of factors including specific contract and purchase order terms, completion and timing of delivery to the common-carrier, past transaction
history with the customer, the creditworthiness of the customer, evidence of sell-through to the end user, and current payment terms. Based on the results of the assessment, the Company may recognize revenue when the products are shipped or defer
recognition until evidence of sell-through occurs or cash is received; or, if cash has been received, when it is determined there is no reasonable likelihood the Company would accept the return of products which had not been sold through, including
sales where there are no return rights. Estimated warranty costs are calculated based on historical experience and are recorded at the time revenue is recognized. Our products generally carry a one-year warranty from the date of purchase.



Contract Service Revenue



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.



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Path 1 Network Technologies Inc.



Notes to the Unaudited Consolidated Financial Statements(Continued)



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.



Allowances
for Doubtful Accounts, Returns and Discounts



The Company
performs credit evaluations on all prospective customers, and historically has not required collateral or deposits. The Company establishes allowances for doubtful accounts based upon current economic trends, contractual terms and conditions and
historical customer payment practices, as the well as for known or expected events. If there were to be a deterioration of a major customers creditworthiness, or if actual defaults were higher than the Companys historical experience, the
Companys operating results and financial position could be adversely affected.



Note 7Warranty Reserves, Indemnification Arrangements and Guarantees



In connection with the Companys adoption of FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others,the
following disclosures are made with respect to the Companys product warranties.



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 estimate of future warranty costs expected to be incurred for its products still
under warranty at the time of measurement. This estimate is derived from analyzing trends in product failure rates and trends in actual product repair costs incurred. The Companys standard product warranty extends one year from date of sale;
however, the Company may warrant products for periods greater than one year under certain circumstances. The following table summarizes the activity in the liability accrual related to product warranty during the three months ended June 30, 2005:



|                                               |  |                |    |  
|---------------------------------------------- |  | -------------- | -- | -
|                                               |  | (in thousands) |   
|Balance at December 31, 2004                   |  | $              | 29 |  
|Warranty expense accrued in the current period |  |                | 7  |  
|Actual warranty costs incurred in the period   |  |                | (8 | )
|                                               |  |                |    |  
|Balance at June 30, 2005                       |  | $              | 28 |  
|                                               |  |                |    |  



The Company also
undertakes indemnification obligations in the ordinary course of business related to its products, the licensing of its software, and the issuance of securities. Under these arrangements, the Company may indemnify other parties such as business
partners, customers, and underwriters, for certain losses suffered, claims of intellectual property infringement, negligence and intentional acts in the performance of services, and violations of laws including certain violations of securities laws.
The Companys obligation to provide such indemnification in such circumstances would arise if, for example, a third party sued a customer for intellectual property infringement and the Company agreed to indemnify the customer against such
claims. The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to its indemnification obligations. Some of the factors that would affect this assessment include, but are not limited to, the nature
of the claim asserted, the relative merits of the claim, the financial ability of the parties, the nature and amount of damages claimed, insurance coverage that the Company may have to cover such claims, and the willingness of the parties to reach
settlement, if any. Because of the uncertainty surrounding these circumstances, the Companys indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in
the ordinary course of business.



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Path 1 Network Technologies Inc.



Notes to the Unaudited Consolidated Financial Statements(Continued)



Note 8Capitalized Software Development Costs



The Company capitalizes certain software development costs in accordance
with FASB Statement of Financial Accounting Standards 86 (SFAS 86), Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed and AICPA SOP 98-1 (SOP 98-1), Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. During the six months ended June 30, 2005, the Company capitalized approximately $112,000 of engineering costs, consisting of $107,000 related to product development under SFAS 86 and $5,000 for
development of internal use software tools under SOP 98-1.



The
costs capitalized under SFAS 86 for the period ended June 30, 2005 consisted primarily of the salaries and employee benefits of the Companys personnel directly involved in the various software development efforts and direct costs associated
with third parties hired to assist with these developments. These capitalized costs were costs incurred to create product masters subsequent to the software product under development achieving technological feasibility as a working model as required
by SFAS 86. The Company will capitalize similar future costs incurred to bring this product to general release to the public at which time capitalization will cease and amortization will begin.



While capitalization of costs under SFAS 86 to date, and for the development
of a particular software product to be sold, has been recorded under the working model provisions, SFAS 86 also provides for capitalization of costs incurred once a product has achieved technological feasibility under a more structured detail
program design model. The Company plans to use the detail program design methodology in the future for software development efforts.



At June 30, 2005, the Company had net software capitalizations totaling $123,000. The Company has started to amortize capitalized software over an
expected twenty-four month period beginning in the second quarter of 2005. The amount of annual expense to be recognized is the greater of the amount that would be amortized using the straight-line method over the remaining economic life of the
product including the period being reported and the amount that would be amortized by the ratio actual period sales of the product bear to the total of current and anticipated future sales of the product. The following table summarizes activity
within the capitalized software and related amortization accounts during the six months ended June 30, 2005:



|                                                         |  |                |     |  
|-------------------------------------------------------- |  | -------------- | --- | -
|                                                         |  | (in thousands) |    
|Capitalized software assets:                             |  |                |     |  
|Balance at December 31, 2004                             |  | $              | 11  |  
|Costs capitalized during the period                      |  |                | 112 |  
|                                                         |  |                |     |  
|Balance at June 30, 2005                                 |  | $              | 123 |  
|                                                         |  |                |     |  
|Accumulated amortization of capitalized software assets: |  |                |     |  
|Balance at December 31, 2004                             |  | $              | 0   |  
|Amortization expense recorded during the period          |  |                | (11 | )
|                                                         |  |                |     |  
|Balance at June 30, 2005                                 |  | $              | (11 | )
|                                                         |  |                |     |  



Note 9Off Balance Sheet
Arrangements



The Company does not have off-balance sheet
arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as special purpose entities (SPEs).



Note 10Reportable Operating Segments



The Company does not have more than one reportable operating segment.



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Path 1 Network Technologies Inc.



Notes to the Unaudited Consolidated Financial Statements(Continued)



Note 11Long-Term Liabilities



Notes Payable



During the six months ended June 30, 2005, approximately $102,000 of note principal was converted into 26,050 shares of the Companys common stock.
The carrying value of the convertible notes payable, excluding the Companys line of credit, at June 30, 2005 is zero. Interest expense related to convertible notes for the six months ended June 30, 2005, includes coupon interest of
approximately $2,533; non-cash interest expense of approximately $2,000 pertaining to the discount related to the warrants; and non-cash interest expense of approximately $7,000 pertaining to the discount related to the beneficial conversion
feature. Amortization of debt issuance costs for the six months ended June 30, 2005, was $9,000.



The Company maintains a $1 million revolving line of credit (the LOC) with Laurus Master Fund Ltd. 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. The LOC expires in February 2006. The amount outstanding under the LOC at June 30, 2005 is zero.



Mandatorily-redeemable convertible preferred shares (see Note 3)



In connection with the sale of the Series A Preferred Stock and Series B Preferred Stock, which are required to be redeemed by the Company if not
converted to the Companys common stock, and the issuance of the warrants as part of the financing transaction, the Company has recorded a long-term liability under FASB Statement of Financial Accounting Standards No. 150 (SFAS 150),
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 requires that mandatorily-redeemable stock be characterized as a liability and that all payments to, or accruals for the benefit of,
the holders of the stock that are not a return of principal be treated as interest expense.



The following table shows the carrying value of the long-term liability related to the Companys convertible preferred shares:



|                                                                                                      |  |                |        |  
|----------------------------------------------------------------------------------------------------- |  | -------------- | ------ | -
|                                                                                                      |  | (in thousands) |       
|Amount payable for mandatorily-redeemable preferred shares (convertible into 1,696,072 common shares) |  | $              | 5,382  |  
|Unamortized discount related to warrants                                                              |  |                | (691   | )
|Unamortized discount related to beneficial conversion feature                                         |  |                | (2,620 | )
|                                                                                                      |  |                |        |  
|Carrying value of mandatorily-redeemable convertible preferred shares                                 |  | $              | 2,071  |  
|                                                                                                      |  |                |        |  



The convertible
preferred shares have a cumulative 7% dividend rate and are mandatorily-redeemable for cash if not converted at the holders sole discretion into the Companys common stock by January 27, 2009.



Total interest expense related to mandatorily-redeemable convertible
preferred shares for the six months ended June 30, 2005 includes non-cash interest expense of approximately $47,369 pertaining to discounts related to warrants, and non-cash interest expense of approximately $198,322 pertaining to discounts related
to the beneficial conversion features which includes $99,826 of such expense related to the one-time special re-set discussed in Note 3.



Amortization of issuance costs for debt and mandatorily-redeemable preferred stock for the six months ended June 30, 2005, was approximately $21,618.



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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.



OVERVIEW



We are an industry pioneer and leader in designing, developing and supplying
products that enable the adaptation, transportation and delivery of broadcast-quality real-time video over private and public Internet Protocol (IP) networks, such as the networks that comprise the Internet.



We sell two broad categories of products: long haul video gateways and video
multiplexers. Our long haul video gateways are used by many types of customers to transport live, broadcast quality video perfectly over IP networks that span long distancessometimes tens of thousands of miles, and sometimes over multiple IP
networks operated by separate service providers, while our video multiplexer products are used primarily by cable companies or MSOs to offer video on demand.



Our long haul video gateway products operate in many types of IP networks, including those used to transport video to mobile devices. They are used in
very high-grade or clean IP networks (sometimes referred to as 5 nines networks), as well as less reliable networks such as the public Internet. In all cases, our products basically convert video from its many legacy formats
into IP packets, wrap around the packets our proprietary intellectual property or our recently implemented version of the Pro MPEG standards-based Forward Error Correction (FEC) and encapsulation designed to ensure that the digitized
video packets are transported perfectly across an IP network, and then re-convert the IP packets to the legacy video formats. In summary, our gateway products serve as a bridge between the worlds of video and networking.



Our long haul product revenues represented nearly 50% of our total product
revenues in 2004, and in the first half of 2005, the percentage of revenues from long haul gateway products increased to nearly 78% of total product revenues, reflecting our continuing focus on long haul opportunities across many industry segments.



We continue to mature as a company, with long-haul product
sales advancing and profit margins at good levels. Our private-placement financings in the first half of 2005 reflected our ongoing progress and provided us with approximately $5.5 million gross proceeds of needed financial support.



We rely on distribution partners to drive sales into markets and / or to
customers where we would otherwise not have adequate presence or the relationships to do so. In Japan, we engaged Frontiers Co. Ltd. (Frontiers) in 2003 as our distributor, with exclusive status in Japan and non-exclusive status in
certain other Asian countries. We believe that Frontiers is in breach of a non-cancelable 2005 Master Purchase Agreement under which



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Frontiers was obligated to purchase $2,000,000 in products from us. For the quarter ended June 30, 2005, we have reported $227,000 in revenue from sales made
to Frontiers in prior quarters, which we had not previously reported as revenue, even though we had been paid by Frontiers, because Frontiers had not provided evidence of sell-through. We have terminated the exclusive distribution rights previously
granted to Frontiers in Japan. We are no longer relying on any further product sales to Frontiers, although we remain willing to sell to them with assurance of payment. We are presently exploring possible relationships with other Japanese partners
and representatives. We believe we have good market opportunities in Japan and other Asian countries, and we will strive to capitalize on those opportunities through other resellers or channels.



In June 2005, we discovered that a clerk in our finance department was
embezzling from us. We immediately fired the clerk and reported the matter to the police. We conducted an internal investigation, and have determined that this former employee acted alone, that no other Path 1 employees were involved in this matter,
and that the amount of the embezzlement was approximately $245,000. This sum is reflected primarily in general and administrative expenses in the first and second quarters of 2005, and in the third and fourth quarters of 2004. Approximately half of
the embezzlement occurred in the second quarter of 2005. After the completion of the internal investigation, stronger controls and procedures have been instituted and we have recommitted to compliance with previously existing procedures. We
have also filed suit against this former employee, an employment agency from which we hired this former employee, and our bank, to recover the amount which was embezzled.



INDUSTRY BACKGROUND



Current technologies for transmitting real-time, high-quality video over long distances require an established and fully dedicated circuit for the
duration of a transmission, regardless of whether the circuit is being used by the end-user. The concept is similar to a traditional telephone networka call is placed, a circuit between two (or multiple) points is established and thereafter
remains open for the duration of the call (regardless of whether anyone is speaking). These technologies typically require that the network be designed to be able to handle twice the expected average capacity in order to prevent congestion during
peak usage. These technologies also require procuring expensive, dedicated bandwidth that remains open at all times regardless of usage. Dedicated bandwidth is often priced on a monthly basis, requiring significant cost regardless of usage.



Cable and satellite companies have historically used
technologies that typically require all available packages of programs be broadcast to every subscriber. As a result, limited bandwidth remains available for video on demand and similar interactive services requiring two-way communication. Because
of these factors, such services are currently available only on a limited basis and in select markets.



The rise of Internet Protocol (IP) and packet-based networks



The advent of IP and packet-based networks has resulted in a dramatic increase in the transmission and exchange of data, information and ideas. IP
networks have been predominantly used to carry data traffic such as web site pages, e-mail and file transfers. In IP networks, the flow of information (data, audio, video, etc.) is not continuous, and is not sent as one complete uninterrupted
package. Instead, the information is broken into many small pieces called packets before it is sent out. The reason this protocol (Internet Protocol) was adopted was to make sure that information could travel from one point to another
over the best route and not be constrained in case there were bottlenecks along the first path used. In the event a particular pathway on the network fails, alternate routes to the same destination are available. But because each packet
travels independent of the others and possibly by a different pathway, certain packets can be delayed or delivered out of order relative to others, or may not ever arrive at the intended destination. There is no guarantee that all the packets will
get through, so the protocols involved allow for requests to be sent back to the sender to re-send any missing packets until the information is complete and reassembled in the proper order. While this process does not cause major problems when
sending files, web pages or emails, it can make the transmission of video impractical unless it is modified.



Over the past few years, voice traffic has been added to these networks as a replacement for more expensive circuit-switched telephony networks. The term
used to describe voice calls made using this approach is voice



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over IP (VoIP). Video is the most recent extension of data types that can be transported over IP networks. As a result, IP networks have become a powerful
and flexible platform capable of supporting data, voice, and video, all converged on the same network infrastructure. This push toward converged IP networks is enabling the rollout of new services and new service providers such as telecommunications
carriers offering IP Television, cable companies offering bundled data, voice and video offerings, carriers offering bundled IP video transport services, and mobile providers offering video including live content to mobile subscribers.



In the case of transmissions that must be delivered continuously, such as
real-time, high-quality video, even a few milliseconds of delay may be noticeable by the viewer. As the majority of video consumers have become accustomed to high-quality delivery, new service offerings must provide quality at least as good as that
to which the target viewing audience has become accustomed. Thus, IP networks have historically not been well-suited for delivery of real-time, high-quality video. While it is currently possible to view video clips (such as movie trailers) over the
public Internet, the inability of current IP networks to deliver real-time, broadcast quality video requires that the clips be downloaded first, and then played. This download-and-play approach has limited application because, for instance, a
2.5-hour movie may generally take 6 hours to download over T1 or some types of DSL lines. The data rates for a live quality voice call are typically between 64 and 128 kbps, but video is much more problematic, requiring data rates ranging from 1
Mbps (MPEG-4 Standard Definition TV) to 20 Mbps (MPEG-2 High Definition TV) for acceptable performance.



THE PATH 1 SOLUTION



We
have developed the technologies and products incorporating those technologies that have overcome the above mentioned inherent limitations of IP networks for transporting live, broadcast quality video, and that enable broadcasters, telcos, carriers,
satellite operators and cable companies to transport live video over these types of networks. As a result, they can enjoy significant lower capital and operating costs of video transport, higher reliability and quality and other benefits over legacy
circuit switched networks, satellite, ATM and other platforms. Our products provide significant benefits for both contribution and distribution of video.



Our products perform four primary functions: First, they process and prepare multiple video feeds for delivery over an IP network. Second, and perhaps
most important, they condition the video data to avoid impairments or disruptions that would otherwise deteriorate the quality of the video signal. Third, they play out the received video flawlessly. And fourth, depending upon the application, they
may combine multiple video streams arriving over the IP network into single multiplexed stream for delivery to the end-viewer.



Our products provide benefits and enable services as follows:



| |  |  | FeasibilityIP offers wider bandwidths than are currently available on alternate video transmission methods (such as satellite and DS-3);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Efficiencyby using bandwidth only when needed, a greater amount of content can be passed over a providers network.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Transparencywe can transport video regardless of the type of encoding at bit rates from under 1 Mbps to 270 Mbps and can accept ASI, SDI or IP inputs and output them in the
same formats.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Decreased capital coststhe extensive installed base of IP networks and the equipment used to support them results in economies of scale and the availability of cost-effective
products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Decreased operations costsIP networks, designed to be fault-tolerant and self-correcting, reduce the need for redundant back-up networks and significantly reduce maintenance
and support costs; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Customization and flexibilitythe software architecture underpinning our products allows providers to increase the volume of video traffic being delivered simply by the remote
activation of additional ports or features within our products, rather than incurring costs associated with new equipment installation.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Content on demandno longer compelled to broadcasting content uniformly to all end-users, providers can send specific content to only those requesting it, further reducing
bandwidth constraints (both into the home and within the network);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe our technology can be used for a wide variety of purposes by all forms of communication service providers.



Product Development



Our product development efforts are based on customer requirements for increased performance, flexibility and functionality. These efforts include
upgrades and functional enhancements to current products and ultimately the development of a new generation of products.



For example, our most recent new product is the Vx8000, a multi port ASI and IP gateway product capable of handling up to 8 ports of ASI video for long
haul IP transport. This product makes use of the latest Pro-MPEG Code of Practice #3 forward error correction and RTP transport. We have actively participated in the setting of the standard and have led these efforts along with other key vendors.
However, our implementation of that standard goes beyond the requirements for interoperability, providing the broadest envelope of performance available in the market today. Indeed, in a recent interoperability test conducted by a major European
broadcaster, our Vx8000 outperformed competing gateways.



We
anticipate that our projected next generation products will make use of higher performance elements including network processors developed by companies like Intel and Broadcom, general purpose processors made by companies like IBM and MIPS, and
FPGAs from companies like Xilinx and Altera. The use of higher performance electronics will increase flexibility of our products, increase capacity to handle uncompressed High Definition video, and increase capacity to handle multiple High
Definition and Standard Definition streams. Many of these higher performance elements are being designed in a building block manner that also enables us to tailor other designs to focused lower performance requirements as well, thus reducing
development efforts required to bring products to market.



COMPETITION



We face competition in each of the target markets for our
products, services and products in development. Our competition includes vendors that produce products for legacy video transport networks such as satellite, circuit switch, Radio Frequency (RF), ATM and other transport platforms. We also compete
with vendors that produce products that enable the transport of video over IP networks including, but not limited to, companies such as Tandberg Television, Thomson, Harris, Aastra, and Scientific-Atlanta. A number of established and
development-stage or start-up companies in these markets offer similar or alternative technological solutions for convergence of real-time data, such as audio and video over IP networks, as well as real-time, high-quality transition (or
transmission) of video over IP networks. We anticipate that we will continue to face increased competition in the future as adoption rates for video over IP transport increase, and as competitors offering video over IP products and solutions
continue to enhance their product offerings and new competitors emerge.



The recent adoption of a standard for forward error correction (FEC) known as Pro-MPEG COP-3 may lead potential customers to believe that all products adopting this standard will perform as well as those of Path 1, threatening our position
as the acknowledged leader in this market. While we have already released products that exceed this standard and perform under a much wider range of network conditions, there is no guarantee that our efforts to demonstrate our continued product
differentiation will be successful.



Many of our competitors
have substantially greater financial, technical and marketing resources, industry clout, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry, and could, therefore, threaten
the viability of our business. As a result, certain of these competitors may be able to develop products that directly compete with ours and may be able to succeed with inferior product offerings. These competitors may also be able to adapt to new
or emerging technologies and



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changes in customer requirements more readily, take advantage of acquisition and other opportunities more effectively, devote greater resources to the
marketing and sale of their products and adopt more aggressive pricing policies than we can. In addition, these competitors have entered and will likely continue to enter into joint ventures or consortiums to provide additional value-added services
competitive with those provided by us.



Our product line is
relatively narrow, whereas many of our competitors offer a more complete solution, including products that we do not offer. Our limited product line represents a significant competitive disadvantage for us.



LIQUIDITY AND CAPITAL RESOURCES



Since our inception on January 30, 1998, we have financed our operations
through a variety of methods including the sale of common equity securities to investors (including our public offering in July/August 2003), sale of common equity to a strategic partner, issuance of convertible notes, and in 2005, the issuance of
convertible preferred stock.



From January 30, 1998 through
June 30, 2005, we incurred losses totaling $49.7 million. We have not yet achieved profitability, and we remain a risky enterprise. We believe that our existing capital resources will enable us to fund operations for at least the next six months,
and depending on our ability to generate sales, the next 12 months. We may need to raise additional capital sooner than the next 12 months, depending on our ability to generate sales. We may also need to take steps to reduce expenses to help manage
our cash. At June 30, 2005, we had working capital of $3.5 million. Cash and cash equivalents at June 30, 2005 totaled $2.9 million.



Unless we increase our sales substantially we cannot be profitable. For the foreseeable future, we expect to incur substantial additional expenditures
associated with cost of sales, marketing, and research and development, in addition to increased costs associated with staffing for management.



We raised $2,808,750 in the first quarter of 2005 by a private placement of Series A 7% convertible preferred stock and associated common
stock warrants. We raised an additional $2,575,000 in the second quarter by a private placement of Series B 7% convertible preferred stock and associated common stock warrants. Both Series A and B have similar terms and conditions
including mandatory redemption on January 27, 2009, if they have not previously been converted or redeemed.



The $5.4 million of private placement financing is reflected on our balance sheet as a long-term liability at its net carrying value. The convertible
preferred stock is treated as a liability, rather than equity, for accounting purposes because of its mandatory redemption feature. As a result of the transaction, we recorded a liability equal to the aggregate redemption price and a discount
totaling approximately $1,825,000 that was booked to additional paid-in capital. The discount results from an embedded beneficial conversion feature and detachable warrants to purchase common stock with fair values of $2,819,000 and $738,000,
respectively. These deferred interest charges will be amortized on an effective yield basis over four years, or sooner if any preferred stock is previously redeemed or converted, resulting in non-cash interest expense each quarter. At June 30, 2005,
the net carrying value of the liability for our mandatorily-redeemable preferred stock was $2,071,000. The remaining unamortized discount related to beneficial conversion feature and detachable warrants was $2,620,000 and $691,000, respectively.



In February 2003, we entered into a $1 million revolving line
of credit with Laurus. This revolving line of credit (the LOC) is secured by our accounts receivables and other assets, and we have the ability to draw down advances under the LOC subject to limits. Under the terms of the LOC, Laurus can
convert advances made to us into our common stock at a fixed conversion price of $6.78 per share. There was zero balance outstanding on our LOC as of June 30, 2005.



At June 30, 2005, we had material commitments related to our obligations under our recent preferred stock financing which
could require us to repurchase all our 7% convertible preferred stock for at least $5.4 million in the first quarter of 2009, and our operating leases,. Our future capital requirements will depend upon many



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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 approximately $3,502,000 for the six months ended June 30, 2005, compared to $4,413,000 for the same period in 2004. The
decrease in cash usage was due primarily to our lower net loss partially offset by the net change in our balance sheet accounts. Cash used in operations for the six months ended June 30, 2005 also reflects front-loaded third-party engineering
expense related to contract payments associated with the development of our next generation product platform. The $525,000 increase in Other assets in the first six months of 2005 was due to the capitalized costs associated with the
issuance of our convertible preferred stock.



Cash used in
investing activities for the six months ended June 30, 2005, was $169,000, compared to $171,000 for the same period ended June 30, 2004. In the same six month period in 2005, we capitalized $112,000 of engineering costs and acquired $57,000 of
engineering equipment.



Cash provided by financing activities
for the six-month period ended June 30, 2005, was $5,594,000 compared to $232,000 for the same period ended June 30, 2004. The cash provided by financing activities in 2005 resulted primarily from the sale of convertible preferred stock while the
2004 provision resulted primarily from the exercise of warrants issued in 2003 in our 7% convertible notes offering.



RESULTS OF OPERATIONS



Three Months Ended June 30, 2005 vs. Three Months Ended June 30, 2004



For the second quarter ended June 30, 2005, total revenues declined by $367,000 or 24%, to $1,142,000, compared to
$1,509,000 during the three-month period ended June 30, 2004. Revenues in the second quarter of 2005 include $227,000 for sales made to Frontiers in prior quarters for which we had already been paid and which were previously reported as deferred
revenue. The second quarter revenue in 2005 was driven heavily by long haul products compared to the same period in 2004, which was weighted by low margin cable products.



Gross profit increased nearly 121% to $635,000 for the quarter ended June 30, 2005, compared to $287,000 in the same quarter
last year, due to major shift in the product mix from low margin cable products in 2004 to higher margin long haul products in 2005.



Engineering, research and development expenses for the quarter ended June 30, 2005, increased by $295,000 or 38% to $1,065,000 from $770,000 in the
quarter ended June 30, 2004. The increase is due primarily to higher costs related to contract employees and outside vendors for engineering efforts related to new product development. We continue to spend heavily on engineering expenses for new
product development and other sustaining engineering efforts.



Sales and marketing expenses for the quarter ended June 30, 2005, decreased by 23% to $636,000 from $830,000 for the quarter ended June 30, 2004, primarily due to sharply reduced consulting fees. We expect Sales and marketing expenses will
continue in this range in the near future.



General and
administrative expenses for the quarter ended June 30, 2005, increased by $68,000, or 20% to $408,000 from $340,000 in the same quarter of the prior year. The expenses for the quarter ended June 30, 2005, include approximately $123,000 embezzled by
an employee, whom we immediately terminated on June 17 when we discovered the scheme. The corresponding amount for embezzlement for the same quarter of last year was minimal. Excluding the embezzlement, general and administrative expenses decreased
by $55,000 due largely to reduction in spending on professional services.



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Depreciation and amortization expense for the quarter ended June 30, 2005, was $62,000, almost flat
compared to $64,000 for the same quarter last year.



Net
interest expense for the quarter ended June 30, 2005 was $167,000 versus $20,000 in the same quarter ended June 30, 2004. The increase in interest expense is due to non-cash deferred interest charges for issuance of mandatorily-redeemable
convertible preferred shares during the first half in 2005.



Six Months
Ended June 30, 2005 vs. Six Months Ended June 30, 2004



For the six months ended June 30, 2005, net revenue increased by $108,000 or 6% to $2,006,000, compared to $1,898,000 during the six-month period ended June 30, 2004. Revenues in the first six months of 2005 include $227,000 for sales made
to Frontiers in prior quarters for which we had already been paid and which had previously been reported as deferred revenue. In the first half of 2005, we sold more long-haul products and cable products than in the first half of 2004. The mix of
our product sales and may fluctuate from period to period.



Gross profit increased by $930,000 or nearly 307% to $1,233,000 for the six month ended June 30, 2005, compared to $303,000 last year. The increase in gross profit for the current year period versus the prior year period is mainly
attributable to the change in product mix from being heavily weighted towards low margin cable units (including shipment of cable products sold at particularly unfavorable prices to a single customer) in 2004 to being heavily weighted towards higher
margin long-haul products in 2005.



Engineering, research and
development expenses for the six months ended June 30, 2005, increased by $755,000 or 60% to $2,005,000 from $1,250,000 in the same period last year. The increase is due primarily to higher costs related to contract employees and third party vendors
for engineering efforts related to new product development. We continue to spend heavily on engineering expenses for new product development and other sustaining engineering efforts.



Sales and marketing expenses for the six months ended June 30, 2005, decreased by $549,000 or 28% to $1,444,000 from
$1,993,000 for the same period last year. The decrease is primarily due to a one-time charge of $400,000 in the 2004 period for the repurchase of the exclusive marketing rights to the integrated QAM product we had developed for Aurora Networks and a
most-favored-nation pricing right which Aurora Networks had as a reseller of our products.



General and administrative expenses for the six months ended June 30, 2005, decreased $761,000 or 50% to $755,000 from $1,516,000 in the same period last year. The expenses for the six months ended June 30, 2005,
include $190,000 embezzled by an employee, whom we immediately terminated on June 17 when we discovered the scheme. The corresponding amount for embezzlement for the same six-month period of last year was minimal. The overall decrease in general and
administrative expenses results from, among other items, lower salary expenses, a one-time charge of $260,000 in the 2004 period for our former CEOs severance arrangement as provided for in his employment agreement, lower expenses for
professional services and demonstration equipment, and the overall effects of an across-the-board cost containment initiative.



Depreciation and amortization expenses for the six months ended June 30, 2005 decreased by $51,000 or 30% to $121,000, compared to $172,000 for the same
period last year. The higher 2004 amount was due to accelerated amortization of debt issuance costs because of early conversion of convertible debt in the first six months of 2004.



Net interest expense for the six months ended June 30, 2005 increased by $205,000 or 410% to $255,000 versus $50,000 in the
same period last year. The increase in interest expense is due to non-cash deferred interest charges related to the issuance of mandatorily-redeemable convertible preferred shares during the first six months of 2005.



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RISK FACTORS



You should carefully consider the following risks and uncertainties before you invest in our common stock. Investing in our common stock involves risk. If
any of the following risks or uncertainties actually occurs, our business, financial condition or results of operations could be materially adversely affected. The following are not the only risks and uncertainties we face. Additional risks and
uncertainties of which we are unaware or which we currently believe are immaterial could also materially adversely affect our business, financial condition or results of operations. In any case, the trading price of our common stock could decline,
and you could lose all or part of your investment. See also, Special Note Regarding Forward-Looking Statements.



Our window of opportunity may be shrinking



It is difficult for companies like us, with small mass and limited resources, to compete in the video transport equipment industry against larger
businesses. Although we believe our products remain technologically superior, our margin of superiority over certain large competitors may diminish as we presently do not offer an integrated solution: we have a narrow product offering. Moreover, our
industry is now adopting international standards for forward error correction (FEC) and other technologies that today are proprietary. While we believe that our implementation of these standards is unique, and while an initial comparison
test conducted by a major European broadcaster showed that our Vx8000 operating our implementation of the Pro-MPEG Code of Practice (COP) # 3 FEC performed best, the movement toward industry standards-based products may result in commoditization and
may reduce our technological advantages, thereby resulting in lower selling prices and reduced gross margins, and thus negatively impact the results of our operations. For these and other reasons, our industry has been experiencing consolidation.



We have incurred losses since inception and will likely not be profitable
at least for the next several quarters.



We have incurred
operating losses since our inception in January 1998. As of June 30, 2005, our accumulated deficit was approximately $49.7 million. We have never been profitable. 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.



We may need to raise additional
capital in the near future.



Our cash position at June 30,
2005, was $2,852,000. Despite our two private placements in the six months ended June 30, 2005, in which we raised aggregate proceeds of approximately $5.4 million, given our projected cash burn rate, we may need to raise additional capital
to sustain our operations at current levels. We believe that our existing capital resources will enable us to fund operations for at least the next six months, and depending on our ability to generate sales, for the next 12 months. We cannot ensure
that financing will be available to us on acceptable terms, if at all. Our inability to raise capital when needed would 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. If adequate funds are not available, we would need to curtail our
operations significantly.



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 competitive. We face direct and indirect competition from a number of established
companies, including Tandberg Television, Thomson, Harris, Aastra and 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



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emerge. Many of our competitors have greater resources, sell a more complete product line or solution, have higher name recognition, have more established
reputations within the industry and maintain stronger marketing, 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
commercialized by established companies that possess substantially greater financial, marketing, 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, we may find ourselves at a competitive disadvantage and
our business could be adversely affected. In addition, competitors with greater financial, marketing, distribution and other resources than we have may be able to leverage such resources to gain wide acceptance of products inferior to ours.



Our product line is relatively narrow, whereas many of our
competitors can offer customers a complete solution that includes products that we do not manufacture or technologies which we have not developed. Our limited product line represents a significant competitive disadvantage for us.



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 on a timely basis design, develop, manufacture and sell new or enhanced products that provide
increasingly higher levels of performance and reliability. However, in addition to the technological and managerial risks inherent in any product development effort, we may not be able to develop these products on a timely basis if the development
effort requires more financial resources than we are able to bring to bear, and we may not be able to introduce successfully any new 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.
| | - |  | ----------------------------------



Our future success will depend on our ability to develop new products that will use next generation Intel IXP processors and other key components. These
technologies are changing rapidly, and we will be required to spend significant sums on research and developmentparticularly for new hardware designs and software developmentto produce these next generation products. Our existing
products may soon become difficult to produce because of end-of life components, because of emerging governmental restrictions on the manufacture and sale of electronic products containing lead parts and components, and because of increasing demand
in the market for new standards-based products.



In order to
develop and market successfully 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.



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We must re-engineer our current platform and products to comply with environmental laws and regulations.



Our products are not currently in
compliance with the RoHS (Reduction of certain Hazardous Substances) directive of the European Union which will require electronic components shipped into Europe after June 30, 2006 to be essentially lead-free. Various states and other
countries are contemplating adopting this type of legislation and/or similar WEEE (Waste from Electrical Electronic Equipment) legislation designed to reduce the potential damage from hazardous substances contained in electronic
components and parts. We will need to expend significant engineering resources to conform our existing products to this directive, as we believe noncompliant products will no longer be viable in some markets after June 30, 2006. In addition, we will
continue to need significant engineering resources for sustaining-development work (bug fixes, needed upgrades for specific customer bids, etc.). In view of these needs and our finite resources, we are being compelled to scale back certain
development toward next-generation products.



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 or other types of networks that are incompatible with our current or future products. In addition to competing with
video over IP vendors, we compete with existing or incumbent alternative technologies and architectures for transporting live broadcast video that have existed for many years such as satellite, circuit switched networks and ATM, and our customers
may not be willing to move to using an IP network for transporting live video.



If we are unable to design, develop, manufacture and sell products that incorporate or are compatible with these new or existing architectures or technologies, our business could suffer. Moreover, our industry is
rapidly adopting technical standards for transporting video over IP networks, and many customers appear to prefer standards-based or open standards products such as those operating the Pro-MPEG COP (Code of Practice). Our Vx8000,
launched in April 2005, is our first product that is Pro-MPEG standards-based. This move towards offering standards-based products for transporting video over IP networks may result in increased competition, adversely affect our ability to offer
differentiated products incorporating our proprietary technology, and cause negative impact to our gross profit margins.



Pricing pressure on our products has placed us at a competitive disadvantage.



We have experienced significant pricing pressure in some of the markets for our products, predominantly the cable market.
Due to competitive factors, cable customers have been willing to pay only reduced amounts for our products. This has placed us at a competitive disadvantage with our competitors which have the financial strength to withstand pricing pressures. Most
of our competitors in the cable market sell a broader array of products as a bundled solution to cable customers, and these competitors can offer substantial discounts to cable customers on products that compete directly with ours, sometimes even as
loss leaders. If we are unable to regain larger margins on such products, we may be forced to exit certain market segments and our results of operations and profitability will be negatively affected.



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 by our customers,
| | - |  | ----------------------------------------------------



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



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| |  |  | problems in our execution of key functions such as engineering, manufacturing, marketing and/or sales,
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | 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,
| | - |  | --------------------------------------------



| |  |  | purchases of our products by communication service providers in large, infrequent amounts consistent with past practice,
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | customer acceptance of the services our products enable,
| | - |  | --------------------------------------------------------



| |  |  | interruption in the manufacturing or distribution of our products,
| | - |  | ------------------------------------------------------------------



| |  |  | the willingness and ability of customers to conduct necessary trials and tests of our products prior to sale, and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | general economic and market conditions, including war, acts of terrorism, and other conditions specific to the telecommunications industry.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



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



The sales cycle for certain of our products is
lengthy, which makes forecasting of our customer orders and revenues difficult.



The sales cycle for certain of our products is lengthy, often lasting six months to more than a year. Our customers generally conduct significant technical evaluations and trials of our products as well as competing
products prior to making a purchasing decision, even in cases where they may have previously purchased our products for use in one region of their operations and later seek to deploy our products in another. In addition, purchasing decisions may
also be delayed because of a customers internal budget approval processes. Because of the lengthy sales cycle and the size of customer orders, if orders forecasted for a specific customer for a particular period do not occur in that period,
our revenues and operating results for that particular quarter could suffer. Moreover, a portion of our expenses related to an anticipated order is fixed and difficult to reduce or change, affecting results for a particular period.



The rate of market adoption of our technology is uncertain and we could experience long
and unpredictable sales cycles.



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 or 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 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 contemplating 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 many potential customers measured approaches to corporate spending on technology generally as well as new
technologies such as ours, substantially complicate our planning and may reduce



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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.



Changes in senior management may result in difficulties



On September 1, 2004 we hired Jeff Hale as Vice President, Sales. On January 24, 2005, we hired Dan McCrary as our new Vice President, Marketing. In July 2005, we terminated David Houillion, our Controller and
Principal Accounting Officer. Changes in senior management of small companies are inherently disruptive, and efforts to implement any new strategic or operating goals may also prove to be disruptive.



Besides serving as the President and CEO of our Company, Mr. John Zavoli also
serves as our chief financial officer, general counsel and secretary. Until we hire new senior executives to assist Mr. Zavoli, there is a risk that his many responsibilities may overwhelm him to the point that he will not be able to devote
sufficient attention to one or more of his important roles. We are seeking, but may not be able to successfully hire, a new chief financial officer.



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. 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.



The success of our business is dependent on establishing and expanding sales and distribution channels for our products.



Third-Party Collaborations. Although we intend to establish
strategic relationships with leading suppliers, integrators and resellers to promote and distribute our products, we may not succeed. 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 leverage effectively 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 our product lines and other future products to suppliers
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.



We may not be able to profit from growth if we are unable to manage the growth effectively.



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,



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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 may 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. Indeed, even without consideration of future needs imposed by any future growth of our business, we need to upgrade several of these areas even to support our present levels of business.



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 will depend on broadcasting, cable 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.



Spending by customers in these sectors is dependent on a variety of factors, including:



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



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



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



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



| |  |  | 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.



Product quality problems may negatively affect our revenues and
results from operations, as well as disrupt our research and development efforts.



We produce highly complex products that incorporate leading edge technology including hardware, software and embedded firmware. In addition to problems relating to the physical quality of manufacturing, 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 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 operate under 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 have instructed 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.



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. 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 assimilate successfully 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, in particular, our CEO, John Zavoli, 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.



Changes in the mix of product sales, product distribution model or customer base could
negatively impact our sales and margins.



We may encounter
a shift in the mix of the various products that we sellproducts that have varying selling prices based in part on the type of product sold, competitive conditions in the particular market into which the product is 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.



Since 2001, we have submitted several patent applications and provisional 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



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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. 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.



We have to vigorously enforce our rights to, and protect our interests in, our intellectual property, and we may not be successful. For example, in March
2005, we filed suit in California Superior Court against QVidia Technologies, Inc. and Ronald Fellman (who was a founder of Path 1) for alleged misappropriation of our proprietary and confidential information. Discovery has commenced and the case is
now pending. There can be no assurance that these efforts will be adequate or prove successful, 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 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 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.



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
is 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;
| | - |  | -----------------------



| |  |  | stock selling by persons to whom we sold securities in one or more private placements at below-market prices;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------



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| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



In addition, stock prices for many technology companies, especially
early-stage companies such as ours, 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.



In addition, if the average daily trading volume in our common stock is low, the resulting illiquidity could magnify the effect of any of the above
factors on our stock price.



Newly adopted accounting regulations requiring
companies to expense stock options will result in a decrease in our earnings and our stock price may decline.



The Financial Accounting Standards Board recently adopted the previously proposed regulations that will eliminate the ability to account for share-based
compensation transactions using the intrinsic method that we currently use and generally would require that such transactions be accounted for using a fair-value-based method and recognized as an expense in our consolidated statement of operations.
We will be required to expense stock options vested after December 31, 2005. Currently, we generally only disclose such expenses on a pro forma basis in the notes to our consolidated financial statements in accordance with accounting principles
generally accepted in the United States. The adoption of this new accounting regulation will have a significant impact on our results of operations when or if we issue stock options after December 31, 2005, and our stock price could decline
accordingly.



Our outstanding convertible preferred stock and warrants and
the stock options and bonus stock we offer to our employees, non-employee directors, consultants and advisors could result in ongoing dilution to all stockholders.



We maintain three equity compensation plans: (i) the 2000 Stock Option/Stock Issuance Plan (the 2000 Plan),
pursuant to which we may issue an aggregate of 710,000 options and shares of common stock to employees, officers, directors, consultants and advisors, (ii) the 2001 Employee Stock Purchase Plan (the Purchase Plan), pursuant to which our
employees are provided the opportunity to purchase our stock through payroll deductions, and (iii) the 2004 Equity Incentive Plan (the 2004 Plan), pursuant to which we may issue a total of 900,000 options and shares of common stock to
employees, officers, directors, consultants and advisors. As of June 30, 2005, 405,000 shares of stock had been granted directly to current and former executives of the Company and there were options outstanding to purchase 282,350 shares of common
stock under our 2000 Plan; 19,403 shares of common stock remained 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. As of June 30, 2005, there were
options outstanding to purchase 435,231 shares of common stock and 20,000 shares of stock had been granted directly to current executives of the Company under our 2004 Plan; 443,019 shares of common stock remained available for issuance under the
2004 Plan.



In addition, as of June 30, 2005, there were 59,840
shares of common stock subject to outstanding options granted other than under the 2004 Plan, the 2000 Plan or the Purchase Plan. These non-plan options were granted in prior years to various employees, directors, consultants and advisors before the
creation of any stock option plan.



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We plan to continue to provide our employees opportunities to participate in the Purchase Plan. We also
plan to issue options 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. This could result in
substantial dilution to all stockholders and increased control by management.



As of June 30, 2005, there were outstanding warrants to purchase up to 4,047,559 shares of our common stock with a weighted average exercise price of $4.70 per share. The weighted average remaining life for all of the
currently outstanding warrants is 2.85 years from June 30, 2005.



In addition, at June 30, 2005, there were 864,229 shares of Series A 7% convertible preferred stock and 792,306 shares of Series B 7% Convertible Preferred Stock outstanding. These shares are convertible into shares of common
stock.



Our common stock is subject to the rights and preferences of our
mandatorily-redeemable convertible preferred stock.



In
January and February 2005, we issued 864,229 shares of 7% Convertible Preferred Stock in a Series A private placement. These shares have an aggregate liquidation preference of $2,808,750 above the common stock, have an aggregate cumulative dividend
of approximately $200,000 per year, must be redeemable in four years, and are convertible into common stock (with favorable anti-dilution adjustments if we issue stock below fair market value). Also, without approval of a majority of the 7%
Convertible Preferred Stock, we cannot repurchase or redeem common stock (except pursuant to repurchase agreements with service providers) or borrow money or issue debt securities other than in a strategic transaction, in connection with an
acquisition of another entity, or pursuant to an independent-directors-approved commercial borrowing transaction, secured lending transaction or lease financing transaction.



In the second quarter of 2005, we issued 792,306 shares of Series B 7% Convertible Preferred Stock, with rights and
preferences substantially similar to those of Series A.



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, 2005, 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. Our cash equivalents principal would not be materially changed by changes in interest rates, but as the short term instruments mature and roll over, we would be able to earn
more interest in the future if interest rates rise. A one percentage point (100 basis point) increase in interest rates would result in approximately a $17,000 annual increase in our income from cash equivalents, assuming our cash equivalents
principal balance remained at its June 30, 2005 level. Our $1 million revolving line of credit from Laurus has a floating interest rate and currently has zero outstanding balance.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



John Zavoli, who is both our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in Securities Exchange Act of 1934 Rule 13a15(e)), concluded that as of June 30, 2005, our disclosure controls and procedures were effective.



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PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



We are not a defendant in any material legal proceedings.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------



We previously reported on Form 8-K the required information regarding issuance of unregistered equity securities in the second quarter of 2005.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------



Not applicable.



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



On May 13, 2005, we began a solicitation of written consents from our stockholders, in lieu of a special meeting of stockholders, to approve a proposal to
approve the issuance of Series A and Series B 7% convertible preferred stock and warrants overlying common stock, together representing more than 20% of our then outstanding common stock; to approve the participation by certain directors
and officers in the Series A offering; and to approve an amendment to the antidilution provision and some other provisions of the Series As certificate of designations. The solicitation was concluded on May 26, 2005.



The stockholders approved the proposal by a vote of 4,592,105 shares For,
12,462 shares Against, and 1,082 shares Abstaining. The Common Stock stockholders approved the proposal by a vote of 4,065,952 shares For, 12,462 shares Against, and 1,082 shares Abstaining. The Series A Preferred Stock stockholders approved the
proposal by a vote of 526,153 shares For, no shares Against, and no shares Abstaining.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



On March 18, 2005, we filed a complaint against QVidia Technologies, Inc. (QVidia), and the principals of QVidia, Ronald Fellman and John
Beer, in the Superior Court of California, County of San Diego, alleging misappropriation of our proprietary and confidential information. Both Fellman and Beer are former employees of the Company.



On May 17, 2005, we entered into a Second Amendment of Restricted Stock Award
Agreement with David Carnevale, our Vice President of Corporate Development. Under this amendment, 31,250 shares of restricted stock previously issued to Mr. Carnevale would vest, not when originally scheduled in May 2005, but instead in 10 monthly
installments beginning June 2005. Mr. Carnevale agreed to establish a Rule 10b5-1 stock selling plan for a portion of the shares and also agreed to further restrictions against transfer of another portion of the shares.



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|ITEM 6. | EXHIBITS
|------- | --------



The following exhibits are included as part of this report. References to Path 1 or us in this Item 6 mean Path 1 Network
Technologies Inc., a Delaware corporation.



|              |    |  |                                                                                                                                                                                                          
|------------- | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |    |  | Description                                                                                                                                                                                              
|3.3.1         |    |  | Amended and Restated Certificate of Designations of Preferred Stock (for 7% Convertible Preferred Stock), as filed with the Delaware Secretary of State on May 31, 2005. (2)                             
|              |   
|3.4           |    |  | Certificate of Designations of Preferred Stock (for Series B 7% Convertible Preferred Stock), as filed with the Delaware Secretary of State on May 31, 2005. (2)                                         
|              |   
|10.61.1       | *# |  | Second Amendment of Restricted Stock Award Agreement between us and David Carnevale, as of May 17, 2005                                                                                                  
|              |   
|10.84         |    |  | Securities Purchase Agreement, dated April 26, 2005. (1)                                                                                                                                                 
|              |   
|10.85         |    |  | Registration Rights Agreement, dated April 26, 2005. (1)                                                                                                                                                 
|              |   
|10.86         |    |  | Form of Warrant to Purchase Shares of Common Stock. (1)                                                                                                                                                  
|              |   
|10.87         |    |  | Form of amendment / waiver letter dated April 22, 2005, with holders of 7% Convertible Preferred Stock and associated warrants; entered into (in some cases with minor changes) with all such
holders (1)
|              |   
|10.88         |    |  | Form of warrant for Silverwood designees. (3)                                                                                                                                                            
|              |   
|31*           |    |  | Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 / SEC Rule 13a14(a).                                                                                                                 
|              |   
|32*           |    |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 / 18 U.S.C. Section 1350/ SEC Rule 13a-14(b).                                                                                          

---

|* | Filed Herewith
|- | --------------

|# | Indicates management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------

|(1) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Form 8-K filed with the Commission on April 29, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Form 8-K filed with the Commission on June 6, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Form S-3 registration statement filed with the Commission on May 2, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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/    JOHN R. ZAVOLI                                                                                       
|    |  | John R. Zavoli President and Chief Executive Officer, Chief Financial Officer, General Counsel and
Secretary



Date:
August 15, 2005



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INDEX OF EXHIBITS



References to Path 1 or us mean Path 1 Network Technologies Inc., a Delaware corporation.



|              |    |  |                                                                                                                                                                                                          
|------------- | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |    |  | Description                                                                                                                                                                                              
|3.3.1         |    |  | Amended and Restated Certificate of Designations of Preferred Stock (for 7% Convertible Preferred Stock), as filed with the Delaware Secretary of State on May 31, 2005. (2)                             
|              |   
|3.4           |    |  | Certificate of Designations of Preferred Stock (for Series B 7% Convertible Preferred Stock), as filed with the Delaware Secretary of State on May 31, 2005. (2)                                         
|              |   
|10.61.1       | *# |  | Second Amendment of Restricted Stock Award Agreement between us and David Carnevale, as of May 17, 2005                                                                                                  
|              |   
|10.84         |    |  | Securities Purchase Agreement, dated April 26, 2005. (1)                                                                                                                                                 
|              |   
|10.85         |    |  | Registration Rights Agreement, dated April 26, 2005. (1)                                                                                                                                                 
|              |   
|10.86         |    |  | Form of Warrant to Purchase Shares of Common Stock. (1)                                                                                                                                                  
|              |   
|10.87         |    |  | Form of amendment / waiver letter dated April 22, 2005, with holders of 7% Convertible Preferred Stock and associated warrants; entered into (in some cases with minor changes) with all such
holders (1)
|              |   
|10.88         |    |  | Form of warrant for Silverwood designees. (3)                                                                                                                                                            
|              |   
|31*           |    |  | Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 / SEC Rule 13a14(a).                                                                                                                 
|              |   
|32*           |    |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 / 18 U.S.C. Section 1350/ SEC Rule 13a-14(b).                                                                                          

---

|* | Filed Herewith
|- | --------------

|# | Indicates management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------

|(1) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Form 8-K filed with the Commission on April 29, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Form 8-K filed with the Commission on June 6, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Form S-3 registration statement filed with the Commission on May 2, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------