(1) Includes 2003 and 2004 interest paid in kind.

We provide signal distribution and graphics products to the broadcast industry for use in digital television. Currently, our customers are facing capital budget constraints because of a slowdown in the U.S. and European economies, and there are few signs of growth in our traditional markets. In addition, we have sustained losses from operations in each of the seven years ended December 31, 2002.

During 2001 we implemented two restructuring plans to reduce staff and curtail certain operating and discretionary expenses as previously discussed in the section titled "Year ended December 31, 2001 compared to December 31, 2000." We planned that these actions would reduce operating costs by $11 million. The combined savings in 2002 SG&A and R&D expenses were $11.5 million as compared to 2001.

We continue to approach 2003 with caution, adopting a modest outlook for growth, and sizing the business accordingly. We do not currently intend to effect another restructuring as we did in 2001 unless a leveling off of 2003 sales to 2002 levels, or a downturn in sales, necessitates it. We operate in a rapidly changing environment and must remain responsive to changes as they occur. In the event that revenues are significantly below 2003 forecasted revenues we believe we have the ability to (i) reduce or delay discretionary expenditures, including capital purchases, and further reduce headcount, according to our contingency plan and (ii) refinance or sell (outright sale or sale-leaseback) our Pro-Bel division headquarters building in the U.K., so that we will have sufficient cash resources through December 31, 2003. However, there can be no assurance that we will be able to adjust our costs or refinance or sell our U.K. building in sufficient time to respond to revenue shortfalls or ob tain waivers and/or amendments from our U.S. bank should defaults occur.

In preparing contingency plans for a lower level of 2003 sales than we are currently forecasting, we have re-examined our cost structure, and prepared a contingent restructuring plan that recommends, in the event it is necessary, to reduce spending in staffing, travel, trade shows, advertising, professional fees, equipment, and bonuses, among other items. This plan would affect both the Graphics and the Signal Distribution and Automation segments of our business. However, there can be no assurance we would be able to execute the plans in adequate time to provide a significant immediate or short-term benefit and if implemented, could have an adverse effect on our ability to conduct business.

Our borrowing facility with our U.S. bank requires that for 2003, we achieve certain quarterly financial covenants with respect to our U.S. operations: a designated minimum EBITDA; maintain in a pledged account at our U.S. bank a minimum cash balance of $1 million at all times; achieve a set fixed charge ratio, and upon repayment on December 31, 2003 of the senior subordinated convertible notes plus accrued interest, maintain a minimum undrawn availability of $0.25 million at all times under our revolving line of credit. While we met the financial covenants for all quarters of 2002, our operating results in the past, including 2001 and 2000, have caused us to violate the minimum EBITDA financial covenants in place at the time for which we either obtained waivers or amended our bank agreements. We cannot be certain we will achieve our covenants in 2003, although we believe that unless quarterly EBITDA for the U.S. business falls short of plan by more than 15% in any quarter, we will l ikely achieve the covenants. There is no assurance we will not be in violation of bank covenants in the future because of fluctuations or deterioration in our operating results. At that point there is no assurance we will be able to obtain waivers or amend our bank agreements. If not, we would be in violation of our restrictive bank financial covenants and the bank would have the right to demand full payment of all amounts owed them. We would then be required to settle the outstanding obligation. At December 31, 2002, we owed the U.S. bank $3.7 million, consisting of $2.3 million under our revolving credit line and $1.4 million under our outstanding term loan. Based on our agreed repayment schedule with the U.S. bank, we are scheduled to repay the term loan in varying monthly amounts until paid in full in September 2003.

Our expectation is that we would not have the financial resources to meet the bank obligation in a single payment. We would, therefore, expect to agree to a payment plan to pay off the outstanding bank balances over a specific period of time. We cannot provide any assurance that the bank would accept any plan. Furthermore, we cannot provide any assurance that the sources of capital to pay off the bank would materialize in a timely manner and to the extent we had planned for.

In specific terms, the contemplated sources of capital to meet our bank obligation are listed below:

• Make additional reductions in staff and discretionary expenses as per our contingent restructuring plan to save $1.1 million in cash outlays assuming implementation in April 2003. Such savings would be reduced by approximately $0.15 million for each month of delay from April to December 2003. A further restructuring may not be possible without impairing the business.

• Refinance of our Pro-Bel office building in Reading, U.K.: Refinance of the existing mortgage could generate proceeds of up to $1 million. However, there can be no assurance we will be able to refinance our building and if we do, that we will be able to generate the desired proceeds.
• Sale or sale-leaseback of our Pro-Bel office building in Reading, U.K.: Net of and assuming no refinance of the existing mortgage, a sale or sale-leaseback could generate proceeds of between $2.0 million to $2.6 million. However, there can be no assurance we will be able to sell or leaseback our building for these amounts.
• Cash on the balance sheet: There may be no cash on the balance sheet at the time of covenant violation.
• Third party financial support: Sufficient additional financial support from third parties, which may include directors and principal shareholders, may not materialize as it has in the past.

While our 2003 plan, if executed, envisions that we will have sufficient cash to meet our 2003 debt obligations and operate the business beyond December 31, 2003, there can be no assurances we will be able to achieve our plan.

We are currently exploring opportunities with third parties regarding potential benefits that might result from a sale of part of our business. These discussions are preliminary and there can be no assurance or determination of the outcome of such discussions.

Although we cannot accurately determine the precise effect of inflation, we have experienced increased costs of materials, supplies, salaries and benefits and increased general and administrative expenses. We attempt to pass on increased costs and expenses by developing more useful and cost-effective products for our customers that can be sold at more favorable profit margins.

Conversion to a digital standard in the U.S., and similar standards internationally, will produce an opportunity to appropriately positioned companies involved in the broadcast industry and related business; however, this change has caused uncertainty, hesitation and indecision for broadcasters and other customers in their decisions on capital spending. The delay in capital spending by broadcasters has affected the level of our sales. The method and timing of broadcasters' conversion to digital television is very important to our future operating results.

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to at the date an entity commits to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We will adopt SFAS No. 146 as of January 1, 2003, for any exit or disposal activities executed after that date.

In December 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation expands the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis and will be adopted by us as of January 1, 2003, for any guarantees issued or modified after that date. There are no significant guarantees as of December 31, 2002.

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure. An amendment of FASB Statement No. 123." The Company is choosing to continue with its current practice of applying the recognition and measurement principles of APB No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure requirements of SFAS No. 148.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," which addresses consolidation of variable interest entities. FIN 46 expands the criteria for consideration in determining whether a variable interest entity should be consolidated by a business entity, and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 is not expected to have a material effect on the Company's resu lts of operations, cash flows or financial position.

We have a 401(k) plan for U.S. employees into which we make a matching contribution in the form of our common stock equal to one-fifth of up to the first 10% of the compensation contributed by a participant. Prior to January 1, 2003, our Company match was in cash which was used to purchase our stock, whereas since January 1, 2003, we issue new, previously unissued shares. A participant in the plan has 19 investment choices, one of which is our common stock.

In December 2001, we issued 12% Senior Subordinated Convertible Notes in the aggregate principal amount of $2.21 million. The price and other terms of our senior subordinated notes were determined through negotiations between us and our placement agent, Nash Fitzwilliams Ltd., and the major purchaser of the Senior Subordinated Notes, Posaune, Ltd., who is not a related party and who acquired $500,000 principal amount, with our board of directors representing us. Certain directors, officers and beneficial owners of 5% or more of our common stock ("5% Shareholders") acquired $875,000 principal amount, or approximately 40% of the senior subordinated notes, at face value as follows:

• London Merchant Securities plc, a 5% Shareholder, through its affiliate, acquired $250,000 principal amount,
• Christopher Kelly, a director and 5% Shareholder, acquired $450,000 principal amount,
• Alan J. Hirschfield, a former director, through an affiliate, acquired $100,000 principal amount,
• Eugene Weber, a director, through an affiliate, acquired $15,000 principal amount,
• The wife of Roger Henderson, President and CEO until February 2003, and a director, acquired $20,000 principal amount,
• Graham Pitman, Senior Vice President and Managing Director of Pro-Bel Division, acquired $20,000 principal amount, and
• James Paul, Executive Vice President and President of Graphics division, acquired $20,000 principal amount.

We used the proceeds of the offering for general business purposes. We were required to file a registration statement relating to the shares of common stock underlying the senior subordinated notes with the SEC. We did so in the second quarter of 2002 and submitted an amendment in the fourth quarter of 2002. The registration statement requires further amendment and will be re-filed. On February 28, 2002, our note holders consented, and our board of directors agreed to allow us to amend our senior subordinated notes. The notes were amended to require that we will only pay interest on the senior subordinated notes by increasing the amount of principal owed thereunder. If we were to decide to pay interest on the notes in cash, we would be required to obtain the consent of the note holders at that time to amend the notes.

On September 7, 1999, we completed a private placement of approximately $6.5 million aggregate principal amount of 8% Series B Subordinated Convertible Debentures, due December 31, 2003. The price and other terms of the Series B debentures were determined through negotiations between an independent committee of our board of directors and our placement agent at the time and Weiss, Peck & Greer, one of the lead investors in the Series B debentures. Certain directors, officers and 5% shareholders acquired $5,352,000 principal amount, or approximately 83% of the Series B debentures, at face value as follows:

• Christopher Kelly, a director and 5% Shareholder, acquired $2,350,000 principal amount, and received warrants for 268,571 shares,
• Weiss Peck & Greer, a 5% Shareholder, acquired through its affiliates $1,960,000 principal amount, and received warrants for 224,000 shares,
• London Merchant Securities plc, a 5% Shareholder, through its affiliates, acquired $760,000 principal amount, and received warrants for 86,857 shares,
• Alan J. Hirschfield, a former director, through an affiliate, acquired $200,000 principal amount, and received warrants for 22,857 shares,
• Charles Diker, a director, acquired $80,000 principal amount, and received warrants for 9,143 shares, and,
• Eugene Weber, a director, through an affiliate, acquired $2,000 principal amount and received warrants for 229 shares.

On January 22, 1999, we completed a private placement of approximately $1.3 million aggregate principal amount of 8% Series A Subordinated Convertible Debentures, due December 31, 2003. The price and other terms of the Series A debentures were determined through negotiations between an independent committee of the board of directors with our placement agent at the time and Weiss, Peck & Greer, the lead investor in the Series A debentures. Certain directors, officers and 5% Shareholders acquired $1,242,000 principal amount, or approximately 96% of the Series A debentures, as follows:

• Weiss Peck & Greer, a 5% Shareholder, acquired through its affiliates $790,000 principal amount, and received warrants for 90,286 shares,
• London Merchant Securities plc, a 5% Shareholder, through its affiliates, acquired $273,000 principal amount, and received warrants for 31,200 shares,
• Children and affiliates of Alan J. Hirschfield, a former director, acquired $90,000 principal amount, and received warrants for 10,285 shares,
• Charles Diker, a director, acquired $39,000 principal amount, and received warrants for 4,457 shares,
• Edward Grebow, then our President and CEO, acquired $30,000 principal amount, and received warrants for 3,428 shares, and
• Eugene Weber, a director, through an affiliate, acquired $20,000 principal amount and received warrants for 2,286 shares.

The proceeds of the offerings of the Series A debentures and the Series B debentures were used for general business purposes. We are obligated to maintain the effectiveness of a registration statement relating to the shares of common stock underlying the Series A debentures for a period of at least two years from the initial effective date and underlying the Series B debentures until such time as all of these shares have been sold. On May 19, 2000 we filed a registration statement on Form S-3, Registration Number 333-37408, with the SEC, relating to such shares (the "2000 Registration Statement"). Upon the filing of our Annual Report on Form 10-K with the SEC on April 1, 2002, holders were no longer permitted to sell these shares under the 2000 Registration Statement because we are no longer eligible to use Form S-3 registration statements, because our common stock is no longer listed on the New York Stock Exchange. This registration statement covers such shares that to our knowledge were not previously sold.

On December 17, 2001, the terms of the Series A and Series B debentures were amended to:

• extend the maturity date of the Series A and B debentures from December 31, 2003 to December 31, 2004,
• increase the interest rate from 8% to 12%, and
• provide that until December 31, 2004, interest may be paid in the form of additional debentures, or in cash, at our sole option.

The terms of the amendment were determined through negotiations between an independent committee of the board of directors and Weiss, Peck & Greer, a 5% Shareholder and significant investor in the Series A and Series B debentures. In connection with the amendment to the Series A and Series B debentures, we issued warrants to holders of the amended Series A and Series B debentures to purchase an aggregate of 861,027 shares of our common stock at an exercise price equal to $0.35 per share. These warrants were recorded in early 2002. Holders received 114.29 warrants for each $1,000 principal value of debentures held. The warrants were vested immediately and are exercisable through December 31, 2004. The shares of common stock underlying these warrants are also being registered hereunder. On February 28, 2002, our debenture holders consented, and our board of directors agreed, to allow us to amend our debentures. The debentures were amended to require that we will only pay interest on the debentures by increasing the amount of principal owed thereunder. If we were to decide to pay interest on the debentures in cash, we would be required to obtain the consent of the debenture holders at that time to amend the debentures.

During fiscal year 2002 and part of 2001, Mr. Michael Wellesley-Wesley, a member of our board of directors, was paid a $15,000 monthly consulting fee, and was assigned a company automobile, for services in exploring strategic alternatives for the Company and providing services as Chairman of the Executive Committee and as a member of the Office of the Chairman. During the year ended December 31, 2002 and 2001 the cost of these services approximated $0.2 million and $0.09 million, respectively. In February 2003, Mr. Wellesley-Wesley became the President and Chief Executive Officer of the Company and the monthly payments ceased. The balance owed for services was $0.01 million and $0.03 million at December 31, 2002 and 2001, respectively.

In November 2000, we purchased 20% of Video Technics, a supplier of certain hardware and software products. In connection with this investment, we have an exclusive arrangement to sell/license these products. For a time in 2001 and for years prior, we purchased both hardware and software from Video Technics. Currently, only software is purchased since we are manufacturing all hardware. The purchase price of the software is based on market conditions and competitive offerings. Purchases of Aprisa Clip/Stillstore products from Video Technics were approximately $1.0 million, $1.3 million and $2.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Presently, we are the only major customer of Video Technics whose financial well being is dependent on our success with the Aprisa line. Being a privately-held and small company, there is no assurance that Video Technics will not face financial problems, thus being unable to meet its supply obligations and endangering the Aprisa product line for several months. Sales of Aprisa products represented 10%, 18% and 13% of Graphics division sales in 2002, 2001 and 2000, respectively.

We are exposed to foreign currency and exchange risk in the normal course of business related to investments in our foreign subsidiaries and sales to foreign customers. For the years ended December 31, 2002, 2001 and 2000, sales to foreign customers were 43%, 57% and 42% of total sales, respectively. Substantially all sales generated outside of the U.S. are denominated in British Pounds Sterling, Euros and U.S. Dollars. The net impact of foreign exchange transactions was a gain of $0.4 million, a loss of $0.05 million and a loss of $0.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. We record translation gain or loss as a separate component of other comprehensive loss.

Additionally, we are exposed to interest rate risk with respect to certain of our short-term and long-term debt that carries a variable interest rate. Rates that affect the variable interest on this debt include the Prime Rate and LIBOR. We have evaluated the foreign currency exchange risk and interest rate risk and believe that our exposure to these risks are not material to our near-term financial position, earnings, or cash flows.

We incurred significant losses from 1997 through 2002. Our accumulated deficit as of December 31, 2002 was $73.6 million. We cannot assure you that we will achieve profitability in any future periods, and you should not rely on our historical revenue or our previous profitability as any indication of our future operating results or prospects. If we continue to generate losses and do not generate sufficient cash, we will not have cash to maintain operations at current levels. In addition, we may need additional financing to sustain our operations in the future. There can be no assurance that additional financing will be available or if available that it will be on terms acceptable to us.

Our operating results have varied widely in the past and are likely to do so in the future. In addition, our operating results may not follow any past trends. Our future operating results will depend on many factors and may fail to meet our expectations for a number of reasons, including those set forth in these risk factors. Any failure to meet expectations could cause our stock price to significantly fluctuate or decline.

Factors that relate to our internal operations and could cause our operating results to fluctuate include:

• the need for continual, rapid new product introductions,
• changes in our product mix,
• our inability to adjust our fixed costs in the face of any declines in sales,
• successful execution of our strategy to develop and market products for the TV broadcasting markets, namely, character generators, routing equipment, routing switchers, routing peripherals, master control, automation, signal processing, network management, video clip and stillstore, and media management
• the quality and market acceptance of new products, and
• the timing and nature of selling and marketing expenses (such as trade shows and other promotions).

Factors that depend upon our suppliers and customers and could cause our operating results to fluctuate include:

• the timing of significant product orders, order cancellations and reschedulings,
• the lengthy sales cycle associated with our switching and routing systems and certain other products,
• the availability of production capacity and fluctuations in the manufacturing yields at the facilities to which we subcontract our critical components,
• the cost of raw materials and manufacturing services from our suppliers, and
• the financial stability of our suppliers and customers.

• intense competitive pricing pressures due to increased competition,
• introductions of or enhancements to our competitors' products,
• the cyclical nature of the industry, and
• economic conditions affecting the customers and us.

Our day-to-day business decisions are made with these factors in mind. Although certain of these factors are out of our immediate control, unless we can anticipate and be prepared with contingency plans that respond to these factors, we will be unsuccessful in carrying out our business plan.

We operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products. Our future success depends on our ability to develop, introduce and successfully market new products, including Duet products that replaced our existing iNFiNiT!, Max and Maxine product lines. To date, we have been selling our Duet products in increasing quantities, and we must continue to increase our sales or our business will suffer. If any of the following occur, our business will be materially harmed:

• We fail to complete and introduce new product designs in a timely manner,
• We are unable to have these new products manufactured according to design specifications,
• Our customers do not perceive value in our new products and demand deep discounts,
• Our sales force and independent distributors do not create adequate demand for our products, or
• Market demand for our new products does not develop as anticipated.

The markets for our products are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions and enhancements. Due to technological advancements and changes in industry standards, our products may become obsolete or the prices at which we can sell them may decline. Future technological advances in the television and video industries may result in the availability of new products or services that could compete with our products or reduce the price of our existing products or services. The availability of competing or less expensive products could cause our existing or potential customers to fulfill their needs better and more cost efficiently with products other than ours.

For example, customers are beginning to use personal computers to edit graphics. This is a task that traditionally would have been completed on our lower-end stand-alone machines. We may not be successful in enhancing our products or developing, manufacturing or marketing new products that satisfy customer needs or achieve market acceptance. In addition, services, products or technologies developed by others may render our products or technologies uncompetitive, unmarketable or obsolete. Announcements of currently planned or other new product offerings by either our competitors or us may cause customers to defer or fail to purchase our existing products or services.

In addition, errors or failures may be found in our products. Such errors or failures could cause delays in product introductions and shipments or require design modifications that could adversely affect our competitive position. This could result in an increase in the inventory of our products. If we do not develop, on a timely basis, new products, and enhancements to existing products or correct errors should they arise, or if such new products or enhancements do not achieve market acceptance, our business, financial condition and results of operations may suffer. Furthermore, the trend toward the use of open systems may cause price erosion in our products, create opportunities for new competitors, allow existing competitors enhanced opportunities and limit the sale of our proprietary systems. Customers may also have unique product requirements such as support of foreign languages, which may be difficult and expensive for us to support and may have limited acceptability.

To establish market acceptance of our products, we must dedicate significant resources to research and development, production and sales and marketing. We experience a long delay between the time when we expend these resources and the time when we begin to generate revenue, if any, from these expenditures. Typically, this delay is one year or more. We record as expenses the costs related to the development of new products as these expenses are incurred. As a result, our profitability from quarter to quarter and from year to year may be material and adversely affected by the number and timing of our new product introductions in any period and the level of acceptance gained by these products.

If one of our potential customers cancels, reduces or delays product orders from us or chooses not to release equipment that incorporates our products after we have spent substantial time and resources in designing a product, our business could be materially harmed. Our customers often evaluate certain of our products for six to twelve months or more before designing them into their systems, and they may not commence volume shipments for up to an additional six to twelve months, if at all. During this lengthy sales cycle, our potential customers may also cancel or change their product plans. Even when customers integrate one or more of our products into their systems, they may ultimately discontinue the shipment of their systems that incorporate our products. System integrators whose products achieve customer acceptance may choose to replace our products with other products giving them higher margins or better performance.

Our future growth and success in our existing business lines will depend to a significant degree on the rate at which broadcasters and cable operators convert to digital video systems and the rate at which digital video technology expands to additional market segments. Television broadcasters and cable television operators have historically relied on and utilized traditional analog technology for video management, storage and distribution. Digital video technology is still a relatively new technology and the move from traditional analog technology to digital video technology requires a significant initial expense for television broadcasters and cable television operators. Accordingly, the use of digital video technology may not expand among television broadcasters and cable television operators or into additional markets. If television broadcasters and cable television operators do not accept and implement digital video technology, or if the October 1996 ruling of the FCC mandatin g these changes is repealed or amended, we may not be able to grow our existing business lines and our financial condition will suffer.

We may spend significant time and money on research and development to design and develop products around an emerging technology or industry standard. If an emerging technology or industry standard that we have identified fails to achieve broad market acceptance in our target markets, we may be unable to generate significant revenue from our research and development efforts. Moreover, even if we are able to develop products using adopted standards, our products may not be accepted in our target markets. As a result, our business would be materially harmed.

We have limited experience in designing and developing products that support industry standards. If systems manufacturers move away from the use of industry standards that we support with our products and adopt alternative standards, we may be unable to design and develop new products that conform to these new standards. The expertise required is unique to each industry standard, and we would have to either hire individuals with the required expertise or acquire this expertise through a licensing arrangement or by other means. The demand for individuals with the necessary expertise to develop a product relating to a particular industry standard is generally high, and we may not be able to hire such individuals. The cost to acquire this expertise through licensing or other means may be high and such arrangements may not be possible in a timely manner, if at all.

We believe the formation of strategic relationships will be important to our interactive television business. The inability to find strategic partners or the failure of any existing relationships to achieve meaningful positive results for us could harm our business. We will rely in part on strategic relationships to help us:

• Maximize adoption of our products through distribution arrangements,
• Enhance our brand,
• Expand the range of commercial activities based on our technology, and
• Increase the performance, functionality and utility of our products and services.

Many of these goals are beyond our traditional strengths. We anticipate that the efforts of our strategic partners will become more important as the use of interactive television matures. For example, we may become more reliant on strategic partners to provide multimedia content and build the necessary infrastructure for media delivery. We may not be successful in forming strategic relationships. In addition, the efforts of our strategic partners may be unsuccessful. Furthermore, these strategic relationships may be terminated before we realize any benefit.

We may not be able to compete successfully against our current or future competitors. The markets for graphics imaging and editing, signal routing and media storage systems and products are highly competitive. These markets are characterized by constant technological change and evolving industry standards. Many of our competitors have significantly greater financial, technical, manufacturing and marketing resources than we have. In addition, certain vendors dominate certain product categories and market segments, on a region-by-region basis, in which we currently operate or may wish to operate in the future. As a result, our ability to compete and operate in these areas may be limited.

We anticipate increased competition from companies with which we currently compete and from companies that may enter our industry. We are currently aware of several major and a number of smaller competitors:

• In the graphics area, we believe our primary competitors are Pinnacle Systems Inc., Pixel Power, vizrt Ltd. and Inscriber Technology Corporation.
• In the signal management area, we believe our primary competitors are nVision, Leitch Incorporated, Miranda Technologies, Avid Technology, Inc., and Thomson Digital Media Solutions.
• In the control and automation area, we believe our primary competitors are Encoda, Harris Corporation, Sundance and Omnibus.

We believe that our ability to compete depends on factors both within and outside our control, including the success and timing of new product developments introduced by us and our competitors, product performance and price, market presence and customer support. We may not be able to compete successfully with respect to these factors. Maintaining any advantage that we may have, now or in the future, over our competitors will require our continuing investments in research and development, sales and marketing and customer service and support. In addition, as we enter new markets, we may encounter distribution channels, technical requirements and competitive factors that differ from those in the markets in which we currently operate. We may not be able to compete successfully in these new markets. In addition, increased competition in any of our current markets could result in price reductions, reduced margins or loss of market share, any of which could harm our business, financial co ndition and results of operations.

The semiconductor industry (from which surface mount components are derived) has historically been characterized by wide fluctuations in the demand for, and supply of, its products, which feed the electronics, telecommunications and computer markets. These fluctuations have resulted in circumstances when supply and demand for the industry's products have been widely out of balance. Our operating results may be materially harmed by industry-wide surface mount component shortage, which could result in severe pricing pressure. In a market with undersupply, we would have to compete with the larger customers of our vendors for limited manufacturing capacity. In such an environment, we may be unable to have our products manufactured in a timely manner or in quantities necessary to meet our requirements. Since we outsource a large proportion of our products, we are particularly vulnerable to such supply shortages. As a result, we may be unable to fulfill orders and may lose customers. Any future industry-wide shortage of surface mount components or manufacturing capacity would materially harm our business.

Aprisa is our Graphics division's range of stillstores, clipstore and digital disk recorder (DDR) system products, including the SSX, 100, 200, 250, 300 and VCS. Our Aprisa DDR software permits our Aprisa DDRs to operate as network entities and provides many of the features available in the Aprisa product line. Our Aprisa product line has represented 10%, 18% and 13% of Graphics division revenues for the years ended December 31, 2002, 2001 and 2000, respectively. We purchase the software component of this product from Video Technics, a company where we have a 20% ownership interest. Video Technics is a small, privately held company whose financial success is dependent on the success of the Aprisa product line. There is no assurance that they will not face financial problems and not be able to meet its supply obligations. If this were to occur we could sustain a substantial reduction in revenues that could cause us to fall short of our financial covenants with our U.S. bank.

We depend on a limited number of contract manufacturers to produce surface mount components for our products. Our principal suppliers may experience unanticipated events that could inhibit their ability to provide us with adequate manufacturing capacity on a timely basis, or at all. Introducing new surface mount components or transferring existing design and specifications to a new third party manufacturer would require significant development time to adapt our designs to their manufacturing processes and could cause product shipment delays. In addition, the costs associated with manufacturing our components may increase if we are required to use a new third party manufacturer. If we fail to satisfy our manufacturing requirements, our business would be materially harmed.

Our agreements with third-party manufacturers require us to provide forecasts of our anticipated manufacturing orders, and place binding manufacturing orders in advance of receiving purchase orders from our customers. This may result in product shortages or excess product inventory because it may not be practical to increase or decrease our rolling forecasts under such agreements. Obtaining additional supply in the face of product shortages may be costly or not possible, especially in the short term. Our failure to forecast adequately demand for our products would materially harm our business.

Difficulties or delays in the manufacturing of our products in the U.S. and the U.K. can adversely impact our gross margin. In the past we have experienced production and supply problems that affected the gross margin. We may experience in the future the same type of problems or other problems. This would be especially true if we face cash constraints, slowing payments to our suppliers. That in turn affects our ability to manufacture products in a timely manner, which would adversely affect our profitability.

Our success depends in large part on the continued growth of various markets that use our products. Any decline in the demand for our products in the following markets could materially harm our business:

• Broadcasting infrastructure projects,
• Video/audio, graphics and imaging,
• Advertising,
• Corporate customers,
• Military and security systems.

Slower growth in any of the other markets in which our products are sold may also materially harm our business. Many of these markets are characterized by rapid technological change and intense competition. As a result, our products may face severe price competition, become obsolete over a short time period, or fail to gain market acceptance. In addition, customers may require replacements and upgrades of equipment rather than the purchase of new, more expensive products. Any of these occurrences would materially harm our business, financial condition and results of operations.

A reduction in the performance, reliability and availability of our network infrastructure will harm our ability to distribute our products and services to our users, as well as our reputation and ability to attract and retain funding, users and content providers. Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, Internet breakdown, earthquake and similar events. Our systems are also subject to viruses, break-ins, sabotage, acts of physical terrorism, intentional acts of vandalism, hacking, cyber-terrorism and similar misconduct. Our computer and communications infrastructure are located at Melville, NY and Reading, U.K. We do not have fully redundant systems or a formal disaster recovery plan, and we might not carry adequate business interruption insurance to compensate us for losses that may occur from a system outage. Any system error or failure that causes interruption in availability of products or content or an i ncrease in response time could result in a loss of potential or existing customers or content providers and declines in stock values. If we suffer sustained or repeated interruptions, our products and services could be less attractive to our users and our business would be harmed.

The legacy iNFiNiT!, MAX!> and MAXINE! products sold at prices that are a multiple of the current Duet line prices. With advances in technology and introduction of Windows-based operating systems, we have to strive continuously to provide more performance and characteristics in our products at lower prices. We may not be able to do so successfully in the future, thus negatively affecting our performance.

We employ independent, third-party dealers to market and sell a significant portion of our products. During 2002, 26% of our sales were made through our dealers and representatives. Although we have contracts with our dealers and representatives, any of them may terminate their relationship with us on short notice. The loss of one or more of our principal dealers, or our inability to attract new dealers, could materially harm our business. We may lose dealers in the future and we may be unable to recruit additional or replacement dealers. As a result, our future performance will depend in part on our ability to retain our existing dealers and representatives and attract new dealers and representatives that will be able to market, sell and support our products effectively.

Furthermore, with advances in technology we have been able to introduce lower-priced products. It may be that our distribution strategy needs to be modified as new product prices are lowered. It is possible we may not be successful in modifying our distribution strategy, thus adversely impacting our ability to sell our new products.

Sales to customers located outside the United States accounted for 43%, 57% and 42% of our total sales in 2002, 2001 and 2000, respectively. We anticipate that sales to customers located outside the United States will continue to represent a significant portion of our total sales in future periods and the trend of foreign customers accounting for an increasing portion of our total sales may continue. Accordingly, our operations and revenues are subject to a number of risks associated with foreign commerce, including the following:

• Managing foreign dealers and foreign customers, which may be state corporations or government agencies,
• Staffing and managing foreign branch offices,
• Political and economic instability,
• Foreign currency exchange fluctuations,
• Changes in tax laws, tariffs, environmental directives, freight rates and governmental royalties,
• Timing and availability of export licenses,
• Changes in laws and policies governing operations of foreign-based companies,
• Inadequate protection of intellectual property rights in some countries, and
• Obtaining governmental approvals for certain products.

In 2002 we denominated sales of our products in foreign countries exclusively in U.S. dollars, British Pounds Sterling and Euros. As a result, any increase in the value of the U.S. dollar relative to the local currency of a foreign country will increase the price of our products in that country so that our products become more expensive to customers in the local currency of that foreign country. As a result, sales of our products in that foreign country may decline. To the extent any such risks materialize, our business would be materially harmed.

We build up our sales projections from information obtained by the sales force and our dealers. We recognize revenue from sales to our dealers only when these dealers make sales to customers. Furthermore, in certain large contracts, applicable to both the Graphics division and Pro-Bel division, there are acceptance and/or commissioning conditions. It is possible our products are delivered but are not paid for because acceptance and/or commissioning have not taken place to the satisfaction of the customer. We would not be able to recognize the revenue until the customer has accepted and/or commissioned the products.

Any deviation or inaccuracy in these above factors could affect our quarterly revenue and results of operations. As a result, on a quarterly basis, our stock price could materially fluctuate.

We believe our future success will depend upon our ability to attract and retain engineers and other highly skilled personnel and sales people. Most of our employees are at-will and only a few are subject to employment contracts. Hiring qualified sales and technical personnel will be difficult due to the limited number of qualified professionals. Competition for these types of employees is high. We have in the past experienced difficulty in recruiting and retaining qualified sales and technical personnel necessary for the development of our business. Failure to attract and retain personnel, particularly sales and technical personnel, would materially harm our business. We are also highly dependent upon the efforts of our senior management. The loss of the services of one or more of these individuals may delay or prevent us from achieving our objectives.

Protection of intellectual property rights is crucial to our business, since that is how we keep others from copying innovations that are central to our existing and future products. Our success also depends, in part, upon our ability to operate without infringing the rights of others. We rely on a combination of methods to protect our proprietary intellectual property, technology and know-how, such as:

• trade secret laws,
• copyright law,
• trademark law,
• patent law,
• contractual provisions,
• confidentiality agreements, and
• certain technology and security measures.

Because it is critical to our success that we are able to prevent competitors from copying our innovations, we intend to continue to seek patent and trade secret protection for our products. The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us.

The steps we have taken regarding our proprietary technology, however, may not be sufficient to deter misappropriation. For example, we have rights in trademarks, service marks and copyrights that are not registered. In addition, the laws of certain countries in which our products are or may be developed, manufactured, sold or otherwise distributed do not protect our products and intellectual rights to the extent of the laws of the U.S. We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, employees may breach these agreements, and we may not have adequate remedies for any breach. In any case, others may come to know about or determine our trade secrets through a variety of methods.

In the systems and software industries, companies receive notices from time to time alleging infringement of patents, copyrights or other intellectual property rights of others. In the past we have been, and may from time to time continue to be, notified of claims that we may be infringing patents, copyrights or other intellectual property rights owned by third parties. Companies may pursue claims against us with respect to the alleged infringement of patents, copyrights or other intellectual property rights owned by third parties. In addition, litigation may be necessary to protect our intellectual property rights and trade secrets, to determine the validity of and scope of the proprietary rights of others or to defend against third party claims of invalidity. Any litigation could result in substantial costs and diversion of resources.

Existing copyright, trademark, patent and trade secret laws afford only limited protection. Moreover, effective protection of copyrights, trade secrets, trademarks and other proprietary rights may be unavailable or limited in certain foreign countries and territories. Domestic and foreign laws, in combination with the steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our technology or other proprietary rights. Also, these protections do not preclude competitors from independently developing products with functionality or features similar or superior to our products and technologies or designing around the patents we own or the technology we create.

Litigation may be necessary to defend against claims of infringement, to enforce our proprietary rights, or to protect trade secrets and that could result in substantial cost, and a diversion of resources away from the day-to-day operation of our business.

Our borrowing facility with our U.S. bank requires that for 2003, we achieve certain quarterly financial covenants with respect to our U.S. operations: a designated minimum EBITDA; maintain in a pledged account at our U.S. bank a minimum cash balance of $1 million at all times; achieve a set fixed charge ratio, and upon repayment on December 31, 2003 of the senior subordinated convertible notes plus accrued interest, maintain a minimum undrawn availability of $0.25 million at all times under our revolving line of credit. While we met the financial covenants for all quarters of 2002, our operating results in the past, including 2001 and 2000, have caused us to violate the minimum EBITDA financial covenants in place at the time for which we either obtained waivers or amended our bank agreements. We cannot be certain we will achieve our covenants in 2003, although we believe that unless quarterly EBITDA for the U.S. business falls short of plan by more than 15% in any quarter, we will l ikely achieve the covenants. There is no assurance we will not be in violation of bank covenants in the future because of fluctuations or deterioration in our operating results. At that point there is no assurance we will be able to obtain waivers or amend our bank agreements. If not, we would be in violation of our restrictive bank financial covenants and the bank would have the right to demand full payment of all amounts owed them. We would then be required to settle the outstanding obligation. At December 31, 2002, we owed the U.S. bank $3.7 million, consisting of $2.3 million under our revolving credit line and $1.4 million under our outstanding term loan. Based on our agreed repayment schedule with the U.S. bank, we are scheduled to repay the term loan in varying monthly amounts until paid in full in September 2003.

Our expectation is that we would not have the financial resources to meet the bank obligation in a single payment. We would, therefore, expect to agree to a payment plan to pay off the outstanding bank balances over a specific period of time. We cannot provide any assurance that the bank would accept any plan. Furthermore, we cannot provide any assurance that the sources of capital to pay off the bank would materialize in a timely manner and to the extent we had planned for.

In specific terms, the contemplated sources of capital to meet our bank obligation are listed below:

• Make additional reductions in staff and discretionary expenses as per our contingent restructuring plan to save $1.1 million in cash outlays assuming implementation in April 2003. Such savings would be reduced by approximately $0.15 million for each month of delay from April to December 2003. A further restructuring may not be possible without impairing the business.

• Refinance of our Pro-Bel office building in Reading, U.K.: Refinance of the existing mortgage could generate proceeds of up to $1 million. However, there can be no assurance we will be able to refinance our building and if we do, that we will be able to generate the desired proceeds.
• Sale or sale-leaseback of our Pro-Bel office building in Reading, U.K.: Net of and assuming no refinance of the existing mortgage, a sale or sale-leaseback could generate proceeds of between $2.0 million to $2.6 million. However, there can be no assurance we will be able to sell or leaseback our building for these amounts.
• Cash on the balance sheet: There may be no cash on the balance sheet at the time of covenant violation.
• Third party financial support: Sufficient additional financial support from third parties, which may include directors and principal shareholders, may not materialize as it has in the past.

While our 2003 plan, if executed, envisions that we will have sufficient cash to meet our 2003 debt obligations and operate the business beyond December 31, 2003, there can be no assurances we will be able to achieve our plan.

We are currently exploring opportunities with third parties regarding potential benefits that might result from a sale of part of our business. These discussions are preliminary and there can be no assurance or determination of the outcome of such discussions.

We may not be able to successfully implement our contingency plan upon a decline in revenues.

During 2001 we effected a restructuring that involved reductions in staff and overhead, as well as reduced capital expenditures and discretionary spending, so as to reduce costs and expenses and reduce cash outflows in response to lower revenues. If sales decline we could be forced to further reduce staff and other costs and expenses, as contemplated in our contingency plan. Were this to occur, we may be unable to reduce personnel and other costs and expenses on a timely basis, which could have a material adverse effect on our business, financial condition and results of operations. In addition, further reductions in personnel and costs and expenses may adversely affect our ability to generate revenues.

We are uncertain of our ability to obtain additional financing or refinance existing obligations for our future needs, and liquidity issues have and may continue to increase our cost of capital.

At December 31, 2002, we had cash and cash equivalents of $2.2 million and working capital of $2.5 million. We also had repayment obligations on revolving lines of credit, term debt, leases, a mortgage, senior subordinated convertible notes, and Series A and Series B convertible debentures of $9.1 million during 2003, $13.3 million during 2004, $0.8 million during 2005, $0.7 million during 2006, $0.7 million during 2007 and $5.3 million thereafter. We believe that cash on hand and net cash expected to be generated in the business will be sufficient to meet our needs for the next twelve months if we are able to achieve our planned results of operations. However, we may need to raise additional funds in order to fund our business, expand our sales and marketing activities, develop or enhance new products, respond to competitive pressures and satisfy our existing and any new obligations that may arise. Additional financing may not be available on terms favorable to us, or at all. While w e significantly reduced our cash usage for operations during the latter part of 2001 and 2002, capital is critical to our business, and our ability to raise capital in the event that ongoing losses use our available cash would have a material adverse effect on our business.

Our need for cash in late 2001 in order to maintain liquidity necessitated that we borrow additional monies and modify the terms of existing obligations, which actions increased our cost of capital. Due to the level of our current and non-current debt in relation to cash, as well as our results of operations and cash flows, we expect our cost of capital to remain at relatively high levels. In December 2001, the holders of the existing Series A and Series B subordinated debentures agreed to an amendment of those debentures to change their maturity dates from December 31, 2003 to December 31, 2004. In return we were required to increase the interest rate payable on the debentures from 8% to 12% and issue 861,027 warrants to the holders thereof to permit them to purchase stock at a price of $0.35 per share at any time until the debentures mature. The effect of the amendment to the debentures and the related issuance of warrants is to increase interest expense by $0.41 million, $0.48 milli on and $1.38 million for years 2002, 2003 and 2004, respectively. The increased risk to note holders associated with our ability to repay the $2.2 million in Senior Notes issued December 2001 and maturing December 31, 2003, resulted in us having to agree to pay an annual percentage rate of 12% on that debt.

In the past we have spent generously on marketing. We have attended major trade shows in the U.S. and Europe, which cost us a substantial amount of money. Our plan going forward is to participate in the principal trade shows and some of the minor shows. We plan to control these expenditures and be more frugal. We cannot provide any assurance we will remain frugal and judicious in expensing our marketing dollars, because of market demands. Furthermore, we cannot provide any assurance that selective spending of our marketing dollars will pay off in the areas in which we are expecting results.

We generated approximately 6% of our 2002 revenues from hardware and software service agreements sold to our customers. The customary term of such agreements is one year. In order to maintain our customer relations, we may need to support customers' products beyond their useful life, which may require us to expend significant resources. It is possible that our products, current and prospective, will not provide sufficient customer satisfaction and require inordinate and expensive service support for each product category, beyond the level planned in the service agreements in place. That, by itself, would increase our expenses and make these service agreements unprofitable. In addition, customers who purchase service agreements and experience problems may be disinclined to renew their service agreements in subsequent years, hence affecting the revenues generated from service agreements.

We warranty our products from 90 days to two years, depending on the type of product and industry practices. It is possible that our products, current and prospective, do not provide sufficient customer satisfaction and we may decide to extend our warranty for a particular product or product line. In addition, we may extend the warranty period in certain special situations to win a particular contract, hence extending our liability period.

Any unplanned increase of our warranty periods would increase our costs and reduce our profitability. Because of the attendant contingent liabilities, it is possible that a reserve would have to be established, further affecting our operating results.

The enactment by U.S. federal or state or international governments of new laws or regulations, changes in the interpretation of existing regulations or a reversal of the trend toward deregulation in these industries could cause our customers to suffer, and thereby adversely affect our ability to continue to be profitable. Television operators are subject to extensive government regulation by the FCC and other U.S. federal and state regulatory agencies. These regulations could limit capital expenditures by television operators and if that happens our business, financial condition and results of operations may suffer.

The telecommunications and television industries are subject to extensive regulation in the United States and other countries. Our business is dependent upon the continued growth of these industries in the United States and internationally. Recent legislation has lowered the legal barriers to entry for companies into the United States' multi-channel television market, but telecommunications companies may not successfully enter this or related markets. Moreover, the growth of our business internationally is dependent in part on similar deregulation of the telecommunications industry abroad, which deregulation may not occur.

Our officers, directors and principal stockholders together control approximately 67% (as of February 28, 2003) of our issued and outstanding common stock. As a result, these stockholders, if they act together, will be able to significantly influence the management and affairs of our company and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control or other business combination and might affect the market price of our common stock. This concentration of ownership may not be in the best interest of our other stockholders.

We have not paid cash dividends on our common stock since November 27, 1989 and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings for use in our business. The decision to pay dividends in the future will be at the discretion of our board of directors and is subject to certain restrictions under our loan agreements. The historical and prospective lack of issuing dividends may diminish the value of the common stock.

The trading price of our common stock has been and may continue to be subject to fluctuations in response to quarter-to-quarter variations in operating results, changes in earnings estimates by analysts, general conditions in the digital media industry, announcements of technological innovations or new products introduced by us or our competitors and other events or factors. The stock market in general, and the shares of technology companies in particular, have experienced extreme price fluctuations in recent years. During the period commencing January 1, 2001 through February 28, 2003, the closing price of our common stock has ranged between $0.20 and $2.19. This volatility has had a substantial impact on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the companies affected. These broad market fluctuations may adversely affect the market price of our common stock. In addition, our common stock is now traded on the OTC Bulletin Board. You may expect trading volume to be low in such a market. Consequently, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.

An increase in the number of shares of our common stock outstanding could reduce the price of our common stock.

At December 31, 2002, there were 18,794,000 potentially dilutive shares that would be issuable if all senior notes and debentures, including interest paid in kind, were converted and all outstanding warrants and common stock options were exercised. Issuance or sale of a substantial number of shares of additional common stock, or the perception that such issuance or sales could occur, could adversely affect the market price for our common stock as it would result in additional shares of our common stock being available on the public market. These issuances or sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Various provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws and in New York corporate law may discourage, delay or prevent a change in control or takeover attempt of our company by a third party which is opposed to by our management and board of directors. Public stockholders who might desire to participate in such a transaction may not have the opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and board of directors. These provisions include:

• authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt,
• limiting who may call special meetings of our stockholders, and
• establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings.

It may be difficult to sell your shares and the value of your investment may be reduced because our common stock has experienced low trading volumes on the OTC Bulletin Board and currently lacks public market research analyst coverage.

Our common stock trades on the OTC Bulletin Board and it experiences lower trading volumes than many stocks listed on a national exchange, and therefore it may be difficult for an investor to sell the shares and to realize any return on an investment in our common stock. Because our common stock lacks public market research analyst coverage it is more difficult to obtain reliable information about its value or the extent of risks to which the investment is exposed. Even if a liquid market for the shares of our common stock exists in the future, there can be no assurance that the securities could be transferred at or above the price paid. The price of our common stock may fall against the investor's interests, and the investor may get back less than he or she invested.

To the Board of Directors and

Shareholders of Chyron Corporation

In our opinion, the consolidated financial statements and the financial statement schedule listed in the index appearing under Items 15(a)(1) and (2) present fairly, in all material respects, the financial position of Chyron Corporation and its subsidiaries at December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the consolidated financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Melville, New York

March 21, 2003

See Notes to Consolidated Financial Statements

Chyron Corporation and its wholly-owned subsidiaries ("Chyron" or the "Company") develop, manufacture, market and support a broad range of equipment, software and systems, including paint and animation systems, character generators, signal distribution systems, master control switchers and broadcast automation and media management packages. The worldwide market for equipment, software and systems used in the production and presentation of video and audio content encompasses major television networks, cable television broadcasters, direct to home satellite program distributors, production companies and post-production houses, as well as organizations and individuals creating materials such as corporate and specialized video and audio presentations.

We provide signal distribution, automation and graphics products to the broadcast industry for use in digital television. Currently, our customers are facing capital budget constraints because of a slowdown in the U.S. and European economies, and there are few signs of growth in our traditional markets. In addition, we have sustained losses from operations in each of the five years ended December 31, 2002.

During 2001 we implemented two restructuring plans to reduce staff and curtail certain operating and discretionary expenses as discussed in footnote "Goodwill Impairment, Restructuring and Other Unusual Charges." We planned that these actions would reduce operating costs by $11 million. The combined savings in 2002 selling, general & administrative ("SG&A") and research and development ("R&D") expenses were $11.5 million as compared to 2001.

We continue to approach 2003 with caution, adopting a modest outlook for growth, and sizing the business accordingly. We do not currently intend to effect another restructuring as we did in 2001 unless a leveling off of 2003 sales to 2002 levels, or a downturn in sales, necessitates it. We have configured our business with a level of costs that allows flexibility to further reduce costs if economic conditions deteriorate. We believe we have sized our core businesses to a level that will not significantly reduce our cash resources while continuing to invest in our new products. We operate in a rapidly changing environment and must remain responsive to changes as they occur. In the event that revenues are significantly below 2003 forecasted revenues we believe we have the ability to (i) reduce or delay discretionary expenditures, including capital purchases, and further reduce headcount, according to our contingency plan and (ii) refinance or sell (outright sale or sale-leaseback) our Pr o-Bel division headquarters building in the U.K., so that we will have sufficient cash resources through December 31, 2003. However, there can be no assurance that we will be able to adjust our costs or refinance or sell our U.K. building in sufficient time to respond to revenue shortfalls or obtain waivers and/or amendments from our U.S. bank should defaults occur.

In preparing contingency plans for a lower level of 2003 sales than we are currently forecasting, we have re-examined our cost structure, and prepared a contingent restructuring plan that recommends, in the event it is necessary, to reduce spending in staffing, travel, trade shows, advertising, professional fees, equipment, and bonuses, among other items. This plan would affect both the Graphics and the Signal Distribution and Automation segments of our business. However, there can be no assurance we would be able to execute the plans in adequate time to provide an immediate or short-term benefit.

Our borrowing facility with our U.S. bank requires that for 2003, we achieve certain quarterly financial covenants with respect to our U.S. operations: a designated minimum EBITDA; maintain in a pledged account at our U.S. bank a minimum cash balance of $1 million at all times; achieve a set fixed charge ratio, and upon repayment on December 31, 2003 of the senior subordinated convertible notes plus accrued interest, maintain a minimum undrawn availability of $0.25 million at all times under our revolving line of credit. While we met the financial covenants for all quarters of 2002, our operating results in the past, including 2001 and 2000, have caused us to violate the minimum EBITDA financial covenants in place at the time for which we either obtained waivers or amended our bank agreements. We cannot be certain we will achieve these covenants in 2003, although we believe that unless quarterly EBITDA for the U.S. business falls short of plan by more than 15% in any quarter, we will likely achieve the covenants. There is no assurance we will not be in violation of bank covenants in the future because of fluctuations or deterioration in our operating results. At that point there is no assurance we will be able to obtain waivers or amend our bank agreements. If not, we would be in violation of our restrictive bank financial covenants and the bank would have the right to demand full payment of all amounts owed them. We would then be required to settle the outstanding obligation. At December 31, 2002, we owed the U.S. bank $3.7 million, consisting of $2.3 million under our revolving credit line and $1.4 million under our outstanding term loan. Based on our agreed repayment schedule with the U.S. bank, we are scheduled to repay the term loan in varying monthly amounts until paid in full in September 2003.

Our expectation is that we would not have the financial resources to meet the bank obligation in one single payment. We would, therefore, expect to agree to a payment plan to pay off the bank debt over a specific period of time. We cannot provide any assurance that the bank would accept any plan. Furthermore, we cannot provide any assurance that the sources of capital to pay off the bank would materialize in a timely manner and to the extent we had planned for.

In specific terms, the contemplated sources of capital to meet our bank obligation are listed below:

• Make additional reductions in staff and overhead as per our contingent restructuring plan to save $1.1 million in cash outlays assuming implementation in April 2003. Such savings would be reduced by approximately $0.15 million for each month of delay.

• Refinance of our Pro-Bel office building in Reading, U.K.: Refinance of the existing mortgage could generate proceeds of up to $1 million. However, there can be no assurance we will be able to refinance our building and if we do, that we will be able to generate the desired proceeds.
• Sale or sale-leaseback of our Pro-Bel office building in Reading, U.K.: Net of and assuming no refinance of the existing mortgage, a sale or sale-leaseback could generate proceeds of between $2.0 million to $2.6 million. However, there can be no assurance we will be able to sell or leaseback our building for these amounts.
• Cash on the balance sheet: There may be no cash on the balance sheet at the time of covenant violation.
• Third party financial support: Sufficient additional financial support from third parties, which may include directors and principal shareholders, may not materialize as it has in the past.

While our 2003 plan, if executed, envisions that we will have sufficient cash to meet our plan obligations and operate the business beyond December 31, 2003, there can be no assurances we will be able to achieve our plan.

We are currently exploring opportunities with third parties regarding potential benefits that might result from a sale of part of our business. These discussions are preliminary and there can be no assurance or determination of the outcome of such discussions.

The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All significant intercompany amounts have been eliminated. Investments in affiliates of less than 20 percent are generally stated at cost. Investments in companies representing ownership interests of 20 percent to 50 percent are accounted for by the equity method of accounting. Under the equity method, we include our pro-rata share of income (loss) in earnings.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the periods presented. Estimates made by management include inventory valuations, allowances for doubtful accounts, warranty reserves, forecasts of 2003 results, contingency plans and cash requirements. Actual results could differ from those estimates.

Cash includes cash on deposit and amounts invested in highly liquid money market funds. Cash equivalents consist of short term investments with original maturities of three months or less. The carrying amount of cash and cash equivalents approximates their fair value.

Inventories are stated at the lower of cost or market, cost being determined primarily on the basis of average cost in the graphics sector and first-in, first-out in the signal, distribution and automation sector. The need for inventory obsolescence provisions is evaluated by us and, when appropriate, reserves for technological obsolescence, non-profitability of product lines and excess quantities are established. Inventories at December 31, 2002 and 2001 do not include an allocation of general and administrative costs.

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight line method over the following estimated useful lives:

Building	35 years
Machinery and equipment	3-10 years
Furniture and fixtures	5-10 years
Leasehold improvements	Shorter of the life of improvement or remaining life of the lease

We continually evaluate whether changes have occurred that would require revision of the remaining estimated useful life of the assigned excess of cost over the value of net tangible assets acquired (goodwill) or its carrying amount. Our method used to measure whether or not there is an impairment in the recorded value of an investment is to use the undiscounted cash flow method prescribed by FAS 121. Under this method we compare the undiscounted future cash flows with the recorded value of the investment to determine whether an impairment exists. If an impairment exists, we use the discounted cash flow method to calculate the impairment amount.

During 2001, we determined that goodwill associated with the 1996 acquisition of Pro-Bel Limited, our Signal Distribution and Automation Division, was impaired as a result of continued declines in the division's financial results. In addition, we also determined that goodwill associated with the 2001 acquisition of Interocity Development Corporation ("Interocity") was impaired as a result of the elimination of our streaming services business. See footnotes 2 and 3 for additional information regarding these impairments.

We account for our investments in accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires that certain debt and equity securities be adjusted to market value at the end of each accounting period. Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. At December 31, 2002, all securities covered by SFAS No. 115 were designated as available for sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported as a separate component of comprehensive income or loss, net of tax. Realized gains and losses on sales of investments, as determined by the specific identification method, are included in the Consolidated Statements of Operations.

Technological feasibility for our products is reached shortly before the products are released to manufacturing. Consequently, costs incurred after technological feasibility is established are not material, and accordingly, we expense all research and development costs when incurred. Research and development costs include wages and other personnel costs, material costs and an allocation of certain indirect costs related to facilities.

For periods prior to 2000 certain software development costs were capitalized. Amortization expense of such costs approximated $0.4 million, $0.8 million and $1.3 million in 2002, 2001 and 2000, respectively. At December 31, 2002 all costs that we previously capitalized have been fully amortized.

We continually evaluate whether changes have occurred that would require revisions to the carrying amounts of our long-lived assets. In making such determination, we reassess market value, assess recoverability and replacement values and evaluate undiscounted cash flows of the underlying business or assets. Currently, management does not believe any of its long-lived assets are impaired.

Net sales includes revenue derived from sales of products and services. We recognize revenue when it is realized or realizable and earned, when we have persuasive evidence of an arrangement, the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. Revenue is reduced for estimated customer returns and other allowances.

Revenue from product sales is recognized when title has passed (usually at the time the product is shipped to the customer) and there are no unfulfilled company obligations that affect the customer's final acceptance of the arrangement. Cost of these obligations, if any, would be accrued when the corresponding revenue is recognized. Revenue from one-time charge licensed software is recognized at the inception of the license term.

Revenue associated with long term contracts is recognized using the percentage-of-completion method of accounting. In using this method, we record revenue by reference to the costs incurred to date and the estimated costs remaining to fulfill the contracts or based upon the completion of certain tasks. Provisions for losses are recognized during the period in which the loss first becomes apparent.

Revenue from time and material service contracts is recognized as the services are provided. Revenue from maintenance contracts is recognized ratably over the contractual period.

At times we enter into transactions that include multiple element arrangements, which may include any combination of hardware, services or software. When some elements are delivered prior to others in an arrangement, revenue is deferred until the delivery of the last element unless there is all of the following:

• Vendor-specified objective evidence of fair value of the undelivered elements.
• The functionality of the delivered elements is not dependent on the undelivered elements.
• Delivery of the delivered element represents the culmination of the earnings process.

Advertising costs are expensed as incurred. Advertising expense was $0.14 million in 2002, $0.27 million in 2001 and $0.38 million in 2000.

We account for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end.

We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized.

Assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at the current rate of exchange, while revenues and expenses are translated at the average exchange rate during the year. Adjustments from translating foreign subsidiaries' financial statements are reported as a component of other comprehensive loss. Transaction gains or losses are included in other income and expense, net. The net impact of foreign exchange transactions for the years ended December 31, 2002, 2001 and 2000 were a gain of $0.4 million, a loss of $0.05 million and a loss of $0.3 million, respectively.

We report our net loss per share in accordance with Financial Accounting Standards Board Statement No. 128, "Earnings Per Share." Basic net loss per common share is computed based on the weighted average number of common shares outstanding during the year. Diluted net loss per common share is computed based on the weighted average number of common shares outstanding during the year plus, when dilutive, additional shares issuable upon the assumed exercise of outstanding common stock equivalents. For 2002, 2001 and 2000 common stock equivalents of 18,794,000, 16,401,000, and 8,434,000, respectively, were not included in the computation of diluted net loss per common share because their effect would have been anti-dilutive.

We account for our stock compensation plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and its related interpretations, which requires that compensation cost be recognized on the date of grant for stock options issued based on the difference, if any, between the fair market value of our stock and the exercise price. Under this intrinsic value method prescribed under APB 25 there was no compensation expense recognized for the years ended December 31, 2002, 2001 and 2000. We have adopted the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation," which allows entities to continue to apply the provisions of APB 25 for transactions with employees and provides pro-forma earnings disclosures for employee stock grants as if the fair value based method of accounting in SFAS No. 123 had been applied to these stock grants. The following table illustrates the effect on net loss an d net loss per share if the fair value method had been applied (in thousands except per share amounts):

We account for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF 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 July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to at the date an entity commits to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We will adopt SFAS No. 146 as of January 1, 2003, for any exit or disposal activities after that date.

In December 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation expands the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis and will be adopted by us as of January 1, 2003, for any guarantees issued or modified after that date. There are no significant guarantees as of December 31, 2002.

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure. An amendment of FASB Statement No. 123." The Company is choosing to continue with its current practice of applying the recognition and measurement principles of APB No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure requirements of SFAS No. 148.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," which addresses consolidation of variable interest entities. FIN 46 expands the criteria for consideration in determining whether a variable interest entity should be consolidated by a business entity, and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 is not expected to have a material effect on the Company's resu lts of operations, cash flows or financial position.

Certain reclassification of prior years' data have been made to conform to 2002 classifications.

In January 2001, we acquired Interocity Development Corporation ("Interocity"), a small, privately held company. The purchase price consisted of $5 million in cash and approximately 633,000 shares of our company's common stock ($1.3 million) accounted for based on the stock price two days before and two days after the announcement, and direct acquisition costs of approximately $0.2 million. The acquisition was accounted for as a purchase in accordance with APB16 and accordingly, the $6.2 million excess of the purchase price over the value of the net assets acquired was recorded as goodwill to be amortized over a period of three years. Supplemental pro-forma information required by APB16 has been determined to be immaterial.

Interocity was a relative start up web site development company (commenced operations in 1999) providing streaming media design and development services, a market that we thought offered growth opportunities as we expected businesses to start to move towards Internet-based broadcasting and would require related consulting services in their effort. We acquired Interocity to be the cornerstone of our then new Streaming Services Division that we had started in late 2000 to build an internal infrastructure to enter this market. However, due to a sharp slowdown in the economy and a sudden and marked decline in the Internet business market in particular at the end of 2000 and into early 2001, the Streaming Services division (which included the Interocity operations) experienced lower than expected revenues in the first quarter (only $0.18 million) and early second quarter (only $0.04 million) of 2001, and the demand that we had anticipated for such services did not materialize. It became ap parent in the second quarter of 2001 that revenues would not be even remotely sufficient to support the accelerating costs of entering the streaming services market (Streaming Services division operating expenses amounted to $2.9 million for the first quarter and $1.7 million, excluding $8.3 million of restructuring and unusual charges, for the second quarter), and that the Streaming Services division would be a significant net user of cash that we needed for our core business, for the foreseeable future. Consequently, we quickly decided to close down the Streaming Services division and assessed the recoverability of our investment in Interocity. Our assessment concluded that the recoverability was minimal based on a comparison of undiscounted cash flow from forecasted revenues and potential disposition to the net carrying amount of our investment in Interocity in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Asset s to be Disposed of" ("FAS 121"). Consequently we determined that the goodwill associated with the acquisition of Interocity was permanently impaired and should be written off. The actual impairment amount to be written off was calculated using a discounted cash flow method. Accordingly, we determined that the entire remaining unamortized net asset of $5.5 million was non-recoverable, and recognized a goodwill impairment charge of $5.5 million during the second quarter of 2001.

3. GOODWILL IMPAIRMENT, RESTRUCTURING AND OTHER

We recorded goodwill impairment, restructuring and other unusual charges totaling $12.5 million during the second, third and fourth quarters of 2001 as summarized in the table below (in thousands):

	Q2	Q3	Q4	Total
Goodwill impairment	$5,478	$3,595	$0	$9,073
Fixed assets	1,504	0	0	1,504
Severance	749	0	571	1,320
Lease commitments	523	0	0	523
Other	48	0	0	48
	$8,302	$3,595	$571	$12,468
Breakdown:
Non cash charges	$6,982	$3,595	$    0	$10,577
Cash charges	1,320	0	571	1,891
Remaining cash outlays
at December 31, 2001	230	0	140	370
at December 31, 2002	0	0	0	0

The $8.3 million charge incurred in the second quarter was directly related to a restructuring involving the closing down of our Streaming Services division. Of this charge, $5.5 million related to the impairment of goodwill from our investment in Interocity, which was the core component of our Streaming Services division, as is explained in more detail below. The $3.6 million charge incurred in the third quarter was directly related to an impairment of goodwill from our investment in our Pro-Bel division, as is explained further below. The $0.6 million charge incurred in the fourth quarter was related to a company-wide restructuring plan effected to bring costs and expenses in line with forecasted revenues. Of the total 2001 charges of $12.5 million, $10.6 million were non-cash charges, consisting of the goodwill impairment and fixed assets write-offs, and the balance of $1.9 million were cash charges, consisting of severance payments, lease payments and other minor payments. The majo rity of the cash charges were paid out in 2001, with the balance paid out during 2002 as follows. The total remaining cash obligation at December 31, 2001 related to the second and fourth quarter restructurings equaled $0.37 million consisting of $0.11 million in lease commitments, which amount was paid out of working capital in roughly equal monthly amounts over the related lease term through the fourth quarter of 2002, and $0.26 million in severance costs that were paid out of working capital during the severance period running through May 2002.

The leased offices in New York, NY, London, U.K., Slough, U.K., Atlanta, GA and Cupertino, CA, were closed and the related liabilities were accrued or written-off in the second quarter, as were operating leases for software and leased communication lines, in connection with the closure of the Streaming Services division. Subsequently, the leases related to closed offices were either subleased or expired. Charges incurred in connection with theses leases were $0.5 million.

We paid severance to 40 employees, representing all of our Streaming Services division employees who were made redundant by the closure of this division. Virtually all types of positions were eliminated including managers, sales persons, consultants and support and administrative staff. Employee severance costs amounted to $0.7 million. Severance consisted of salary and benefits continuance for a period of time and was determined based on length of service or, in a few cases, as per the terms of employment agreements.

Concurrent with the closing down of our Streaming Services division, we evaluated our investment in Interocity, the core component of that Division, in accordance with FAS 121. We assessed the recoverability of our investment in Interocity by comparing the undiscounted future cash flows from forecasted results of operations and its potential disposition with the carrying amount of our investment. As a result of this analysis, we determined that the expected future cash flows would be insufficient to recover the carrying value of our investment and determined the asset was impaired. Accordingly, we determined that the entire net asset of $5.5 million was non-recoverable and recognized a goodwill impairment charge of $5.5 million during the second quarter of 2001.

In creating the Streaming Services division, we invested in computer equipment, servers and furniture. When the division was closed those total fixed assets that could not be used elsewhere in the Company, or sold, were written-off in the second quarter in the amount of their depreciated carrying value of $1.5 million.

In the third quarter of 2001, due to continued poor results of our Pro-Bel division, we assessed the recoverability of our investment in Pro-Bel in accordance with FAS 121 by comparing the undiscounted future cash flows from forecasted results of operations with the carrying value of our investment. As a result of this analysis, we determined that the expected future cash flows would be insufficient to recover the carrying value of our investment and determined the asset was impaired. Accordingly, we recognized a goodwill impairment charge of $3.6 million during the third quarter of 2001. The amount of the goodwill impairment was calculated by comparing the carrying value of our investment with the present value of our estimated future cash flows.

In the fourth quarter of 2001, we implemented a company-wide restructuring plan. Severance associated with the elimination/termination of 66 employees in implementing the restructuring plan was $0.57 million. Positions were eliminated in virtually all functions of the Company including marketing, manufacturing and testing, customer support, service and training, finance, support and administration and research and development. Severance consisting of salary and benefits continuance for a period of time was determined based on length of service or, in some cases, as per the terms of employment agreements. Cash outlays related to severance of $0.43 million were made during the fourth quarter of 2001 and approximately $0.14 million was paid out during the first and second quarters of 2002, and was accrued for as of December 31, 2001.

Our investment in equity securities of vizrt Ltd. (symbol VIZ - traded on Neuer Market, Frankfurt, Germany) is categorized as available for sale and has been reflected in our balance sheet at December 31, 2002 and 2001 at fair market value of $0.08 million and $0.04 million, respectively. A net unrealized loss of $0.2 million and $0.3 million is reported as a component of other comprehensive income at December 31, 2002 and 2001, respectively. During 2001 and 2000, we recognized a loss of $0.33 million and a gain of $0.6 million on the sale of a portion of such securities, respectively.

5. INTANGIBLE ASSETS

In November 2000, we purchased a 20% interest in Video Technics, Inc. ("Video Technics"), which develops software for the Chyron Aprisa Clip/Stillstore systems. The purchase price consisted of $0.5 million in cash and $0.6 million in stock (300,000 shares) accounted for based on the stock price two days before and two days after the announcement. The investment is accounted for under the equity method of accounting.

The excess of the aggregate purchase price over the fair market value of net assets acquired, of approximately $1.1 million, has been ascribed to an exclusive sales and marketing agreement and is being amortized over three years pursuant to Statement of Financial Accounting Standards No. 142 "Goodwill and Intangible Assets." Amortization of this intangible approximated $0.35 million in 2002 and 2001. As of December 31, 2002 and 2001 the gross asset balance was $1.1 million and the accumulated amortization was $0.8 million and $0.5 million, respectively. Amortization for the year ended December 31, 2003 will be $0.25 million.

Accounts receivable are stated net of an allowance for doubtful accounts of $2.1 million and $1.9 million at December 31, 2002 and 2001, respectively. Accounts receivable are principally due from customers in, and dealers serving, the broadcast video industry and non-broadcast display markets. At December 31, 2002 and 2001, receivables included approximately $3.7 million and $4.9 million, respectively, due from foreign customers.

Bad debt expense amounted to $0.2 million, $0.2 million and $0.9 million in 2002, 2001 and 2000, respectively. We periodically evaluate the credit worthiness of our customers and determine whether collateral (in the form of letters of credit or liens on equipment sold) should be taken or whether reduced credit limits are necessary. Credit losses have consistently been within management's expectations. The carrying amounts of accounts receivable approximate their fair values.

Inventory is comprised of the following (in thousands):

As a result of the transition from the legacy iNFiNiT! family of products to the Duet line, it became apparent that inventory contained components, subassemblies and finished goods that were deemed to be slow moving or obsolete. Consequently, we wrote-off $3.2 million of inventory in the third quarter of 2001 which was recorded as a component of cost of sales.

Property and equipment consist of the following (in thousands):

During the second quarter of 2001, we wrote-off computer equipment, servers and furniture as a result of closing down the Streaming Services division. Total fixed assets written-off were $1.5 million.

Machinery and equipment at December 31, 2002 and 2001 includes $0.44 million, and $0.45 million, respectively, of assets held under capital lease obligations. Accumulated depreciation and amortization at December 31, 2002 and 2001 includes $0.22 million and $0.12 million, respectively, attributable to assets held under capital lease obligations.

Depreciation expense, which includes amortization of assets under capital lease, was $1.6 million, $1.9 million and $2.6 million in 2002, 2001 and 2000, respectively.

Accounts payable and accrued expenses consist of the following (in thousands):

Long-term debt consists of the following (in thousands):

(a) At December 31, 2002, we have a $5.3 million credit facility with a U.S. bank, under which we have a term loan and a revolving line of credit. In March 2003, we reduced this facility to $4.0 million and extended it to January 2005. In December 2001, we entered into a term loan arrangement for borrowings of $2.1 million. Principal payments on the term loan during 2003 are as follows: $75,000 in January, $150,000 in February, $250,000 in March, $150,000 in each of April-August and a final payment in September of $125,000. Interest will be payable monthly at Prime plus 2% (6.25% at December 31, 2002). We also have the ability to borrow on a revolving credit basis based on levels of eligible receivables and inventory. Interest is payable monthly at a rate of Prime plus 1% (5.25% at December 31, 2002).

In addition, we pay a monthly commitment fee equal to one half of 1% per annum of the daily unused portion of the facility. Total commitment fees paid during 2002, 2001 and 2000 were not significant.

The entire facility is secured by Chyron's accounts receivable and inventory and the common stock of Pro-Bel. This facility requires that we achieve certain quarterly financial covenants with respect to our U.S. operations: a designated minimum EBITDA; maintain in a pledged account at our U.S. bank a minimum cash balance of $1 million at all times; and, achieve a set fixed charge ratio for each of the quarters of 2003 and upon repayment on December 31, 2003 of the senior subordinated convertible notes plus accrued interest, maintain a minimum undrawn availability of $0.25 million at all times under our revolving line of credit. The agreement also prohibits us from paying dividends in excess of 25% of net income in any fiscal year. The bank has the right to call this facility if these financial covenants are not met.

(b) Pro-Bel has a commercial mortgage term loan and overdraft facility with a U.K. bank. The loan is secured by a building and property located in the United Kingdom. Interest is equal to LIBOR plus 2% (6% at December 31, 2002). The loan is payable in quarterly installments of 21,000 British Pounds Sterling (US$0.03 million, converted at the December 31, 2002 exchange rate) plus interest.

The overdraft facility is renewable on an annual basis and expires on December 31, 2003. This agreement, provides for an overdraft facility of 2 million British Pounds Sterling. Total borrowings are limited to amounts computed under a formula for eligible accounts receivable. Interest is equal to the bank's base rate plus 2.25% (6.25% at December 31, 2002) and is payable quarterly. It is currently our intention to refinance this facility prior to its expiration date.

Aggregate maturities of long-term debt including convertible debentures (described in Note 11) are as follows (in thousands):

2003	$7,627
2004	9,705
2005	133
2006	133
2007	133
2008 and thereafter	554

The carrying amounts of long-term debt instruments approximate their fair values.

During late 1998 and 1999 we raised $7.7 million through the issuance of Series A and Series B 8% subordinated convertible debentures, due December 31, 2003, to certain persons and entities, including certain directors, affiliates and shareholders of the Company. The Series A debentures, totaling $1.2 million, pay interest quarterly and are convertible, at any time, at the option of the holders thereof, into common stock of the Company at a conversion price of $2.466 per share. The Series A debentures may be redeemed by the Company at any time after December 31, 1999 for a price equal to the principal and accrued but unpaid interest on the debentures at the redemption date.

Under the original terms, the Series B debentures, totaling $6.5 million, are convertible, at any time, at the option of the holders thereof, into common stock of the Company at a conversion price of $1.625 per share. Interest is payable quarterly and may be paid by increasing the amount of principal owed thereunder. In certain circumstances, the Series B debentures may be redeemed by the Company, commencing one year from issue date, for a price equal to the principal and accrued but unpaid interest at the redemption date.

On December 17, 2001, the terms of the existing Series A and Series B subordinated convertible debentures were amended to extend the maturity date of the Series A and B debentures from December 31, 2003 to December 31, 2004, increase the interest rate from 8% to 12%, and provide that until December 31, 2004, interest may be paid in the form of additional debentures, or in cash, at our sole option. On February 28, 2002, our board of directors resolved to pay interest on the Series A and Series B convertible debentures only by increasing the amount of principal owed thereunder. At December 31, 2002 the total accumulated principal of Series A and B debentures, including additional debentures paid in kind, total $1.4 million and $8.3 million, respectively. Interest expense attributable to Series A and B debentures, in the form of additional debentures, totaled $1.1 million, $0.56 million and $0.13 million in 2002, 2001 and 2000, respectively.

In connection with the amendment to the Series A and Series B debentures, we issued warrants to holders of the amended Series A and Series B debentures to purchase an aggregate of 861,027 shares of common stock of the Company at an exercise price equal to $0.35 per share. The fair value of the warrants of $0.13 million have been reflected as a discount to the related obligation, which will be amortized as additional interest expense over the life of the debenture. The warrants were valued using the Black-Scholes pricing model using the closing market price and the risk-free interest rate on their issue date. During the year ended December 31, 2002 amortization expense was $0.04 million. Amortization for the year ended December 31, 2003 will be consistent. The warrants were vested immediately and are exercisable through December 31, 2004. A registration statement relating to the shares of common stock underlying the warrants was initially filed with the Securities and Exchange Commissi on in 2002 and is pending further amendment.

The Series A and Series B debentures have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. The sales of the Series A and Series B debentures were made in reliance upon the exemption from the registration provisions of the Securities Act of 1933, as amended, afforded by Section 4(2) thereof and/or Regulation D promulgated thereunder, as a transaction by an issuer not involving a public offering. To the best of our knowledge, the purchasers of the Series A and Series B debentures acquired them for their own accounts, and not with a view to any distribution thereof.

In December 2001, we completed a private placement of 12% Senior Subordinated Convertible Notes and received $2.21 million, exclusive of offering costs of $0.2 million, which have been deferred and will be reflected as additional interest expense over the term of the Notes. These Senior Subordinated Notes have a maturity date of December 31, 2003. Pursuant to the terms of the agreement, interest is payable in the form of additional Senior Subordinated Notes, or in cash, at the option of the Company. On February 28, 2002, the board of directors agreed to amend the Senior Subordinated Notes and resolved that we will only pay interest on the Senior Subordinated Notes by increasing the amount of principal owed thereunder. At December 31, 2002 the total accumulated principal, including $0.3 million of additional debentures paid in kind, was $2.5 million. The Senior Subordinated Notes are immediately convertible into the Company's common stock at a conversion price of $0.35. A registration s tatement relating to the shares of common stock underlying the Senior Subordinated Notes was filed with the Securities and Exchange Commission in 2002 and is pending further amendment.

Activity in 2001 relating our common stock included 632,412 shares issued in connection with our acquisition of Interocity Development Corporation and 58,898 shares issued to certain executive officers as partial payment of their bonus compensation for 2000.

In April 2000, we raised gross proceeds of $20 million in connection with a private placement of 3,076,923 shares of common stock at a price of $6.50. The offering price per share was determined based on negotiations between the Company and its placement agents taking into account the historical trading history of the common stock and market conditions at such time. The price of the common stock, as listed on the New York Stock Exchange, ranged between $5.44 and $9.44 on the various closing dates. In connection with the private placement, we issued 151,914 warrants to the placement agents and 60,000 warrants to a consulting company to purchase common stock of the Company at an exercise price of $6.50. The warrants were valued using the Black-Scholes pricing model using the closing market price and the risk-free interest rate on their issue date. These warrants, which were immediately exercisable upon issuance, will expire in April 2005.

In November 2000, Microsoft purchased 3,096,774 shares of common stock of the Company at a price of $1.9375, totaling $6 million. We used the proceeds from the sale to fund the development of interactive tools and the growth of our Streaming Services division. Microsoft sold all of those shares in March 2002. Also in November 2000, we issued 300,000 shares of common stock in connection with our purchase of a 20% interest in Video Technics.

Components and activity related to accumulated other comprehensive income is as follows (in thousands):

			Accumulated
	Foreign Currency	Net Unrealized	Other
	Translation	Gain (Loss) on	Comprehensive
	Adjustments	Marketable Securities	Income (Loss)
January 1, 2000	$    354	$  2,647	$  3,001
Change for period	(768)	(2,781)	(3,549)
December 31, 2000	(414)	(134)	(548)
Change for period	(166)	(124)	(290)
December 31, 2001	(580)	(258)	(838)
Change for period	202	37	239
December 31, 2002	$  (378)	$ (221)	$   (599)

Incentive awards are provided to employees under the terms of our 1999 Incentive Compensation Plan. The Plan allows for the award of incentive and non-incentive options to employees and non-incentive options to non-employee members of our board of directors. The Plan is administered by a committee, designated by the board, to determine the time and circumstances under which an employee option may be exercised. Generally, options vest 1/3 each year, are fully vested three years from grant date and have a term of ten years. At December 31, 2002, there were 0.3 million shares available to be granted under the Plan.

Transactions involving stock options are summarized as follows:

			Weighted
		Range of	Average
	Stock	Exercise	Exercise
	Options	Price	Price
	Outstanding	Per Share	Per Share	Exercisable
Balance at January 1, 2000	2,399,924	$0.75 - 16.13	$2.09	855,036
Granted	1,345,499	1.88 - 4.00	2.48
Exercised	(233,962)	0.75 - 9.38	1.00
Canceled	(157,634)	0.75 - 5.38	1.88
Balance at December 31, 2000	3,353,827	0.75 - 16.13	2.23	1,072,676
Granted	1,697,500	0.32 - 2.13	0.92
Exercised	(1,914)	0.75	0.75
Canceled	(1,280,901)	0.55 - 5.38	2.08
Balance at December 31, 2001	3,768,512	0.32 - 16.13	1.70	2,088,347
Granted	1,271,000	0.26 - 0.61	0.32
Canceled	(257,180)	0.32 - 5.38	1.70
Balance at December 31, 2002	4,782,332	0.26 - 16.13	1.33	2,910,539

The following table summarizes information concerning currently outstanding and exercisable stock options:

If we had elected to recognize compensation expense based upon the fair values at the grant date for awards under this plan consistent with the methodology prescribed by SFAS No. 123, the effect on our net loss and net loss per share has been illustrated in our footnote entitled "Summary of Significant Accounting Policies." The pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period for purposes of future pro forma disclosures, and additional options may be granted in future years. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 2002, 2001 and 2000: dividend yield of 0%; expected volatility of 125.1% in 2002 and 110.9% in 2001 and 2000 and expected life of 4 years. The weighted average risk free interest rates for 2002, 2001 and 2000 were 3.08%, 4.25% and 6.04%, res pectively. Using these assumptions, the weighted average grant date fair value of options granted during 2002, 2001 and 2000 was $0.26, $0.68 and $1.14, respectively.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options.

The provision for income taxes consists of the following (in thousands):

	2002	2001	2000
Current:
Federal and State	$  0	$  0	$28
Foreign	0	0	0
	0	0	28
Deferred:
Federal and State	0	0	(28)
Foreign	0	0	0
Total provision	$  0	$  0	$  0

The effective income tax rate differed from the Federal statutory rate as follows (in thousands):

The components of our deferred tax assets and deferred tax liabilities are as follows (in thousands):

	December 31,
	2002	2001
Post-reorganization net operating loss carryforward	$17,703	$17,629
Pre-reorganization net operating loss carryforward	4,461	4,461
Pre-reorganization deductible temporary differences	2,218	2,161
Other deductible temporary differences	7,294	8,826
Total deferred tax assets	31,676	33,077
Pre-reorganization taxable temporary differences	648	83
Other taxable temporary differences	184	307
Total deferred tax liabilities	832	390
Deferred tax valuation allowance	30,844	32,687
Net deferred tax asset	$         0	$         0