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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

Amendment No. 1 to Form 10-Q



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(Mark One)



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



| | For the Quarterly Period Ended March 31, 2003.
| | ----------------------------------------------



or



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



| | For the transition period from                      to
                    .
| | ----------------------------------------------------------------------------



Commission File Number 000-30928



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PATH 1 NETWORK TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)



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|DELAWARE                                                      |  | 13-3989885                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification 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 ̈



As of January 20, 2004, 6,640,399 shares of the registrants common stock were outstanding.



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##### Table of Contents

PATH 1 NETWORK TECHNOLOGIES INC.



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

For the Quarterly Period Ended March 31, 2003



TABLE OF CONTENTS



|                                                     | 
|---------------------------------------------------- | 
|PART I 
FINANCIAL INFORMATION                       | 
|                                                     | 
|ITEM 1.                                              | 
|                                                     | 
|CONDENSED CONSOLIDATED BALANCE SHEETS                | 
|                                                     | 
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS      | 
|                                                     | 
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      | 
|                                                     | 
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | 
|                                                     | 
|ITEM 2.                                              | 
|                                                     | 
|ITEM 3.                                              | 
|                                                     | 
|ITEM 4.                                              | 
|                                                     | 
|PART II  OTHER INFORMATION                          | 
|                                                     | 
|ITEM 1.                                              | 
|                                                     | 
|ITEM 2.                                              | 
|                                                     | 
|ITEM 3.                                              | 
|                                                     | 
|ITEM 4.                                              | 
|                                                     | 
|ITEM 5.                                              | 
|                                                     | 
|ITEM 6.                                              | 
|                                                     | 
|SIGNATURES                                           | 



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



Path 1
Network Technologies Inc.

Condensed Consolidated Balance Sheets

(in $ thousands except share data)



|                                                                                                                                                                          |  | March 31, 2003 |         |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | -
|                                                                                                                                                                          |  | (unaudited)    |         |   | (audited)         |  
|ASSETS                                                                                                                                                                    |  |                |         |   |                   |  
|Current assets                                                                                                                                                            |  |                |         |   |                   |  
|Cash and cash equivalents                                                                                                                                                 |  | $              | 424     |   |                   | $
|Accounts receivable, net                                                                                                                                                  |  |                | 338     |   |                   |  
|Inventory                                                                                                                                                                 |  |                | 285     |   |                   |  
|Other current assets                                                                                                                                                      |  |                | 196     |   |                   |  
|                                                                                                                                                                          |  |                |         |   |                   |  
|Total current assets                                                                                                                                                      |  |                | 1,243   |   |                   |  
|Property and equipment, net                                                                                                                                               |  |                | 183     |   |                   |  
|Debt issuance costs, net                                                                                                                                                  |  |                | 209     |   |                   |  
|Other assets                                                                                                                                                              |  |                | 64      |   |                   |  
|                                                                                                                                                                          |  |                |         |   |                   |  
|Total Assets                                                                                                                                                              |  | $              | 1,699   |   |                   | $
|                                                                                                                                                                          |  |                |         |   |                   |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                     |  |                |         |   |                   |  
|Current liabilities                                                                                                                                                       |  |                |         |   |                   |  
|Accounts payable and accrued liabilities                                                                                                                                  |  |                | 1,159   |   |                   | $
|Accrued compensation and benefits                                                                                                                                         |  |                | 141     |   |                   |  
|Current portion of notes payable                                                                                                                                          |  |                | 1,316   |   |                   |  
|Deferred revenue                                                                                                                                                          |  |                | 15      |   |                   |  
|                                                                                                                                                                          |  |                |         |   |                   |  
|Total current liabilities                                                                                                                                                 |  |                | 2,631   |   |                   |  
|Notes payable                                                                                                                                                             |  |                | 541     |   |                   |  
|                                                                                                                                                                          |  |                |         |   |                   |  
|Total liabilities                                                                                                                                                         |  |                | 3,172   |   |                   |  
|                                                                                                                                                                          |  |                |         |   |                   |  
|Stockholders deficit                                                                                                                                                     |  |                |         |   |                   |  
|Preferred stock, 10 million shares authorized, $0.001 par value; no shares issued or outstanding                                                                          |  |                |        |   |                   |  
|Common stock, $0.001 par value; 40,000,000 shares authorized; 9,637,346 and 9,501,346 shares issued and outstanding at March 31,
2003, and December 31, 2002 respectively |  |                | 10      |   |                   |  
|Common stock to be issued                                                                                                                                                 |  |                | 12      |   |                   |  
|Additional paid-in capital                                                                                                                                                |  |                | 30,393  |   |                   |  
|Deferred compensation                                                                                                                                                     |  |                | (25     | ) |                   |  
|Accumulated deficit                                                                                                                                                       |  |                | (31,863 | ) |                   |  
|                                                                                                                                                                          |  |                |         |   |                   |  
|Total stockholders deficit                                                                                                                                               |  |                | (1,473  | ) |                   |  
|                                                                                                                                                                          |  |                |         |   |                   |  
|Total Liabilities and Stockholders Deficit                                                                                                                               |  | $              | 1,699   |   |                   | $
|                                                                                                                                                                          |  |                |         |   |                   |  



See accompanying notes
to these condensed consolidated financial statements.



3



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##### Table of Contents

Path 1 Network Technologies Inc.



Condensed Consolidated Statements of Operations

(in $ thousands except per share data)

(unaudited)



|                                                                   |  |                              |        |   |      |   |        |  
|------------------------------------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                   |  | Three Months Ended March 31, |       
|                                                                   |  | 2003                         |        |   | 2002 |  
|Revenues                                                           |  |                              |        |   |      |   |        |  
|Product sales                                                      |  | $                            | 598    |   |      | $ |       |  
|Contract services                                                  |  |                              | 63     |   |      |   | 154    |  
|License revenue                                                    |  |                              |       |   |      |   |       |  
|                                                                   |  |                              |        |   |      |   |        |  
|Total revenues                                                     |  |                              | 661    |   |      |   | 154    |  
|                                                                   |  |                              |        |   |      |   |        |  
|Cost of revenues                                                   |  |                              |        |   |      |   |        |  
|Cost of product sales                                              |  |                              | 338    |   |      |   |       |  
|Cost of contract services                                          |  |                              | 18     |   |      |   | 123    |  
|                                                                   |  |                              |        |   |      |   |        |  
|Total cost of revenues (exclusive of items shown separately below) |  |                              | 356    |   |      |   | 123    |  
|                                                                   |  |                              |        |   |      |   |        |  
|Gross profit                                                       |  |                              | 305    |   |      |   | 31     |  
|                                                                   |  |                              |        |   |      |   |        |  
|Operating expenses                                                 |  |                              |        |   |      |   |        |  
|Engineering research and development                               |  |                              | 362    |   |      |   | 517    |  
|Sales and marketing                                                |  |                              | 291    |   |      |   | 193    |  
|General and administrative                                         |  |                              | 640    |   |      |   | 702    |  
|Stock-based compensation                                           |  |                              | 25     |   |      |   | 100    |  
|Depreciation and amortization                                      |  |                              | 68     |   |      |   | 108    |  
|                                                                   |  |                              |        |   |      |   |        |  
|Total operating expense                                            |  |                              | 1,386  |   |      |   | 1,620  |  
|                                                                   |  |                              |        |   |      |   |        |  
|Operating loss                                                     |  |                              | (1,081 | ) |      |   | (1,589 | )
|Other income (expense)                                             |  |                              |        |   |      |   |        |  
|Interest expense, net                                              |  |                              | (144   | ) |      |   |       |  
|Loss on sale of securities                                         |  |                              |       |   |      |   | (590   | )
|Other income (expense)                                             |  |                              | (1     | ) |      |   |       |  
|                                                                   |  |                              |        |   |      |   |        |  
|Total other expense                                                |  |                              | (145   | ) |      |   | (590   | )
|                                                                   |  |                              |        |   |      |   |        |  
|Loss from continuing operations                                    |  |                              | (1,226 | ) |      |   | (2,179 | )
|Discontinued operations                                            |  |                              |       |   |      |   | (251   | )
|                                                                   |  |                              |        |   |      |   |        |  
|Net loss                                                           |  | $                            | (1,226 | ) |      | $ | (2,430 | )
|                                                                   |  |                              |        |   |      |   |        |  
|Net loss per common share from continuing operations               |  |                              | (0.13  | ) |      |   | (0.26  | )
|                                                                   |  |                              |        |   |      |   |        |  
|Loss per common share - basic and diluted                          |  | $                            | (0.13  | ) |      | $ | (0.29  | )
|                                                                   |  |                              |        |   |      |   |        |  
|Weighted average common shares outstanding - basic and diluted     |  |                              | 9,555  |   |      |   | 8,406  |  
|                                                                   |  |                              |        |   |      |   |        |  



See accompanying
notes to these condensed consolidated financial statements.



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Path 1 Network Technologies Inc.



Condensed Consolidated Statements of Cash Flows

(in $ thousands)

(unaudited)



|                                                                                              |  | Three Months EndedMarch 31, |       
|--------------------------------------------------------------------------------------------- |  | --------------------------- | ------
|                                                                                              |  | 2003                        |       
|Cash flows from operating activities:                                                         |  |                             |       
|Net loss                                                                                      |  | $                           | (1,226
|Adjustments to reconcile net loss to net cash used in operating activities:                   |  |                             |       
|Depreciation and amortization                                                                 |  |                             | 68    
|Amortization of deferred compensation                                                         |  |                             | 43    
|Accretion of debt discount & debt conversion expense                                          |  |                             | 172   
|Loss on investment                                                                            |  |                             |      
|Changes in assets and liabilities                                                             |  |                             |       
|Accounts receivable                                                                           |  |                             | 100   
|Inventory                                                                                     |  |                             | 108   
|Other current assets                                                                          |  |                             | (181  
|Other assets                                                                                  |  |                             | (128  
|Accounts payable and accrued liabilities                                                      |  |                             | 228   
|Accrued compensation and benefits                                                             |  |                             | (16   
|Deferred revenue                                                                              |  |                             | (45   
|                                                                                              |  |                             |       
|Cash used in operations                                                                       |  |                             | (877  
|                                                                                              |  |                             |       
|Cash flows from investing activities:                                                         |  |                             |       
|Sale of marketable securities                                                                 |  |                             |      
|Purchase of property and equipment                                                            |  |                             | (5    
|                                                                                              |  |                             |       
|Cash provided by (used in) investing activities                                               |  |                             | (5    
|                                                                                              |  |                             |       
|Cash flows from financing activities:                                                         |  |                             |       
|Issuance of common stock                                                                      |  |                             | 108   
|Issuance of convertible notes                                                                 |  |                             | 802   
|Cash from extinguishment of shareholder notes                                                 |  |                             |      
|                                                                                              |  |                             |       
|Cash provided by financing activities                                                         |  |                             | 910   
|                                                                                              |  |                             |       
|Cash flows from continuing operations                                                         |  |                             | 28    
|Cash flows from discontinued operations                                                       |  |                             |      
|                                                                                              |  |                             |       
|Increase (decrease) in cash and cash equivalents                                              |  |                             | 28    
|Cash and cash equivalents, beginning of period                                                |  |                             | 396   
|                                                                                              |  |                             |       
|Cash and cash equivalents, end of period                                                      |  | $                           | 424   
|                                                                                              |  |                             |       
|Supplemental cash flow disclosures:                                                           |  |                             |       
|Unrealized gain (loss) in marketable securities                                               |  | $                           |      
|                                                                                              |  |                             |       
|Capitalized debt issuance costs in connection with beneficial conversion charges and warrants |  | $                           | 76    
|                                                                                              |  |                             |       



See accompanying notes
to these condensed consolidated financial statements.



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Notes to the Unaudited Condensed Consolidated Financial Statements



Note 1  Basis Of Presentation



The accompanying condensed consolidated balance sheet at March 31, 2003, the condensed consolidated statements of operations for the three-month periods
ended March 31, 2003 and 2002, and the condensed consolidated statements of cash flows for the three-month period ended March 31, 2003 and 2002, have been prepared by Path 1 Network Technologies Inc. (the Company) and have not been
audited. The condensed consolidated balance sheet at December 31, 2002 has been audited. These quarterly consolidated 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, 2002 included in the Companys Form 10-K filed March 31, 2003. The interim consolidated financial information contained in this filing is not necessarily indicative of the
results to be expected for any other interim period or for the full year ending December 31, 2003.



In the period from January 30, 1998 (inception) through March 31, 2003, the Company incurred losses totaling $31.9 million. The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Companys assets and the satisfaction of its liabilities in the normal course of
conducting business. Management does not believe that the Companys existing capital resources will enable the Company to fund operations for the next twelve months. Our existing capital resources are insufficient to enable us to continue
operations as currently conducted. The cash crisis is very serious. Our independent auditors opinion expresses substantial doubt about our ability to continue as a going concern. We need additional funding to meet current commitments and
continue development of our business. We currently have the cash resources to continue our business at its current levels only for our immediate needs. If we do not receive additional funding, our ability to continue as a going concern cannot be
assured. See Liquidity and Capital Resources.



Managements plans are to manage costs in all areas of its operating plan until sufficient capital is raised to support growth and more substantial orders and revenues materialize. The Company has implemented various cost savings plans
and continues to manage costs. However, even with the focus on managing costs, the Company needs to raise additional funding to continue as a going concern. In the event the Company does not receive additional funding, the Companys plans
include, but are not necessarily limited to: 1) further reducing costs and focusing on selling existing products and services; 2) selling the Companys assets through a merger or acquisition; or 3) seeking protection under bankruptcy statutes.
Without additional financing, the Company will be required to further delay, reduce the scope of, or eliminate one or more of its research and development projects and significantly reduce its expenditures on product deployment, and may not be able
to continue as a going concern.



Reclassifications



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



Recently Issued Accounting Standards



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



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Path 1 Network Technologies Inc.



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



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



In April 2002, the FASB issued SFAS No. 145
(SFAS No. 145) Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 44, Accounting for Intangible
Assets of Motor Carriers, and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 requires, among other things, (i) that the modification of a lease that results in a change of the classification of the lease
from capital to operating under the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction, and (ii) the reporting of gains or losses from the early extinguishment of debt as extraordinary items only if they met the criteria of
Accounting Principles Board Opinion No. 30, Reporting the Results of Operations. The amendment of SFAS No. 13 is effective for transactions occurring on or after May 15, 2002. Although the rescission of SFAS No. 4 is effective January 1, 2003, the
FASB has encouraged early application of the provisions of SFAS No. 145. Management has assessed the impact of this interpretation and believes it has no material effect on the Companys financial position, results of operations, or cash flows.



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



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



In December
2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. This statement amends FASB Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted this statement for the period ended March 31, 2003.



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Path 1 Network Technologies Inc.



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



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



|                                        |  | Three Months Ended March 31, |       
|--------------------------------------- |  | ---------------------------- | ------
|                                        |  | 2003                         |       
|Net loss, as reported                   |  | $                            | (1,226
|Less: Stock-based employee compensation |  |                              | 76    
|                                        |  |                              |       
|Pro forma net loss                      |  | $                            | (1,301
|                                        |  |                              |       
|Basic and diluted loss per share:       |  |                              |       
|As reported                             |  | $                            | (0.13 
|                                        |  |                              |       
|Pro forma                               |  | $                            | (0.14 
|                                        |  |                              |       



In January 2003, the
FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. It further
clarifies whether an entity shall be subject to consolidation according to the provisions of this interpretation, if by design, certain conditions exist. Management is assessing the impact of this interpretation.



Note 2  Management Estimates And Assumptions



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



Note 3  Inventory



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



Note 4  Revenue Recognition



Product Revenue



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



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Path 1 Network Technologies Inc.



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



Contract Service Revenue



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



License Revenue



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



Allowances for Doubtful Accounts, Returns and Discounts



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



Warranty Reserves



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



Note 5  Reportable Operating Segments



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



The Company currently sells product to a limited number of customers. For the period ended March 31, 2003, approximately 38% and 13%, respectively, of the
Companys product sales were to the Companys two largest customers.



Note 6  Discontinued Operations



In March 2002, the Company decided to dispose of its Sistolic business unit. On April 3, 2002, the Company disposed of the assets of this business unit
back to Metar ADC SRL, in exchange for the elimination of the remaining obligations by the Company to Metar ADC SRL and its affiliates, including the payable of $686,000, the return of all stock options granted to an Executive and the Romanian
employees, and a confirmation that performance criteria specified in such Executives employment agreement related to a potential



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##### Table of Contents

Path 1 Network Technologies Inc.



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



$4 million bonus were never met by him. The Company also received a limited use license to the business units intellectual property. Metar ADC SRL also
received 35,000 shares of our common stock. The Executive resigned on March 27, 2002, as an officer of the Company in anticipation of this transaction.



The results of operations and the loss on disposal for the three months ended March 31, 2002, have been included in discontinued operations. We recorded a
loss of $251,000 from discontinued operations for the three months ended March 31, 2002.



Note 7  Stock Options



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



The Company accounts for equity instruments issued to
non-employees using the fair value method in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. This statement amends FASB Statement No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has made the required disclosure under SFAS No. 148.



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



During the three-month period ended March 31, 2003, the Company recorded stock-based compensation expense of $25,000 related to the amortization of
options outstanding to employees. Stock-based compensation related to consultants has been included in operating expense. For the same three-month period in 2002, the Company recognized expense of $100,000 related to the amortization of stock based
compensation for employees and consultants.



Note 8  Notes Payable



In 2002, the Company
received approximately $1,031,000 from a private placement of convertible notes with European investors (the Euro notes) who were existing Company stockholders. The notes carry a 4% annual coupon, paid quarterly in cash or stock, at our
discretion, and are convertible for a one-year conversion term at a price of $1.20 per share. In addition, upon conversion, the note holder will be issued warrants equal to the number of shares to be issued.



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Path 1 Network Technologies Inc.



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



Because the Euro notes conversion price was below the trading market price of stock on the day
the Euro notes were issued, this resulted in an embedded beneficial conversion element. As a result, we recorded a debt discount of $301,000 and this sum is being accreted over the life of the debt or sooner in the event of conversion. Through
December 31, 2002, approximately 76% of the note holders converted their notes into the Companys common stock. Upon conversion, the Company expensed warrants to purchase 674,654 shares of common stock at $1.60 per share for $293,000. The
warrants are fully vested and expire in June 2007. In 2002, we recorded non-cash interest expense of $573,000 relating to amortization of debt discount and issuance of common stock warrants related to the Euro notes.



During 2002, the Company issued two convertible notes to The Laurus Master
Fund (Laurus). In May 2002, we issued Laurus a 12%, 15-month convertible note in the principal amount of $1,250,000. The note is convertible at a price of $1.40 per share. The Company secured a three-month deferral of principal and
interest under the note. In connection with the issuance of the 12% convertible note in May 2002, we issued to Laurus warrants to purchase 125,000 shares of common stock at $1.68 per share. The warrants are fully vested and expire on May 2009.



On November 7, 2002, we issued Laurus a 12% convertible note
in the principal amount of $300,000. The note is convertible at a price of $.85 per share and is payable on a monthly basis over 18 months. In connection with the issuance of the 12% convertible note in November 2002, the Company issued warrants to
purchase 75,000 shares of common stock at $.85 per share.



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



As part of the November 7, 2002 convertible note transaction, the Company
also repriced the conversion price of the May 2002 convertible note and the 125,000 warrants (which had been purchased by the same investor) to $.85 per share. The term of the May 2002 note was extended to May 7, 2004. The repricing resulted in a
non-cash charge of $130,000 in the fourth quarter ended December 31, 2002 related to debt conversion expense. The Company will incur additional non-cash debt conversion expense in the future upon the conversion of both notes.



On February 14, 2003, the Company entered into a $1 million revolving line of
credit with Laurus. This revolving line of credit (the LOC) is secured by the Companys accounts receivables and other assets, and the Company has the ability to draw down advances under the LOC subject to limits. Under the terms of
the LOC, Laurus can convert advances made to the Company into common stock at a fixed conversion price of $1.13 per share. In connection with the LOC, the Company issued warrants to purchase 75,000 shares of the Companys Common Stock at $1.13
per share. The Company borrowed a $300,000 advance under the LOC. The Company recorded a non-cash debt discount of $23,000 in its quarter ended March 31, 2003.



On March 28, 2003, the Company signed a securities purchase agreement under which the Company can raise up to $1.5 million through the issuance of 7%
convertible notes with a fixed conversion price of $.65 per share. In connection with notes issued under this Agreement, the Company will issue up to 576,923 warrants to purchase the Companys common stock at $1.00 per share. Pursuant to this
Agreement, on March 28, 2003, the Company issued to Palisades Master Fund L.P. (Palisades) a note in the amount of $500,000, together with a warrant to purchase up to 192,308 shares of the Companys common stock. Because the
conversion price of this



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note was below the market price of our stock on the date the note was issued, this resulted in an embedded beneficial conversion element. We recorded a
non-cash debt discount of $53,000 related to this note in our quarter ended March 31, 2003. See Note 9, Subsequent Event.



The Companys notes payable at March 31, 2003 are as follows (in thousands of dollars):



|Short-term notes payable consist of the following at March 31, 2003:  |  |   |      
|--------------------------------------------------------------------- |  | - | -----
|European investors (less unamortized debt discount of $5,000)1        |  | $ | 361  
|Laurus Master Funds Ltd (less unamortized debt discount of $235,000)2 |  |   | 678  
|Laurus Master Funds Ltd (less unamortized debt discount of $23,000)3  |  |   | 277  
|                                                                      |  |   |      
|                                                                      |  | $ | 1,316
|                                                                      |  |   |      

---

|1 | Notes payable to European investors bear interest at 4.0% and are convertible into the Companys stock at a rate of $1.20 per share.
|- | ------------------------------------------------------------------------------------------------------------------------------------

|2 | These notes bear interest at 12.0% and are convertible into the Companys common stock at a variable rate not to exceed $0.85 per share.
|- | ----------------------------------------------------------------------------------------------------------------------------------------

|3 | This Note is a $1 million A/R secured, revolving line of credit expiring in February, 2006 that bears interest at Prime + 1.75%, and drawn-down amounts are convertible into the
Companys common stock at a rate of $1.13 per share.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Long-term notes payable consist of the following at March 31, 2003:                                                                                    |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | ------ | -
|                                                                                                                                                       | 
|4% Euro notes due May, 2003 (less unamortized debt discount of $5,000) (convertible into 192,259 shares of common
stock)                               |  | $ | 361    |  
|12% Laurus Master Funds notes due May, 2004 (less unamortized debt discount of $268,000) (convertible into a minimum of 933,625
share of common stock) |  |   | 772    |  
|Laurus Master Funds $1 million line of credit (less unamortized debt discount of $23,000) (convertible into 265,487 shares of
common stock)            |  |   | 277    |  
|7% Pallisades notes due March, 2005 (less unamortized debt discount of $53,000) (convertible into 769,231 shares of common
stock)                      |  |   | 447    |  
|Less: Current maturities included in current liabilities                                                                                               |  |   | (1,316 | )
|                                                                                                                                                       |  |   |        |  
|                                                                                                                                                       |  | $ | 541    |  
|                                                                                                                                                       |  |   |        |  



At March 31, 2003, the
maturities of long-term debt are as follows:



|2003 |  | $ | 1,064
|---- |  | - | -----
|2004 |  |   | 642  
|2005 |  |   | 500  
|     |  |   |      
|     |  | $ | 2,206
|     |  |   |      



Note
9  Subsequent Event



Pursuant to the March 28, 2003
securities purchase agreement under which the Company can raise up to $1.5 million through the issuance of 7% convertible notes with a fixed conversion price of $.65 per share, on April 4, 2003, the Company issued in favor of Crescent International
Ltd. a note in the amount of $500,000, together with a warrant to purchase up to 192,308 shares of the Companys common stock. Because the conversion price of this note was below the market price of our stock on the date the note was issued,
this resulted in an embedded beneficial conversion element. We will record non-cash debt discount related to this note in our quarter ending June 30, 2003.



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On May 15, 2003, the Company closed the remaining $500,000 round on its $1.5 million, 7% convertible
notes financing pursuant to the March 28, 2003 securities purchase agreement. In this remaining round, the Company issued a total of $500,000, 7% convertible notes in favor of Palisades Master Fund, L.P., Crescent International, Ltd, Alpha Capital
AG and Barucha, Ltd., together with warrants to purchase up to a total of 192,308 shares of the Companys common stock. Because the conversion prices of these notes were below the market price of our stock on the date the notes were issued,
this resulted in an embedded beneficial conversion element. We will record non-cash debt discount related to these notes in our quarter ending June 30, 2003.



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



Long Haul Customers



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



Customers using our products for long-haul transmission include DreamWorks LLC, a major film production studio, for domestic
and international creative collaborations using high-definition video cameras. C-Span uses our products to televise real-time, interactive classrooms between Washington, D.C. and the



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University of Denver. PanAmSat uses our Cx1000 on the Level (3) backbone to interconnect earth stations for video routing with the least delay. RTVI, a
Russian television network, runs live broadcast-quality Russian language programming between Moscow and New York using our long haul product, and is expanding its network internationally. Wiltel/Vyvx has moved video operations centers into
networking facilities to merge IP video, voice and data services that use our Cx1000 product for video.



Cable Company Customers



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



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



Company Information



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



Liquidity And Capital Resources



Since our inception on January 30, 1998, we have financed our operations primarily through the sale of common equity securities to investors and strategic
partners, as well as from the issuance of convertible notes.



From January 30, 1998 through March 31, 2003, we incurred losses totaling $31.9 million. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting
contemplates the recovery of our assets and the satisfaction of our liabilities in the normal course of conducting business. We do not believe that our existing capital resources will enable us to fund operations for the next twelve months. At March
31, 2003, we had negative working capital of $1,388,000, and an increase of $28,000 in cash and cash equivalents compared to December 31, 2002.



Our plans are to contain and reduce costs in all areas of our operating plan until sufficient capital is raised to support our growth and more substantial
product orders materialize; however, even with our cost reduction plans, we need to raise additional funding to continue as a going concern. In the event we do not receive additional funding, our plans may include, but are not necessarily limited
to: 1) further reducing costs and focusing on selling existing products and services; 2) selling the Companys assets through a merger or acquisition; or 3)



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seeking protection under bankruptcy statutes. Without additional financing, we may be required to further delay, reduce the scope of, or eliminate one or
more of our research and development projects and significantly reduce our expenditures on product deployment, and we may not be able to continue as a going concern.



In 2002, the Company received approximately $1,031,000 from a private placement of convertible notes with European investors
(the Euro notes) who were existing Company stockholders. The notes carry a 4% annual coupon, paid quarterly in cash or stock, at our discretion, and are convertible for a one-year conversion term at a price of $1.20 per share. In
addition, upon conversion, the note holder will be issued warrants equal to the number of shares to be issued.



Because the Euro notes conversion price was below the trading market price of stock on the day the Euro notes were issued, this resulted in an
embedded beneficial conversion element. As a result, we recorded a debt discount of $301,000 and this will be accreted over the life of the debt or sooner in the event of conversion. Through March 31, 2003, approximately 76% of the note holders
converted their notes into the Companys common stock. Upon conversion, the Company expensed warrants to purchase 674,654 shares of common stock at $1.60 per share for $293,000. The warrants are fully vested and expire in June 2007. In 2002, we
recorded non-cash interest expense of $573,000 relating to amortization of debt discount and issuance of common stock warrants related to the Euro notes. Some of the Euro notes have matured but have not been paid. We believe we have an arrangement
with the holders of these outstanding Euro notes to roll their notes into new notes.



During 2002, the Company issued two convertible notes to The Laurus Master Fund (Laurus). In May 2002, we issued Laurus a 12%, 15-month convertible note in the principal amount of $1,250,000. The note was
convertible into common stock at a price of $1.40 per share. The Company secured a three-month deferral of principal and interest under the note. In connection with the issuance of the 12% convertible note in May 2002, we issued to Laurus warrants
to purchase 125,000 shares of common stock at $1.68 per share. The warrants are fully vested and expire on May 2009.



On November 7, 2002, we issued Laurus a 12% convertible note in the principal amount of $300,000. The note is convertible at a price of $.85 per share and
is payable on a monthly basis over 18 months. In connection with the issuance of the 12% convertible note in November 2002, we issued warrants to purchase 75,000 shares of common stock at $.85 per share.



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



As part of the November 7, 2002 convertible note transaction, we also repriced the conversion price of the May 2002 convertible note and the 125,000
warrants (which had been purchased by the same investor) to $.85 per share. The term of the May 2002 note was extended to May 7, 2004. The reprice resulted in a non-cash charge of $130,000 in the fourth quarter ended December 31, 2002 related to
debt conversion expense. The Company will incur additional non-cash debt conversion expense in the future upon the conversion of both notes.



On February 14, 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 $1.13
per share. In connection with the LOC, we issued warrants to purchase 75,000 shares of our Common Stock at $1.13 per share.



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On March 28, 2003, we signed a securities purchase agreement under which we can raise up to $1.5 million
through the issuance of 7% convertible notes with a fixed conversion price of $.65 per share. In connection with notes issued under this Agreement, we will issue up to 576,923 warrants to purchase our common stock at $1.00 per share. Pursuant to
this Agreement, on March 28, 2003, we issued to Palisades Master Fund L.P. (Palisades) a note in the amount of $500,000, together with a warrant to purchase up to 192,308 shares of our common stock. Because the conversion price of this
note was below the market price of our stock on the date the note was issued, this resulted in an embedded beneficial conversion element. We recorded non-cash debt discount of $53,000 related to this note in our quarter ended March 31, 2003.



Pursuant to the March 28, 2003 securities purchase agreement
under which the Company can raise up to $1.5 million through the issuance of 7% convertible notes with a fixed conversion price of $.65 per share, on April 4, 2003, the Company issued in favor of Crescent International Ltd. a note in the amount of
$500,000, together with a warrant to purchase up to 192,308 shares of the Companys common stock. Because the conversion price of this note was below the market price of our stock on the date the note was issued, this resulted in an embedded
beneficial conversion element. We will record non-cash debt discount related to this note in our quarter ending June 30, 2003.



On May 15, 2003, the Company closed the remaining $500,000 round on its $1.5 million, 7% convertible notes financing pursuant to the March 28, 2003
securities purchase agreement. In this remaining round, the Company issued a total of $500,000, 7% convertible notes in favor of Palisades Master Fund, L.P., Crescent International, Ltd, Alpha Capital AG and Barucha, Ltd., together with warrants to
purchase up to a total of 192,308 shares of the Companys common stock. Because the conversion prices of these notes were below the market price of our stock on the date the notes were issued, this resulted in an embedded beneficial conversion
element. We will record non-cash debt discount related to these notes in our quarter ending June 30, 2003.



For the foreseeable future, we expect to incur substantial additional expenditures associated with cost of sales and with research and development, in
addition to increased costs associated with staffing for management, manufacturing, sales and marketing and administration functions. Additional capital is required to implement our business strategies and fund our plan for future growth and
business development. We are continuing to seek other sources of additional capital to fund operations until we are able to fund operations through internal cash flow.



At March 31, 2003, we had no material commitments other than our operating leases. Our future capital requirements will
depend upon many factors, including the timing of research and product development efforts, the possible need to acquire new technology, the expansion of our sales and marketing efforts, and our expansion internationally. We expect to continue to
expend significant amounts in all areas of our operations.



As
noted above, we will need additional financing in 2003. We may pursue a number of alternatives to raise additional funds, including: borrowings; lease arrangements; collaborative research and development arrangements with technology companies; the
licensing of product rights to third parties; or additional public and private equity financing. There can be no assurance that funds from these sources will be available on favorable terms, if at all. If we raise additional funds through the
issuance of equity securities, the percentage ownership of our stockholders will be reduced or significantly diluted, or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock.



Our existing capital resources are insufficient to enable us
to continue operations as currently conducted. The cash crisis is very serious. Our independent auditors opinion expresses substantial doubt about our ability to continue as a going concern.



Cash used in operations was $877,000 at March 31, 2003, compared to
$1,180,000 for the same period in 2002. The decrease in cash used in operations for the quarter ended March 31, 2003, compared to the same period in the prior year was due primarily to a lower net loss and a decrease in inventory.



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Cash used in investing activities as of March 31, 2003, was $5,000, compared cash provided of $488,000 as
of March 31, 2002. Cash provided for the quarter ended March 31, 2002 was primarily the result of our sale of marketable securities in early 2002.



Cash provided by financing activities for the quarter ended March 31, 2003 was $910,000, compared to cash provided of $136,000 at March 31, 2002. This
change was primarily due to the issuance of convertible notes.



Results
Of Operations



Three Months Ended March 31, 2003 vs. Three
Months Ended March 31, 2002



For quarter ended March
31, 2003, net revenue was $661,000 compared to $154,000 during the three-month period ended March 31, 2002, reflecting a 329% increase. Revenue in the quarter ended March 31, 2003 came principally from sales of our products for the video over IP
transport market, as well as from contract services. In the quarter ended March 31, 2002 revenue was generated from contract services.



Cost of goods sold increased to $356,000 from $123,000 in the quarter ended March 31, 2003. Cost of goods sold for products consists primarily of raw
material costs, warranty costs and labor associated with manufacturing our products. Cost of goods sold for contract services consists primarily of engineering payroll costs.



Our gross profit increased over 800% to $305,000 from $31,000 in the quarters ending March 31, 2003 and 2002, respectively.
Our increase in gross profit results primarily from the change in our business to selling products, as well as our managing our production and development costs.



Engineering research and development expenses for the quarter ended March 31, 2003 decreased 33% to $362,000 from $517,000
in the quarter ended March 31, 2002. The decrease is due primarily to reduced cost of R&D personnel, and reduced expenditures on to acquire development expertise and tools for our new products.



Selling, marketing, and general and administrative expenses for the quarter
ended March 31, 2003 increased 4% to $931,000 from $895,000 for the quarter ended March 31, 2002. The increase is primarily due to increased sales and marketing expenses for payroll, trade shows and travel.



Stock-based compensation expense is a non-cash expense item that is
recognized as a result of stock options having exercise prices below estimated fair value. Stock-based compensation expense is calculated as the difference between exercise prices and estimated fair market value on the date of grant. We record
compensation expense related to the outstanding options to consultants and some employees for the amount of options that vest in that period. In the first quarter ended March 31, 2003, we recorded a $25,000 non-cash charge for stock-based
compensation related to employees. Stock-based compensation related to consultants has been included in operating expense. For the same three-month period in 2002, the Company recognized expense of $100,000 related to the amortization of stock based
compensation for employees and consultants.



Interest expense
for the quarter ended March 31, 2003 was $144,000. We reported no interest income or expense in the quarter ended March 31, 2002. The increase in interest expense predominantly consists of the amortization of deferred interest and debt discount
related to our convertible note borrowings in 2002.



We neither
held nor sold portfolio securities in the quarter ended March 31, 2003. In the quarter ended March 31, 2002, we recorded a loss on sale of securities totaling $590,000, reflecting our sale of securities that we held in various companies, especially
Leitch Technology Corporation.



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Discontinued Operations



We decided to dispose of our Silicon Systems business unit (Sistolic) after a large semiconductor company, with
whom we entered into a non-exclusive licensing agreement and an engineering services agreement related to Sistolics technology, informed us that they were terminating their agreements in March 2002. Due to this material and adverse turn of
events, we decided that we could no longer sustain the negative cash flow from Sistolic. On April 3, 2002, we disposed of the assets of this business unit back to Metar ADC SRL and its President (Executive) in exchange for the
elimination of our remaining obligations to Metar ADC SRL and its affiliates, including the payable of $686,000, the return of all stock options granted to the Executive and the Romanian employees, and a confirmation that performance criteria
specified in the Executives employment agreement with us related to a potential $4 million bonus were never met by him. We also received a limited use license to the business units intellectual property. In addition, the Romanian
facility lease was transferred to Metar ADC SRL and the Romanian employment contracts were terminated. Metar ADC SRL was permitted to hire any and all Romanian employees. Metar SRL also received 35,000 shares of our common stock. The Executive
resigned on March 27, 2002, as an officer of the Company in anticipation of this transaction.



Sistolics results of operations for the quarter ended March 31, 2002 have been included in discontinued operations. We recorded a loss of $251,000 from discontinued operations for the quarter ended March 31,
2002.



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RISK FACTORS



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



Risks Related to Our Business



WE ARE DEPENDENT UPON ADDITIONAL FUNDING TO MEET CURRENT COMMITMENTS, CONTINUE DEVELOPMENT OF OUR BUSINESS AND MAINTAIN OUR ABILITY TO CONTINUE AS A GOING CONCERN.



Our existing capital resources are insufficient to enable
us to continue operations as currently conducted. The cash crisis is very serious. Our independent auditors opinion expresses substantial doubt about our ability to continue as a going concern.



We need additional funding to meet current commitments and continue
development of our business. We currently have the cash resources to continue our business at its current levels only for our immediate needs. If we do not receive additional funding, our ability to continue as a going concern cannot be assured.



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



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



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



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



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



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



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



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



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



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



OUR CRITICAL RELATIONSHIP WITH Scientific-Atlanta AS BOTH A CUSTOMER AND AS
A COMPETITOR MAY JEOPARADIZE OUR SUCCESS.



In 2002,
approximately 66% of our revenues were from sales to Scientific-Atlanta and its subsidiary, BarcoNet N.V. Should our level of business with Scientific-Atlanta change, our results could be negatively impacted.



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



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



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



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



We have incurred operating losses since our inception in
January 1998, and we expect to incur losses and negative cash flow for at least the next several quarters. As of March 31, 2003, our accumulated deficit was approximately $31.9 million. We expect to continue to incur significant operating, sales,
marketing, research and development and general and administrative expenses and, as a result, we will need to generate significant revenues to achieve profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or
increase profitability on a quarterly or annual basis in the future.



OUR
QUARTERLY FINANCIAL RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.



Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period, particularly because our sales prospects are uncertain and our sales are made on a purchase order basis. In addition, we have
not proven our ability to execute our business strategy with respect to establishing and expanding sales and distribution channels. Fluctuations may result from decreased spending on new products such as ours by communication service providers or
their suppliers, the timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors, our ability to establish a productive sales force or partner with communication service providers or their suppliers,
demand and pricing of the products we offer, consumer acceptance of the services our products enable, interruption in the manufacturing or distribution of our products and general economic and market conditions, including war, and other conditions
specific to the telecommunications industry. As a result, we may experience significant, unanticipated quarterly losses.



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



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



Internal Sales Force. We have limited experience in marketing and selling our products. We intend to expand our direct sales force domestically and internationally for the promotion of each of our Cx1000,
Cx1410 and Chameleon vidX product lines and other future products to suppliers to and communication service providers of all kinds. Competition for quality sales and marketing personnel 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. As a result, there can be no assurance that the sales force we are able to build will be of a sufficient size or quality to effectively market our products.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Broadband communications markets are characterized by continuing
technological advancement, changes in customer requirements and evolving industry standards. To compete successfully, we must design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and
reliability. However, we may not be able to successfully develop or introduce these products if our products:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



We produce highly complex products that incorporate leading edge technology including both hardware, software and embedded
firmware. Our software and other technology may contain bugs that can prevent our products from performing as intended. There can be no assurance that our pre-shipment testing programs will be adequate to detect all defects either in
individual products or which could affect numerous shipments that, in turn, could create customer dissatisfaction, reduce sales opportunities, or affect gross margins if the cost of remedying the problems exceed our reserves established for this
purpose. Our inability to cure a product defect



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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.



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



Even if one assumes that we can resolve our very serious short-term cash crisis, we must raise additional capital to fund our operations and planned
growth. We cannot be certain that any such financing will be available on acceptable terms, or at all, and our failure to raise capital when needed could seriously harm our business. In addition, additional equity financing may dilute our
stockholders interest, and debt financing, if available, may involve restrictive covenants and could result in a substantial portion of our operating cash flow being dedicated to the payment of principal and interest on debt. If adequate funds
are not available, we may need to curtail our operations significantly.



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



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



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



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



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



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



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



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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.



Risks Related to Investment in Our Securities



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



The market price 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;
| | - | -----------------------



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



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



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



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



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



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



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



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



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



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



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



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



As of March 31, 2003, a small number of our executive officers, directors and 5% stockholders, beneficially own, in the aggregate, approximately 56% of
our outstanding common stock. As a result, these stockholders (or subgroups of them) retain substantial control over matters requiring approval by our stockholders, such as the election of directors and approval of significant corporate
transactions.



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THE ISSUANCE OF COMMON STOCK TO THE LAURUS MASTER FUND AND TO OUR OTHER INVESTORS IN OUR CONVERTIBLE NOTES WOULD CAUSE
SIGNIFICANT DILUTION TO OUR STOCKHOLDERS, AND THE RESALE OF SUCH SHARES MAY DEPRESS THE PRICE OF OUR COMMON STOCK.



Assuming a full $1.5 million funding of the March 28, 2003 securities purchase agreement, our convertible notes issued during 2002 including, but not
limited to, Laurus, and our existing drawdown of the Laurus line of credit, we will have outstanding derivative securities (in addition to stock options) convertible or exercisable for approximately 5,256,961 shares of common stock. The issuance of
the Companys common stock under the convertible notes and other financing agreements may have a material dilutive impact on our shareholders, as well as a negative impact on our financial results.



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



We maintain two equity compensation plans: (i) the 2000 Stock Option/Stock Issuance Plan (the 2000 Plan), pursuant to which we may issue
options and common stock to employees, officers, directors, consultants and advisors, and (ii) the 2001 Employee Stock Purchase Plan (the Purchase Plan), approved by our stockholders in February 2002, pursuant to which our employees are
provided the opportunity to purchase our stock through payroll deductions. As of March 31, 2003, there were options outstanding to purchase 3,618,514 shares of common stock under our 2000 Plan; 622,004 shares of common stock remain available for
issuance under the 2000 Plan. A maximum of 250,000 shares of common stock have been authorized for issuance under the Purchase Plan.



In addition, as of March 31, 2003, there were 539,713 shares of common stock subject to outstanding options granted other than under the 2000 Plan or
Purchase Plan. These non-plan options were granted to various employees, directors, consultants and advisors.



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



The number of shares of common stock subject to currently outstanding options under the 2000 Plan, as well as shares of
common stock subject to options granted other than under the 2000 Plan, exceeds 30% of the total number of shares of our currently outstanding common stock. The California Department of Corporations has issued regulations for companies seeking
qualification of stock option plans, which regulations require that the total number of shares issuable upon exercise of all options shall not exceed 30% of such companies outstanding shares, unless a percentage higher than 30% is approved by
at least two-thirds of the outstanding shares entitled to vote. We unsuccessfully sought to obtain this two-thirds supermajority vote of the outstanding shares pursuant to a written consent solicitation of our stockholders under a Proxy Statement
filed with the Securities and Exchange Commission on December 31, 2001. Therefore, the issuance of further stock options and shares under the 2000 Plan to persons other than officers, directors and previous optionees requires qualification, and is
restricted under the blue sky securities provisions of the California Corporations Code. As a result, our ability to grant options and stock as a means of attracting and retaining employees and directors will be materially impaired.



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.



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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 March 31, 2003, we did not have any marketable securities or investments in available-for-sale securities, nor did we have any sales denominated in a currency other than the United States
dollar. Our $1 million revolving line of credit from Laurus has a floating interest rate.



ITEM 4. CONTROLS AND PROCEDURES



(a) Evaluation of
disclosure controls and procedures



Our chief executive
officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the Evaluation
Date) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective and designed to ensure that material information relating to us and our
consolidated subsidiaries would be made known to them by others within those entities.



(b) Changes in internal controls



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



PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



We are not
a party to any material legal proceedings.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



On February 14, 2003, we entered into a $1 million revolving line of credit with Laurus Master Fund, Ltd. (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 at a fixed conversion price of $1.13 per share. In connection with the LOC, we issued
warrants to purchase 75,000 shares of our Common Stock at $1.13 per share. We received a $300,000 advance under the LOC in our quarter ended March 31, 2003. The issuance of the securities was exempt from the Securities Act registration requirement,
by virtue of Section 4(2) of the Securities Act.



On March 28,
2003, we signed a securities purchase agreement for the issuance of 7% convertible notes with a fixed conversion price of $.65 per share. In connection with notes issued under this Agreement, we will issue warrants to purchase our common stock at
$1.00 per share. Pursuant to this Agreement, and in exchange for $500,000 cash, on March 28, 2003, we issued to Palisades Master Fund L.P. a convertible note in the amount of $500,000, together with warrants to purchase up to 192,308 shares of our
common stock. The issuance of the securities was exempt from the Securities Act registration requirement, by virtue of section 4(2) of the Securities Act.



On February 5, 2003, we issued 240,000 shares of our common stock to Del Mar Consulting Group, Inc., pursuant to an Independent Consulting Agreement dated
November 27, 2002. We also granted an option for 70,000 shares of our common stock exercisable at $1.00 per share.



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ITEM 3. DEFAULTS UPON SENIOR SECURITIES



Not applicable.



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



Not applicable.



ITEM 5. OTHER INFORMATION



Not
applicable.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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



|Exhibit Number |  | Description                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|               | 
|10.1           |  | Agreement dated March 28, 2003 by and between Path 1 and DTKA Holdings Limited terminating Common Stock Purchase Agreement dated January 17, 2002. (1)
|               | 
|10.2           |  | Securities Purchase Agreement dated March 28, 2003 among Path 1, Palisades Master Fund L.P. and Crescent International Ltd. (1)                       
|               | 
|10.3           |  | 7% Convertible Debenture due March 27, 2005 issued to Palisades Master Fund L.P. in the principal amount of $500,000. (1)                             
|               | 
|10.4           |  | Registration Rights Agreement dated March 28, 2003, among Path 1, Palisades Master Fund L.P. and Crescent International Ltd. (1)                      
|               | 
|10.5           |  | Stock Purchase Warrant dated March 28, 2003 issued to Palisades Master Fund L.P. (1)                                                                  
|               | 
|10.6           |  | 7% Convertible Note due March 27, 2005 issued to HPC Capital Management in the principal amount of $10,000. (1)                                       
|               | 
|10.7           |  | Stock Purchase Warrant dated March 28, 2003 issued to HPC Capital Management. (1)                                                                     
|               | 
|10.8           |  | Laurus Master Fund, Ltd. Waiver of Full Ratchet Rights in Connection with issuance of Securities under Purchase Agreement dated March 26, 2003. (1)   
|               | 
|10.9           |  | Laurus Master Fund, Ltd. Waiver and Consent to Purchase Agreement dated March 26, 2003. (1)                                                           
|               | 
|10.10          |  | Materials and Manufacturing Management Agreement Board Assembly dated February 1, 2003 by and between us and Arrow Electronics, Inc. (1)              
|               | 
|31*            |  | Certifications under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                   
|               | 
|32*            |  | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                   

---

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

|(1) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Quarterly Report on Form 10-Q filed with the Commission on May 19, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



29



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##### Table of Contents

SIGNATURES



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



|                                 |  |                                                        
|-------------------------------- |  | -------------------------------------------------------
|Path 1 Network Technologies Inc.
|                                 | 
|By:                              |  | /s/    FREDERICK A. CARY                               
|                                 |  |                                                        
|                                 |  | Frederick A. Cary President and Chief Executive Officer

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



Date: January 26, 2004



30



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##### Table of Contents

Exhibits.



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



|ExhibitNumber |  | Description                                                                                                                                           
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|10.1          |  | Agreement dated March 28, 2003 by and between Path 1 and DTKA Holdings Limited terminating Common Stock Purchase Agreement dated January 17, 2002. (1)
|              | 
|10.2          |  | Securities Purchase Agreement dated March 28, 2003 among Path 1, Palisades Master Fund L.P. and Crescent International Ltd. (1)                       
|              | 
|10.3          |  | 7% Convertible Debenture due March 27, 2005 issued to Palisades Master Fund L.P. in the principal amount of $500,000. (1)                             
|              | 
|10.4          |  | Registration Rights Agreement dated March 28, 2003, among Path 1, Palisades Master Fund L.P. and Crescent International Ltd. (1)                      
|              | 
|10.5          |  | Stock Purchase Warrant dated March 28, 2003 issued to Palisades Master Fund L.P. (1)                                                                  
|              | 
|10.6          |  | 7% Convertible Note due March 27, 2005 issued to HPC Capital Management in the principal amount of $10,000. (1)                                       
|              | 
|10.7          |  | Stock Purchase Warrant dated March 28, 2003 issued to HPC Capital Management. (1)                                                                     
|              | 
|10.8          |  | Laurus Master Fund, Ltd. Waiver of Full Ratchet Rights in Connection with issuance of Securities under Purchase Agreement dated March 26, 2003. (1)   
|              | 
|10.9          |  | Laurus Master Fund, Ltd. Waiver and Consent to Purchase Agreement dated March 26, 2003. (1)                                                           
|              | 
|10.10         |  | Materials and Manufacturing Management Agreement Board Assembly dated February 1, 2003 by and between us and Arrow Electronics, Inc. (1)              
|              | 
|31*           |  | Certifications under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                   
|              | 
|32*           |  | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                   

---

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

|(1) | This exhibit was previously filed as part of, and is hereby incorporated by reference to, our Quarterly Report on Form 10-Q filed with the commission on May 19, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------