PATH 1 NETWORK TECHNOLOGIES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 31, 2000.
or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to____________.

Commission File Number (000-30928)

PATH 1 NETWORK TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)

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

3636 NOBEL DRIVE, SUITE 275, SAN DIEGO, CALIFORNIA 92122
(858) 450-4220
(Address, including zip code, and telephone number, including area code, of
principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, US$.001 par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of January 31, 2001 was approximately US$57,400,000 (based on
the closing price for shares of the registrant's Class A Common Stock as
reported by the OTC Bulletin for the last trading day prior to that date).
Shares of Class A Common Stock held by each officer, director and holder of 5%
or more of the outstanding Class A Common Stock have been excluded in that
such persons may be deemed affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant's Class A Common Stock,
US$.001 par value, as of January 31, 2001 was 8,583,901.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 2001 Annual Meeting are incorporated herein by reference into Part
III of this Report. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the registrant's fiscal year
ended December 31, 2000.

Certain exhibits filed with the registrant's prior registration statement on
Form 10/A, and Form 10-Q and 8-K are incorporated herein by reference into
Part IV of this report.

PATH 1 NETWORK TECHNOLOGIES INC.

FORM 10-K

For the Year Ended December 31, 2000

INDEX

PART I

Item 1. Business

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters

Item 6. Selected Financial Data

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act*

Item 11. Executive Compensation*

Item 12. Security Ownership of Certain Beneficial Owners and Management*

Item 13. Certain Relationships and Related Transactions*

*Incorporated by reference from our definitive proxy statement relating to the
annual meeting of stockholders scheduled for June 1, 2001, which we will file
with the Securities and Exchange Commission within 120 days after our December
31, 2000 fiscal year end.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Signatures

PART I

Item 1. Business

Forward Looking Statements

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

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no obligation to publicly update any
of the forward-looking statements after the date of this report to conform
such statements to actual results or to changes in our expectations.

Readers are also urged to carefully review and consider the various
disclosures made by us which attempt to advise interested parties of the
factors which affect our business, including without limitation the
disclosures made under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and under the caption "Risk
Factors" included herein and in Path 1's General Registration Statement on
Form 10/A filed June 19, 2000. These are factors that we think could cause
our actual results to differ materially from expected and historical events.

The following comments should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements
contained herein.

Overview

Path 1 Network Technologies Inc. ("Path 1") has developed communications
technologies that enable the transport of real-time multimedia over Internet
Protocol ("IP") networks and employs a patented approach to Quality of Service
("QoS"). Path 1's technology enables the transport of broadcast quality video,
audio, telephony and other time-critical data, such as sensor and control
data, over an IP Ethernet network with minimal latency and jitter. Path 1
believes that the greatest demands on the Internet and IP-based wide-area
networks will take the form of broadcast video distribution, video-on-demand,
video networking, interactive video and other forms of high quality video
media consumption. The Internet and most enterprise networks today are using
Ethernet/IP or SONET/ATM transport protocols. Current network capacity is
inadequate to handle the video delivery demands of the future. Path 1 has
begun a planned phased approach of deploying its technology, beginning with
validation and trials of current development platforms and potentially
building to full end-to-end solutions to address the emerging demands for the
delivery of high quality video, voice and data over IP networks.

Path 1 has developed and patented several techniques that address the network
requirements to distribute video over legacy IP environments. This combined
technology and know-how provide the critical components of the required end-
to-end solution. This system, called "Path 1 QoS," includes our patented core
TrueCircuitTM technology. Path 1 is currently undertaking a planned phased
deployment of its technology and is using its in-house engineering expertise
to position itself as a technical leader in the growing broadband marketplace.
In support of this objective, Path 1 is developing technical expertise in the
areas of: storage devices (servers), network bandwidth management,
synchronization, MPEG transmission, subscriber software services, security and
IP home networking devices.

Today, Path 1 is demonstrating equipment and engaging development partners and
intends to migrate its technology into the heart of this new and growing
broadband market. IP networks offer significant advantages in the areas of
data handling, deployment cost and worldwide acceptance and availability.
However, one limiting factor has been the inability to offer video across
commercial wide-area IP networks with an acceptable level of quality and
reliability. Path 1 is addressing many of the issues associated with this
challenge. With Path 1's technology, broadcast-quality video is being
demonstrated, end-to-end with a high degree of reliability. In fact, during
early 2001, Path 1 successfully demonstrated coast-to-coast (US) transmission
of broadcast television material in an all-IP offering.

Path 1's business approach is to: 1) develop an end-to-end technology video
network solution using in-house technologies or by links and partnerships with
outside enterprises; 2) develop channel partners to develop and penetrate
video distribution markets; and 3) reduce cost and enhance the performance of
solutions through Application Specific Integrated Circuit ("ASIC")
implementations. Path 1 intends to leverage its TrueCircuitTM technology as an
enabling technology integral to the development of end-to-end solutions.

Path 1 is working to transition from a development stage company to an
operating company. During 2000, Path 1 raised US$4.4 million of capital from
private investors and entered into a series of agreements with Leitch
Technology Corporation ("Leitch") wherein Path 1 received US$10.3 million in
cash plus approximately US$3.1 million in Leitch common stock. These funds
were used to develop Path 1's technology, acquire a group of ASIC design
engineers, begin a marketing program, develop prototypes utilizing Path 1's
technology and for general working capital purposes. Path 1 currently
believes it needs to seek approximately US$15-30 million in additional
capital from private investors and strategic partners to implement its
business strategies and fund its plan for future growth.

Summary of 2000 Events

During 2000, Path 1 entered into a strategic relationship with Leitch under
which Leitch made an investment in Path 1 in return for the exclusive rights
to use TrueCircuitTM technology in the professional broadcast market and the
non-exclusive rights in other markets. Under the agreements, Path 1 received
US$10.3 million in cash plus approximately US$3.1 million in Leitch common
Stock.

In addition to the Leitch strategic partnership, Path 1 raised approximately
US$4.4 million of capital from private investors in 2000.

During 2000 the company transitioned from the creation of new technologies to
prototype development in preparation for product deployment. The following
three prototype products are currently under development:

- - PG 1 Gigabit Ethernet Gateway, which enables broadcast quality uncompressed
audio/video or high quality ASI compressed video to be transported over a
Gigabit Ethernet Network with minimal latency and jitter. This prototype
product was featured at major trade shows, including the Path 1 Exhibit at
NAB (National Association of Broadcasters) and Networld+Interop as well as
the Leitch Exhibit at IBC (International Broadcasting Conference) in
Amsterdam, Netherlands.

- - TMG II, which enables the transport of compressed MPEG II or MJPEG video
over a 10/100 Base T network in conjunction with other real-time data
streams, such as audio, sensor and control data. The TMG II is a modular
design, which can be tailored to different customer applications and
ultimately can be utilized for wireless communications.

- - PGA 100, which distributes multiple MPEG II streams of entertainment video
from the head end to the consumer over an IP Ethernet network. Development
on this intended product was started during the fourth quarter of fiscal
year 2000. The prototype is expected to be completed during the third
quarter of fiscal year 2001.

Path 1 also entered into negotiations with BarcoNet, a Belgian-based provider
of broadband network equipment and services, for payment of non-recurring
engineering costs for PGA 100 development. An agreement was reached with
BarcoNet during February 2001 that includes payments to Path 1 totaling US$1.7
million. Payment of a portion of the US$1.7 million is based upon Path 1
meeting certain milestones of product development and the acceptance of the
product tests by Barconet. In conjunction with the agreement Path 1 will place
100,000 shares of its class A common stock into an escrow account as collateral
for a US$1 million advance to be paid by Barconet upon signing an Acceptance
Test Plan.

The year also marked the announcement of the acquisition of an ASIC design
group, METAR ADC, a division of a Romanian based company. This acquisition
was completed in February 2001. This addition to Path 1 provides the ASIC
design expertise of a team of designers, as well as intellectual property and
know-how that will facilitate Path 1's objective of providing a one-chip
solution to QoS over IP. The labor costs in the Romanian market provide for
cost-effective ASIC development. In conjunction with the purchase Path 1
entered into an employment agreement with Metar's President. Terms of the
employment agreement include options to purchase class B common stock and a
bonus of a US$4 million in Path 1 stock, provided certain technologies are
developed by June 2001.

Industry Background

The telecommunications industry is experiencing an emphasis on broadband
communications, which is driving the demand for high quality video over IP in
the entertainment industry, business-to-business communications and ultimately
Video-on-Demand to the home. Traditionally, IP, while cost-effective for non
real-time data communications, has not been satisfactory for the transport of
real-time data streams, such as video, audio, sensor and control data due, to
quality of service issues.

We believe the broadband global network, in order to meet the demands of the
future, will have to move data in unprecedented quantities from distributed
server farms and real-time sources through DWDM (Dense Wavelength Division
Multiplexing) fiber backbones through local-office switches and into the home
and enterprise without loss, delay or interruption of service. Today's IP
networks are essentially big "party-lines" and offer no end-to-end transport
guarantees. We believe available bandwidth will be insufficient to handle the
random intensity of the data traffic and the huge loads will render packet-by-
packet processing impossible. We believe firewalls will collapse under the
weight of processing billions of packets a second through complex algorithms.

There are major challenges that face the transport of video and other real-
time data over IP networks. One of these is jitter. Because the IP world is
made up of an indeterminate number of switching hardware, bandwidths and line
speeds, the typical route that pieces of information (individual data packets)
can take for end-to-end delivery becomes near impossible to predict. Computer
data is tolerant of packet-switching jitter (the continuous breakage in smooth
delivery) and other QoS problems because computer data does not require real-
time delivery, i.e., it does not matter when or in what order the packets
arrive. In contrast, real-time services (e.g. voice, audio and live,
interactive video) require timely, predictable and consistent delivery.
Because of the QoS problems inherent in current packet switched networks,
multimedia and other time critical transmissions experience long delays and
degradation. These quality issues render IP networks unsuitable for the
transmission of multiple streams of real-time data.

Delays and delivery problems, associated with real-time transmissions over IP,
result when network traffic volume is high from too much packet carrying data
competing for the same narrow transmission lines (bandwidth). This condition
exists because IP computer networks transport data on a "best efforts" basis,
which is adequate for non real-time data communication. Until recently, the
primary demand has been for non real-time data. IP's ability to meet that
requirement, along with its cost-effectiveness, has resulted in the IP
protocol becoming the de facto standard for computer networks and the most
prevalent infrastructure in the world.

The Challenge

As networks integrate and become faster, Path 1 projects an increasing demand
for real-time services driven by new applications and ever-increasing
expectations on the part of business and consumers. Path 1 believes that IP
network traffic of the future will be dominated by interactive applications
and services such as: interactive video on demand, video conferencing, virtual
reality, IP telephony, automation and transaction processing.

Real-time services require predictability and minimal delays from end-to-end.
If not addressed, problems associated with video latency and jitter become
apparent. To meet this demand, the network infrastructure must provide
sufficient use of bandwidth, and guarantee an acceptable quality of service.
As more high-speed corporate Local Area Networks (LANs) connect to slower
external Wide Area Networks (WANs), and as newer high-speed networks link to
existing, slower ones, bottlenecks will arise where faster networks meet
slower ones. As these networks saturate, congestion will increase. The
competing demands for network available bandwidth will cause contention that
will further degrade the quality of service provided over the network.

Fundamentally this causes tremendous problems for applications that require
predictable transmission of data. IP networks transmit data in divisions
known as packets. The aforementioned bottlenecks coupled with unpredictable
volumes and bursts of data, across a spectrum of hardware, hops, routes, and
transmission speeds, create a very hostile environment. This makes it nearly
impossible to get a seamless and continuous transmission stream, end-to-end,
for any time critical applications carrying dense data such as video without
experiencing difficulties. To be accepted, the solution to this problem must
reflect the same levels of quality that the consumer has come to expect from
an analogous environment like the circuit-switched telephone service of today.

The Path 1 Solution

Path 1's technology satisfies these expectations and quality of service
requirements. It is designed to industry standards and protocols and we
believe it is compatible with today's IP networks. Path 1 developed its
patented TrueCircuitTM technology, together with specialized expertise and
know-how in video over IP transport, to address the growing demand for high
quality video and other time-critical data streams over broadband networks.
The key to the global broadband network is precise synchronization in the
transport of information packets over IP networks. This requires establishing
secure end-to-end virtual circuits with precision coordination during
initiation, transport and final delivery of IP information packets. The
clocks and "just-in-time" synchronization of every single packet moving
through the system would replace the queue-based systems of today, which are
prone to bottlenecks. TrueCircuitTM technology manages network traffic by
dynamically setting up and tearing down separate dedicated channels across the
network for individual real-time data streams. This ability to establish
these "virtual circuits" guarantees the arrival time of every packet from the
point of entry into the network, through every switching element and to the
end user with no known delays, queues and/or lost data. This translates to an
ability to dynamically allocate bandwidth to maximize the utilization of a
network. The TrueCircuitTM technology approach significantly increases
bandwidth utilization over competing systems that allocate fixed
bandwidth and cannot adapt to continuously changing transport requirements.
Path 1's patented TrueCircuitTM technology is software-based and designed to
interface with the specific hardware and infrastructure systems on which it
will be hosted. This allows it to be easily tailored to operate with a
wireless infrastructure, twisted pair telephone wiring or fiber optic cable.

The ability for TrueCircuitTM technology to effectively transmit real-time
data on IP networks yields a host of derived benefits, which include the
following:

1. The elimination or avoidance of bottlenecks in the network, reducing the
need for queuing at network nodes. Because the time-critical data would
now be transported over dedicated channels, the remaining bandwidth can be
used for non-time-critical data. This feature enables businesses to reduce
network equipment costs, as a result of increased utilization of networks
at any given capacity level.

2. TrueCircuitTM technology can operate on legacy Internet Protocol (IP)
networks because it is compatible with industry standards. This
compatibility benefits potential customers such as Internet Service
Providers (ISPs), who would have the ability to provide their customers
with "circuit-switched" QoS for the transmission of real-time signals
within an IP network. Without such guaranteed QoS, there would be visible
delays and degradation of sound and images transmitted over an IP network.

3. TrueCircuitTM technology is also cost-effective for the network owner,
because rather than having to install an entirely new network to increase
capacity, legacy equipment can be conditioned with Path 1 technology to
maximize the existing bandwidth. In addition, TrueCircuitTM technology is
scaleable. The network can be conditioned incrementally, without
impacting the performance of the sections of the network that are not yet
TrueCircuitTM technology enabled.

4. Some of our intended products, based on our TrueCircuitTM technology,
could also offer significant advantages for ISPs by making new billing
approaches possible, such as call-based and/or class-based billing, rather
than just packet-based or flat-rate billing systems that are currently in
use. The fast, automatic set-up and tear-down of dedicated end-to-end
communication channels allows ISPs to adopt a telephone company billing
model based on actual usage, if desired.

With Path 1's patented TrueCircuitTM technology, the QoS issues are well in
hand. This is the only currently available solution (to Path 1's knowledge)
that can deliver the "circuit-switched" QoS directly over IP networks. As a
result, Path 1 is well positioned to capitalize on emerging telecommunications
technology that is rapidly moving toward convergence of real-time multimedia
over IP.

Strategy

Path 1 will utilize two primary strategies to achieve its objectives.

1. Create joint ventures and strategic partnerships:

Path 1 plans to continue to develop strategic alliances that will migrate its
technology into the products and platforms of companies having established
customer relationships and distribution channels. In 2000, Path 1 developed a
strategic partnership with Canadian based Leitch Technology Corporation. In
return for the Leitch investment, Path 1 deeded non-exclusive rights to Leitch
to utilize TrueCircuitTM technology with licensed exclusive rights in the
Professional Broadcasting Market. In February of 2001 Path 1 also completed
negotiations with BarcoNet, a European based provider of broadband network
equipment, to jointly develop a product that will distribute video to the
consumer over IP networks. Path 1 is continuing to seek and form joint
ventures and strategic relationships in order to place its products and
technology into new markets and to obtain access to new and important
technologies to fit its overall end-to-end video strategic plan.

2. Develop end-to-end solutions:

Path 1 intends to participate in the creation of end-to-end video distribution
systems and work with the prominent companies pursuing the leading edge of
this industry. Many companies are working on components of the system without
addressing the integration required to develop a turnkey solution for
business. Path 1 understands the requirements of ISP's, Video Service
Providers (VSP's), cable companies, and others, in assembling a complete
solution and plans to participate via in-house development and/or joint
venture partners in the installation and maintenance of end-to-end video
systems.

By using TrueCircuitTM technology as an enabling technology for Video-over-IP,
value-added features are provided to a product or system. This increased
capability can represent a competitive advantage to our partners/customers and
distinguish them from their competition.

To fully realize its goals, Path 1 intends to utilize a four-phase approach to
implement its strategies. The following is the phased outline for this
approach.

- - Phase I - Establish Path 1 as an industry leader in Video over IP
technology. To accomplish this, Path 1 will focus its efforts on
technology feature validation and customer field trials; thereby validating
the markets and correcting the prototypes based on customer reactions.
Revenues will come from design services, platform revenue and installation
and maintenance services provided through specific customer agreements.

- - Phase II- Establish a leadership position in the Video Gateway Solutions
marketplace. Using the technology and reference designs built and proven
in Phase I, Path 1 will deploy custom gateway solutions for end-users and
integrators. This will require custom products based on gateway platforms
validated during Phase I.

- - Phase III- Expand Path 1's influence into the full end-to-end network
management of video transport over IP networks. These Integrated Video
Network Systems will include installation and support. This phase will
incorporate NetOS and TrueCircuitTM technology into the full integration.

- - Phase IV - Concentrate on developing service solutions for vertical
markets. Examples could include a low cost video conferencing over IP
solution for small business or a centralized video-on-demand training
center for office or home delivery. Path 1's desire is to create a new
channel to distribute high quality video to businesses and to the home.

Path 1 is working to present itself as the link between Broadcast Video and IP
technologies.

Product Platforms

Path 1 is developing and marketing a family of video platforms that are
required as critical components in an end-to-end video over IP network
solution, including amongst others the PG1 Demo Platform, the PGA
Platform, the NetOS Management System and the lower end TMG demo product.

PG 1 Demonstration Platform

The TrueCircuitTM technology enabled PG 1, designed and manufactured by Path
1, is a multi purpose, multi-function multimedia gateway platform that is
being developed for the emerging global carrier markets to provide MPEG over
IP networks and is specifically targeting the broadcast video distribution
market. The PG 1 encapsulates audio/video data streams, synchronizes and
transports the encapsulated data through a high speed Gigabit connection to
the IP network, retrieves encapsulated audio/video data from the IP network
and de-encapsulates into audio/video data streams for use by end devices.

PGA 100

The PGA 100 is currently under development for a customer by Path 1. This
product is a key element in contributing to the video-on-demand (VOD) market
place and it is designed to work with existing hardware. The PGA 100 will have
a single Gigabit Ethernet input, have 4 Digital Video Broadcast (DVB)
Asynchronous Serial Interface (ASI) output ports, will re-multiplex Ethernet
or UDP encapsulated MPEG2 transport streams and will generate multiple program
transport streams in a 1RU (Rack Unit) chassis.

NetOS

The Network and bandwidth management system (NMS) for TrueCircuitTM technology
IP platforms is being designed to control the bandwidth allocation by
provisioning virtual circuits to time critical data, such as video. It may
use topology discovery - the ability to detect the layout and map of devices
residing on a network, bandwidth management - the ability to control how much
bandwidth is allocated to a data stream and provision - the building and
tearing down of virtual circuits.

TMG II Demonstration Platform

The TMG II is a multimedia gateway equipped with TrueCircuitTM technology and
operates using the lower speed and lower cost 10 Based T Ethernet (CAT 5)
prevalent in most offices and multi-tenant installation.

Market

Although the market for the intended TrueCircuitTM technology and products is
global, Path 1 will initially center its marketing efforts on the rapid move
toward IP networking in the United States. Upon a successful marketing and
sales program of Path 1 products in the United States, Path 1 anticipates an
expanded marketing and sales effort to include Europe and Asia, where there is
a growing need for technology that facilitates convergence of disparate
digital information (e.g. full-motion video, audio and telephony).

In the United States, the market for network infrastructure equipment is
dominated by a few large competitors, including companies such as Cisco
Systems, Lucent Technologies, Nortel Networks and 3Com Corporation. These
companies have announced their intention to offer technology for network
convergence. They will either attempt to develop technology themselves or
procure it from others. Therefore, they are potentially powerful competitors
to Path 1 as well as potentially significant strategic partners and/or
customers.

Path 1's TrueCircuitTM technology can be provided as licensed intellectual
property, as a chip-set and reference design for integration, or as a
component of an overall systems solution, or can be embedded in Path 1's own
intended TrueCircuitTM technology hardware products.

Sales and Marketing

Path 1's sales and marketing efforts are focused on providing exposure to the
technology for potential OEMs, system integrators, manufacturers and
distributors, in part by attending trade show and conferences. To the present
time, this has been accomplished with direct sales employees and consultants.
In the future, the company intends to investigate relationships with a select
group of distributors and/or strategic partners with strong relationships in
the industry.

Research & Development

Path 1 from its inception has focused primarily on research and development.
Although the company has moved to the prototype stage and is progressing
toward the development of revenue generating product, the management of Path 1
is strongly committed to a high level of research and development in order to
keep its technological lead in the network communications industry. With
technology progressing rapidly in response to the growing demand for Video
over IP, Path 1 management realizes that only through applying its domain
expertise and continuing to develop patentable technology, can Path 1 continue
to remain the leader in high quality video over IP. .

Path 1 has focused its recent research and development efforts in developing
prototypes for industry trials so Path 1 can effectively demonstrate its
domain expertise and core technologies. To that end, Path 1's short term
research and development efforts will concentrate on improving its abilities
to manage its technology across network infrastructure through continued
development of hardware platforms and ASIC designs that can economically
exploit its core technologies.

Competition

Path 1 has a number of major, entrenched network equipment providers that
are potential competitors, such as Cisco, Nortel (Bay), 3Com, and Lucent.
Each of these vendors has announced a strategy for convergence. All of these
companies can be seen either as potential partners in licensing and
distributing our technology, or as potential competition. Although Path 1 is
initially focusing on high-end applications and markets that require
proprietary technology not yet demonstrated by these companies, there clearly
exists a risk that these companies, or new startups Path 1 is not yet aware
of, may develop their own competitive technology and enter the market.

All the major network equipment manufacturers stress their adherence to
recognized international standards. Path 1 therefore designed TrueCircuitTM
technology as an implementation of QoS over IP that is compatible with all
appropriate IP standards - RSVP/MPLS, IETF DiffServ, and IEEE 803.2p/q. A
major advantage of TrueCircuitTM technology is in its ability to provide ATM
compatibility and QoS over a standard Ethernet or IP network. However, a
potential risk is that one of the major equipment manufacturers may choose to
develop their own, incompatible proprietary standard or write a new standard
in such a fashion as to become incompatible with Path 1's implementation or
Path 1's technology.

Cisco has announced a strong push towards IP telephony. It has announced IP
telephones in the US$300 range, along with the switching equipment to go with
them. However, Cisco has adopted a queue-based implementation of QoS that
gives priority-based preference to packets of data. The problem with queue-
based QoS is that queues introduce unpredictable delay. For telephone signals,
this translates to latency and jitter. For smaller numbers of simultaneous
phone calls, the latency may not be noticeable. The adverse effects of queues
become apparent when telephone or other real-time traffic becomes a large
fraction of the overall network capacity and in high-end applications such as
interactive CD-quality audio or high-quality video. Such applications require
either TrueCircuitTM technology or some other equally effective means for
transporting converged application traffic. In particular, interactive and
high-end video requires very low jitter, under 200 nanoseconds. We believe
TrueCircuitTM technology can provide such latency guaranties whereas queue-
based Weighted Fair Queuing QoS cannot. However, there remains the risk that
Cisco or others may reduce the price of bandwidth to the extent that a
customer could obtain competitive QoS by partitioning and upgrading their
networks to operate at much higher data rates and thereby reduce network
contention.

Lucent and the telecom industry have pioneered an alternative network
implementation to IP/Ethernet called SONET/ATM. SONET/ATM is primarily used as
the links to IP routers in the core of the Internet and Wide -Area Networks.
However, it generally is not used as the routing mechanism itself. At
present, ATM is expensive, requires centralized management, and is therefore
not generally used as the packet routing mechanism that underlies the
Internet. It is possible that the price of ATM equipment might one day become
competitive with the cost of Ethernet/IP equipment and that ATM will at that
time have solved the issues of multicasting and distributed control that
currently inhibit its widespread adoption.

The possibility exists that Path 1 may find itself in competition with an
alternative technology for QoS over IP, or customers may choose a
technologically inferior product if the product's provider can give better
pricing, availability, manufacturing, quality, service or reliability of
continued supply. Path 1's philosophy will be to build positive customer
relationships in which Path 1 is truly a valued-added partner and problem
solver for its customers. Path 1 plans to utilize its in-house expertise in
embedded systems to help tailor the integration of QoS for customer specific
applications, to help minimize the risk that customers will choose another
technology supplier, and provide more cost-effective and higher-performance
equipment. Path 1's operations will be oriented toward meeting the needs of
customers cost-effectively and in a timely manner.

Customers

Path 1 has not generated revenue from sales to customers. Path 1 is a
development stage company and is still developing enabling technologies. Path
1 has only recently commenced production of prototypes and evaluation units of
some of its intended products. Path 1 has received a purchase order from
Leitch to deliver thirty PG1 units for their use and evaluation of the
TrueCircuitTM technology Multimedia Gateway.

Intellectual Property

To maximize Path 1's competitive position in the marketplace, Path 1 protects
its technology and proprietary rights with a combination of patents,
trademarks, trade secrets, nondisclosure agreements and other measures.

Path 1 has applied for the following patents.

1. Time-Synchronized multi-Layer network switch for providing quality of
service guarantees in computer networks

2. Methods and apparatus for providing quality of service guarantees in
computer networks

3. Methods and apparatus for providing quality of service guarantees in
computer networks (continuation-in-part).

The U.S. patent office approved all three patents. The first has been
issued. The remaining two have been allowed, with final issuance to be
forthcoming. Path 1 cannot be certain that any patents that are granted to
the company will be sufficiently broad to fully protect its interests.

Employees

As of March 26, 2000, Path 1 employed thirty-two (32) people full-time in the
United States and fourteen (14) people full time and one part time person in
Romania. It is anticipated that additional employees will be hired as needed
to develop the technology, strengthen management and support the commercial
launch of Path 1's products.

The management of Path 1 believes its relationship with its employees is good.
None of Path 1's employees are members of a labor union.

Risk Factors

Our business and results of operations could be seriously harmed by any of the
following risks. The trading price of our Class A Common Stock could decline
due to any of these risks, and you may lose part or all of your investment.

It is difficult to evaluate our business because we have not yet launched any
products commercially.

Path 1 has a relatively brief operating history. Path 1 was incorporated in
January 1998 and commenced operations in May 1998. As of December 31, 2000,
Path 1 did not yet have any products in commercial production. Accordingly, we
are subject to all of the risks associated with new business ventures
including, without limitation, those associated with raising capital,
acquiring or developing products which function as intended, arranging for
suitable manufacturing facilities, entering into strategic relationships with
other companies, identifying and retaining necessary personnel, establishing
and penetrating markets for our intended products and achieving profitable
operations.

Path 1 has incurred losses since inception and may never be profitable.

Path 1 has incurred operating losses since inception on January 30, 1998, and
expects to incur losses and negative cash flow for the foreseeable future. As
of December 31, 2000, our accumulated deficit was US$19,798,000. Path 1's
management expects to continue to incur significant operating expenses and
research and development expenses and, as a result, we will need to generate
significant revenues to achieve and maintain profitability. Even if we do
achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future.

Path 1 will need more working capital to expand its business and the prospect
of obtaining additional financing is uncertain.

We anticipate that we will require additional financing to fund expansion, to
develop new or enhance existing services or products, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies, and to finance the commercialization of any products we develop.
If we raise additional funds through the issuance of equity or equity-linked
securities, the percentage ownership of our stockholders would be reduced. In
addition, these securities may have rights, preferences or privileges senior
to the rights of the securities held by our current stockholders. We cannot
guarantee that additional financing will be available in the future on
favorable terms, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to continue our operations, fund
our expansion, take advantage of potential opportunities, develop or enhance
our intended products, or otherwise respond to competitive pressures would be
significantly limited.

Path 1 has recently completed a significant acquisition of a company based in
Eastern Europe and face risks associate with integrating this business and
potential future acquisitions.

In February 2001, Path 1 completed the asset acquisition of Metar ADC, a
company based in Bucharest, Romania, and are in the process of integrating
this business. Acquisition of other businesses is one of the growth
strategies contemplated by our long-term business plan, and we plan to
continue to review potential acquisition candidates . Acquisitions involve
numerous risks, including among others, difficulties and expenses incurred in
the consummation of acquisitions and assimilation of operations, personnel
and services of products of the acquired company, difficulty of operating new
businesses, diversion of management's attention from other business concerns
and the potential loss of key employees of the acquired company. Acquisitions
of foreign companies such as Metar ADC may involve additional risks, including
assimilating different business practices, overcoming language and cultural
barriers, foreign currency translation, familiarization and compliance with
applicable foreign laws and regulations, and the possibility of future
economic, societal or governmental instability within the foreign country. If
we do not successfully integrate Metar ADC or any businesses we may acquire in
the future, our business will suffer. At present, we have no agreements or
commitments with respect to any acquisition and we may never successfully
complete any additional acquisitions.

Path 1 is relying, in part, on Leitch Technology Corporation for marketing
into its first target market.

Pursuant to the Technology License Agreement between Path 1 and Leitch dated
April 10, 2000, we have granted Leitch an exclusive license, for sale of
TrueCircuitTM technology-based products within the studios of the professional
broadcast video market. We are precluded from selling our intended products
directly into the professional broadcast video market until the exclusive
license expires. The exclusive license will last for one year and, thereafter,
will automatically renew for consecutive additional one-year periods provided
we receive the minimum aggregate monies and other consideration for that year
as set forth in the Technology License Agreement. Therefore, it is possible
that Leitch's exclusive license will continue well past its initial one-year
term, thus lengthening the period of time during which we will be prohibited
from selling and marketing directly into the broadcast video market. Although
it is possible that we may sell the PG1 and its related family of products
(the TrueCircuitTM technology-based products that we have developed and are
developing for distribution into the professional broadcast video market) to
Leitch for re-sale into this target market, discussions regarding such a
distribution agreement are currently underway.

Path 1's ability to profit from the professional broadcast video market,
whether it be through sale of the PG1 to Leitch or future direct sales into
this target market, will depend heavily upon the motivation and success of
Leitch in developing, manufacturing, launching and marketing TrueCircuitTM
technology-based products in this field. The more successful their efforts,
the more royalties we shall ultimately receive (such royalties shall not
commence until termination of the five-year royalty-free period in favor of
Leitch), and the more receptive that market would be to our own products. If
Leitch's TrueCircuitTM technology-based products experience difficulties (e.g.
operational malfunctions or poor sales experience) upon their introduction to
the professional broadcast video market, we may encounter difficulties in
marketing TrueCircuitTM technology-based products in that market or in other
fields.

Path 1's intended products are only at a developmental stage.

As of December 31, 2000, our intended products are either at the conceptual
stage, i.e., ideas for products, or have been reduced to beta units or
prototypes that must be tested and modified. Our product development and
commercialization process must incorporate the necessary steps to assure
conformance to industry standards and protocols. This conformance must
include Underwriter Laboratories certification for the PG1 (all of our other
products were designed so as not to require this certification). We must
continue our efforts to design these intended products and arrange for
prototypes of each intended product to be manufactured, tested and de-bugged
before we can implement our marketing plan. There is no assurance that each of
these milestones can be achieved or that, if they are achieved, we will be
able to effectively market our products and achieve profitable operations.

Path 1 may be unable to obtain full patent protection for its core technology
and products, and there is a risk of infringement.

Path 1 intends to patent its core technology and products. On October 31,
2000, we were issued a U.S. patent for our TrueCircuitTM technology - multi-
layer network switch. However, there can be no assurance that other patents
will be issued for other aspects of our core technology and products, or, if
patents are issued, that they will be broad enough to prevent significant
competition or that third parties will not infringe upon or design around such
patents to develop a competing product. Furthermore, others may design and
manufacture superior products.

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

There has been a trend toward litigation regarding patent and other
intellectual property rights in the telecommunications industry. Although
there are currently no lawsuits pending against us regarding possible
infringement claims, there can be no assurance such claims will not be
asserted in the future or that such assertions will not materially adversely
affect our business, financial conditions and results of operation. Any such
suit, whether or not it has merit, would be costly in terms of employee time
and defense costs and could materially adversely affect us. If an
infringement or misappropriation claim is successfully asserted against us, we
may need to obtain a license from the claimant to use the intellectual
property rights. There can be no assurance that such a license will be
available on reasonable terms or at all.

Path 1 faces competition in our industry from much larger companies with
significantly greater resources than our own, and such competition is likely
to increase in the future.

A number of major network equipment providers such as Cisco Systems, 3Com and
Lucent have announced network convergence strategies. Other competitors are
developing alternative network approaches, which, if successful, could
materially and adversely affect us. Many of our current and potential
competitors have longer operating histories, significantly greater financial,
technical and marketing resources, greater name recognition and substantially
larger customer bases then we have. In addition, many of our competitors may
be able to respond more quickly than we can to new or emerging technologies,
as well as devote greater resources than we can to the development, promotion
and sale of their products. Increased competition could force us to reduce
prices, lower our projected margins and hinder our ability to gain or hold
market share. In addition, if we expand our marketing and sales strategy to
target markets abroad, we may face additional competition. There can be no
assurance that we will be able to compete successfully against current and
future competitors.

Path 1 may not be able to profit from growth in its business if Path 1 is
unable to effectively manage the growth.

Even though Path 1 is still in the developmental, pre-revenue stage, we
experienced rapid growth in the past year and we anticipate (but by no means
do we guarantee) that we will grow rapidly in the near future and that this
growth will place significant strain on our managerial, financial and
personnel resources. The pace of past and our anticipated expansion including
our acquisition of Metar ADC, together with the complexity of the technology
involved in our intended products, demands an unusual amount of focus on the
operational needs of our future customers for quality and reliability, as well
as timely delivery and post-installation field support. In addition,
relationships with new customers generally require significant engineering
support. Therefore, adoption of our intended products by customers would
increase the strain on our resources, especially our engineers. To reach our
goals, we will need to hire rapidly, while, at the same time, invest in our
infrastructure. We expect that we will also have to expand our facilities,
both at our San Diego headquarters and in Romania. In addition, we will need
to:

- successfully train, motivate and manage new employees;

- expand our sales and support organization;

- integrate new management and employees into our overall
operations; and

- establish improved financial and accounting systems.

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

Competition for employees in our industry is intense, and Path 1 may not be
able to hire key employees.

Path 1's future success will depend, in part, on our ability to attract and
retain highly skilled employees, particularly management (including senior
management), technical and sales personnel. We believe our current roster of
senior management is incomplete and that if we are to succeed we must identify
and hire several additional professional senior managers, including a
President for the Metar ADC (Sistolic) operations and a Vice President of
Engineering. Competition for employees in our industry and in our Southern
California geographic region is intense due to the scarcity of available
people with the necessary professional technical skills. We may be unable to
identify and attract highly qualified employees in the future. In addition, we
may not be able to successfully assimilate these employees or hire qualified
key management personnel to replace them.

Path 1 is dependent on its key employees for our future success, and none of
these key employees is obligated to stay with us.

Path 1's success depends on the efforts and abilities of our senior
management, specifically Michael T. Elliott, Ronald D. Fellman, Michael
Florea, William McKnight, Douglas A. Palmer and Richard B. Slansky and other
senior managers yet to be identified and hired, and certain other key
personnel including Alan Remen and Yendo Hu. Currently, we have key man life
insurance on only Michael Florea. If any of these key employees leaves or is
seriously injured and unable to work and we are unable to find a
qualified replacement, then our business could be harmed.

Path 1's executive officers, directors and 5% stockholders currently maintain
substantial voting control over us, which will allow them to control most
matters submitted to stockholders for approval.

At December 31, 2000, our executive officers, directors and 5% stockholders
own, in the aggregate, approximately 59% of our outstanding Class A Common
Stock. As a result, these stockholders (or subgroups of them) retain
substantial control over matters requiring approval by our stockholders, such
as the election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying or preventing a change in control.

Unanticipated delays or problems in introducing our intended products or
improvements to our intended products may cause customer dissatisfaction or
deprive us of the "first-to-market" advantage.

Management has limited experience in manufacturing and shipping products. In
addition, delays in the development of prototype products and the launch of
commercial products are not uncommon in high-tech industries such as ours. If
we experience problems related to the introduction or modification of our
intended products or the reliability and quality of such products, which
problems delay the introduction of our intended products or product
improvements by more than a few months, we could experience reduced product
sales and adverse publicity. We believe the company first-to-market with
viable products will gain a significant advantage with customers; delays could
prevent us from being the company that gains this advantage.

Our intended products are complex and are likely to contain a number of
undetected errors and defects, especially when these intended products are
first released. These errors or defects, if significant, could harm the
performance of these intended products, result in ongoing redevelopment and
maintenance costs, and/or cause dissatisfaction on the part of customers.
These costs, delays or dissatisfaction could harm our business.

To date there has been only a limited public market for our Class A Common
Stock and there is no assurance that an active trading market for our Class A
Common Stock will ever exist.

As of December 31, 2000, there were 8,183,901 shares of our Class A Common
Stock outstanding. To date, there has been only a limited public market for
Path 1 securities and there can be no assurance that a broad public market for
our securities will arise. We may be unable to attract and maintain good-
quality market makers. In the event a liquid market for our Class A Common
Stock does develop, there can be no assurance that the market will be strong
enough to absorb all of the Class A Common Stock currently owned by our
stockholders. Now that our Class A Common Stock has been registered under the
Securities Exchange Act of 1934, substantial quantities of shares classified
as "restricted securities" or "control securities" are now eligible for resale
on the public market under Rule 144. This has the potential to create a
supply/demand imbalance that could hurt our stock price. In addition,
subsequent issuances of equity or equity-linked securities may further
saturate the market for our Class A Common Stock. The resale of substantial
amounts of our Class A Common Stock will have a depressive effect on the
price of our shares in the market.

The market price of our Class A Common Stock may fluctuate significantly, in
which case stockholders may lose all or part of their investment.

Our Class A Common Stock is presently quoted for trading on the OTC Bulletin
Board, a quotation service that displays real-time quotes and other
information about over-the-counter (OTC) equity securities, and on the Third
Segment of the Frankfurt Stock Exchange. The market price for our Class A
Common Stock is susceptible to a number of internal and external factors
including:

- - quarterly variations in operating results;

- - stock price changes in the previous quarter resulting in large increases or
decreases in reported stock-based compensation expenses, causing our overall
net income/loss to be highly volatile and unpredictable;

- - announcements of technological innovations;

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

- - announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;

- - proprietary rights disputes or litigation;

- - changes in earnings estimates by analysts or other factors;

- - additions or departures of key personnel;

- - economic and political factors, both in the United States and in Romania;
and

- - unforeseen or substantial sales of our Class A Common Stock.

In addition, stock prices for many technology companies fluctuate widely for
reasons that may be unrelated to operating results. These fluctuations may be
related to market maker activity and investor short sales, as well as general
economic, market and political conditions such as interest rate increases,
recessions or military conflicts, and may materially and adversely affect the
market price of our Class A Common Stock.

We offer stock options to our employees, which could result in substantial
dilution to all stockholders.

In order to provide incentives to current employees and induce prospective
employees and consultants to work for us, we have offered and issued options
to purchase our Class A Common Stock and Class B Common Stock. As of December
31, 2000, there were options outstanding to purchase approximately 732,000
shares of our Class A Common Stock, and there were options outstanding to
purchase approximately 2,623,000 shares of our Class B Common Stock. We will
continue to issue options to purchase sizable numbers of shares of stock to
new and existing employees, directors, advisors, consultants or other
individuals as we deem appropriate and in our best interests. The grant and
subsequent exercise of such options could result in substantial dilution to
all stockholders. As of December 31, 2000 280,000 shares of Class A Common
Stock under our 2000 Stock Option/Stock Issuance Plan and 877,000 shares of
Class B Common Stock under our 1999 Stock Option/Stock Issuance Plan remain
authorized but not yet granted as options.

Item 2. Properties

We lease approximately 11,000 square feet of office space within one facility
under three separate leases in San Diego, California. The San Diego offices
are used for research and development, prototype production, sales and
marketing and administration. The San Diego leases expire between May, 2002
through August, 2002. We also lease approximately 4,000 square feet of office
space in Bucharest, Romania on a month-to-month basis. The Romanian offices
are used for research and development and administration. We believe our
current facilities are adequate to meet our near-term space requirements.

Item 3. Legal Proceedings

On September 20, 1999, we filed a complaint against certain stockholders and
their affiliates for breach of oral contract, professional negligence, breach
of fiduciary duty, constructive trust, breach of the covenant of good faith
and fair dealing and unfair business practice, primarily in connection with
the allocation of founders stock of the Company. On November 29, 1999, Dr.
Franklin Felber, a former officer and director of ours, who was a defendant in
the September 20, 1999 complaint, filed a cross-complaint against us, certain
of our directors and Jyra Research, Inc. alleging fraud, breach of fiduciary
duty, breach of the covenant of good faith and fair dealing, and
misrepresentation in connection with the exercise by Jyra's assignees of
Jyra's arrangement to purchase from him for US$4.00 per share, 30,000 shares
of our Class A Common Stock in February 1999 and 225,640 shares of our Class A
Common Stock in July 1999.

In April 2000, this complaint and all counterclaims arising out of it were
settled as to all parties other than Dr. Felber. Other than with respect to
Dr. Felber, the parties released the original complaint and all counterclaims
against each other and certain directors of Path 1.

Under a Settlement Agreement and Mutual Release dated January 4, 2001, we
settled the lawsuits and signed a mutual general release with Dr. Felber. Each
party agreed that the settlement was not to be construed as an admission of
any liability or wrongdoing by anyone. Pursuant to this Settlement Agreement
and Mutual Release, we paid Dr. Felber US$300,000 and placed in escrow an
additional US$200,000 as well as 400,000 shares of Class A Common Stock. On
January 10, 2002, Dr. Felber will receive from escrow some or all of the cash
and stock, based on the following rule (US Dollars):

If for the 30 trading days immediately Then Felber shall receive
preceding January 10, 2002, the average from the escrow the following
closing price ("ACP") of our Class A number of shares of our Class Plus the following
Common Stock is: A Common Stock: amount of cash:
- --------------------------------------- ----------------------------- ------------------

A. $11.00 or more The quotient of $1,000,000 $0
divided by the ACP

B. Between $6.00 and $10.99 100,000 $0

C. Between $4.00 and $5.99 100,000 The difference
between $600,000
and the product of
100,000 times the ACP

D. Between $1.00 and $3.99 The quotient of $400,000 $200,000
divided by the ACP

E. Less than $1.00 400,000 $200,000

Any of the cash and stock not delivered to Dr. Felber under this rule will be
returned back to Path 1. We recorded a reserve for settlement costs of US$1.4
million at December 31, 2000, our maximum exposure under the terms of the
settlement agreement.

As of the date of filing this report on Form 10-K, we are not a party to any
material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters

The Class A Common Stock of the Company is traded on the OTC Bulletin Board
under the symbol "PNWK." The following table sets forth the range of high and
low bid prices on the OTC Bulletin Board of the Class A Common Stock for the
periods indicated. Such quotations represent inter-dealer prices without
retail markup, markdown or commission and may not necessarily represent actual
transactions.

High (US$) Low (US$)
----------- ----------
1999:
First Quarter 8.13 3.57
Second Quarter 16.63 6.88
Third Quarter 12.50 8.13
Fourth Quarter 14.50 9.00

2000:
First Quarter 13.38 8.75
Second Quarter 16.60 8.05
Third Quarter 11.25 6.44
Fourth Quarter 19.13 5.38

As of December 31, 2000, there were approximately 355 holders of record of the
Class A Common Stock. The Company has never paid cash dividends on its Common
Stock and has no present intention to do so.

In December 1999, we partially completed a Private Placement Offering (that
extended into May of 2000) under which we sold 126,800 shares of common stock
at US$8.00 per share to accredited investors, resulting in net cash proceeds
totaling US$962,000. These shares were purchased in an arms length transaction
by private and institutional investors, none of whom had a significant
beneficial interest before the placement. Further, none of these investors are
affiliates of Path 1. These shares are also subject to resale restrictions
for one year as they were purchased in a private transaction. The price of
US$8.00 per share was the highest price we were able to negotiate and still
attract the funds. The resulting discount in price from the average price of
OTC Bulletin Board transactions for the period represents the associated
discount for the resale restriction and the block of stock being offered. In
connection with the offering, we granted options for the purchase of 6,250
shares of Class A common stock with an exercise price of US$8.00 per share
through December 2006, to brokers as payment for finders fees and incurred
other offering related expenses of US$52,000.

In April 2000, we sold 1,250,000 shares of our Class A Common Stock in a
private placement to Leitch for US$8.00 per share, resulting in gross proceeds
of US$10.0 million. We also received 200,000 shares of Leitch common stock
with a fair market value at the date of the transaction of US$3.1 million. In
conjunction with the private placement, we entered into a technology license
agreement with Leitch and provided Leitch a non-exclusive worldwide royalty
bearing license (except as to TrueCircuitTM technology in products designed
for the professional video market, which is subject to an exclusive royalty
bearing license in favor of Leitch) to utilize our intellectual property to
develop and sell products incorporating our TrueCircuitTM technology. The
technology license is subject to a five-year initial royalty-free period.
Pursuant to the terms of the agreement, Leitch is not obligated to pay us
anything in the first year of the agreement but thereafter, provided certain
conditions of the agreement are satisfied, a minimum annual fee of US$2
million in the second year, US$3 million in the third year, US$5 million in
the fourth year and US$5 million in the fifth year must be paid to us in order
to maintain the exclusive license. After the fifth year, minimum annual fees
will be mutually agreed upon. If the minimum annual fee is not made in any
year, the exclusive license reverts to a non-exclusive license. Minimum annual
fees may be in the form of product revenue, research contract revenue or any
form other than an equity investment in the company.

In May 2000, we completed a Private Placement Offering (started in 1999) that
had authorized the Company to issue up to 1,250,000 shares of Class A Common
Stock to accredited investors at a price of US$8.00 per share. Between
January 1, 2000 and May 31, 2000, we sold 600,000 shares of Class A Common
Stock to accredited investors pursuant to this offering, resulting in net cash
proceeds totaling approximately US$4.4 million. In connection with the
offering, we granted options to purchase 30,000 shares of Class A Common Stock
at an exercise price of US$8.00 per share through February 2007 as payment for
finder's fees, and incurred other offering expenses of US$379,000.

In July of 2000, we sold an additional 36,250 shares of its Class A Common
Stock to Leitch for US$8.00 per share, resulting in gross proceeds of
US$290,000. The shares were issued pursuant to the exercise of certain anti-
dilution rights maintained by Leitch.

Item 6. Selected Financial Data

In the table below, we provide you with our summary historical financial data.
We have prepared this information using our financial statements, for the
consolidated years ended December 31, 2000, 1999, and for the period January
30, 1998 (inception) to December 31, 1998. When you read this summary
historical financial data, it is important that you read along with it the
historical financial statements and related notes included herein (in
thousands, except per share data (US Dollars):

(1) - See Note 1 of the Notes to Consolidated Financial Statements for a
description of the computation of basic and diluted net loss per share and the
number of shares used to compute basic and diluted net loss per share.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Results of Operations

For the Years Ended December 31, 2000 and 1999

Research and Development. Our research and development expenses increased
from US$1.0 million in 1999 to US$3.7 million in 2000. The increase in our
research and development expenses is primarily due to higher expenses for
consulting, increases in engineering staff, and an increase in prototype
material related to the development of the PG1, the DotCAM and TrueCircuitTM
technology.

Sales and Marketing. Our sales and marketing expenses increased from
US$359,000 in 1999 to US$1.2 million in 2000. The increase in our sales and
marketing expenses is due to an increase in promotional and marketing expenses
primarily relating to our attendance at the 2000 National Association of
Broadcasters (NAB) convention, the addition of new sales and marketing
personnel, and increased travel and demonstration expenses.

General and Administrative. Our general and administrative expenses increased
from US$984,000 in 1999 to US$4.2 million in 2000. The increase in our general
and administrative expenses is primarily due to US$2.2 million of legal fees
and settlement costs related to our litigation with Dr. Franklin Felber (see
Item 3. Legal Proceedings). We also incurred higher personnel costs as we
added key management and staff positions such as Chief Executive Officer,
Chief Financial Officer and Corporate Controller along with other general,
human resource, information systems and administrative positions. We also
incurred higher consulting, legal and financial expenses related to re-
establishing our position on the OTC Bulletin Board and as an SEC reporting
company.

Stock-based Compensation. Stock-based compensation expense is a non-cash item
that is recognized in association with stock options having exercise prices
below estimated fair value. Stock-based compensation expense is calculated as
the difference between exercise price and estimated fair market on the date of
grant or subsequent measurement date. If the options are subject to variable
accounting treatment, then each quarter additional compensation expense,
either positive or negative, is recognized based on the fair market value of
our common stock in accordance with the provisions of variable stock option
accounting. We recognized US$1.6 million in 1999 and US$4.4 million in 2000 of
stock-based compensation charges, respectively. Stock-based compensation
expense may continue to fluctuate, in material amounts, as the fair market
value of our common stock increases or decreases.

Interest Income. Our interest income increased from US$20,000 in 1999 to
US$449,000 in 2000. The increase in interest income was due to significantly
higher average cash balances during 2000, which included proceeds from a
private placement with Leitch completed in April of 2000 and a private
placement with other investors completed in May of 2000.

Other Expense. Our other expense increased from US$34,000 in 1999 to
US$101,000 in 2000. The increase in other expense was due to a decline in
fair market value of marketable securities we hold in Jyra Research, Inc.,
considered to be other than temporary.

For the Years Ended December 31, 1999 and 1998 (from inception of January 30,
1998)

Research and Development. Our research and development expenses were
US$589,000 for the period from inception through December 31, 1998, compared
to US$1.0 million for the twelve months ended December 31, 1999, as the receipt
of additional invested funds over this twelve month period (as opposed to the
nine month period following commencement of operations in late March 1998)
enabled us to ramp up our research and development effort. The company had
limited internal research and development personnel. We engaged several third
party engineering firms and individuals to assist in the development effort
during these periods.

Sales and Marketing. Our sales and marketing expenses were US$291,000 for the
period from inception through December 31, 1998. Our sales and marketing
expenses were US$359,000 for the twelve months ended December 31, 1999, as we
continued our ongoing efforts to increase market awareness and acceptance of
our technology and our intended products. The increase in sales and marketing
expenses from 1998 to 1999 was due primarily to the increased costs of
conducting sales and marketing efforts for a full twelve months (as opposed to
the nine month period following commencement of operations in late March
1998).

General and Administrative. Our general and administrative expenses were
US$298,000 for the period from inception through December 31, 1998, compared
to US$984,000 for the twelve months ended December 31, 1999. The increase in
general and administrative expenses from 1998 to 1999 was primarily due to (i)
higher personnel costs, as we filled two executive officer positions with new
hires, and increased salaries for our existing executive officers and
employees, (ii) legal costs (US$252,000 as of December 31, 1999) associated
with litigation against certain former officers, directors and affiliates,
(iii) increased rent payment for our premises, (iv) the increase in
compensation expenses related to employee option grants at below fair market
value and (v) the costs of doing business for a full twelve months (as opposed
to the nine month period following commencement of operations in late March
1998).

Stock-based Compensation. Stock-based compensation expense is a non-cash item
that is recognized in association with stock options having exercise prices
below estimated fair value. Stock-based compensation expense is calculated as
the difference between exercise price and estimated fair value on the date of
grant or subsequent measurement date, and if the options are subject to
variable accounting treatment, then each quarter additional compensation
expense, either positive or negative, is recognized based on the fair market
value of our common stock in accordance with the provisions of variable
stock option accounting. We recognized US$1.5 million in 1998 and US$1.6
million in 1999 of stock-based compensation charges, respectively. Stock-
based compensation expense may continue to fluctuate, in material amounts, as
the fair market value of our common stock increases or decreases.

Interest Income. Our interest income increased from US$7,000 in 1998 to
US$20,000 in 1999. The increase in interest income was due to higher average
cash balances during 1999, which included proceeds from a private placements
completed during fiscal year 1999.

Other Expense. Our other expense increased from zero in 1998 to US$34,000 in
1999. The increase in other expense was due to a decline in fair market value
of marketable securities we hold in Jyra Research, Inc., considered to be
other than temporary.

Liquidity and Capital Resources

Since our inception on January 30, 1998, we have financed our operations
primarily through the sale of common equity securities to investors and
strategic partners. The funds we received through these sales are currently
invested in U.S. Treasury and government agency obligations and investment-
grade corporate obligations. We also hold common stock in Leitch Technology
Corporation and Jyra Research, Inc., which they issued directly to us.

At December 31, 2000, we had cash and cash equivalents of US$7.2 million,
marketable securities of US$4.3 million (US$ 3.3 million in Leitch common
stock), and net working capital of US$9.0 million. For the next several years,
we expect to make substantial additional expenditures associated with research
and development and incur increased costs associated with staffing for
management, sales and marketing and administration functions. We anticipate
that our existing capital resources will enable us to fund operations for a
minimum of one year. However, we are currently seeking additional funding to
expand our research and development activities and our infrastructure.

Cash used for operating activities for the years ended December 31, 2000, 1999
and from January 30, 1998 (inception) to December 31, 1998, totaled US$6.3
million, US$2.2 million and US$777,000, respectively. The relative increase
in cash used for operating activities for the years ended December 31, 2000
and 1999 compared to the prior year, was primarily due to an increase in net
loss as a result of an increase in personnel expenses associated with research
and development activities, promotional and marketing activities, staffing of
the general and administrative functions, consulting fees, and other operating
costs. The increase for the year ended December 31, 2000 was partially offset
by an increase in accounts payable and accrued liabilities that includes a
US$1.4 million reserve for the settlement of litigation with Dr. Franklin
Felber.

Cash used for investing activities for the years ended December 31, 2000, 1999
and from January 30, 1998 (inception) to December 31, 1998, totaled US$ 1.5
million, US$17,000 and US$73,000, respectively. This increase was primarily
the result of the purchase of computers and test equipment and the net
purchase of marketable securities.

Cash provided by financing activities for the years ended December 31, 2000,
1999 and from January 30, 1998 (inception) to December 31, 1998, totaled
US$14.6 million, US$2.6 million and US$969,000, respectively. This increase
was primarily due to the proceeds from a private placement with Leitch
Technology Corporation and other private placement issuances.

At December 31, 2000, we have no material commitments other than our operating
leases. Our future capital requirements will depend upon many factors,
including the timing of research and product development efforts, the
expansion of our general and administrative functions and sales and marketing
efforts, the development of prototype systems demonstrating our technology and
the need to finance the manufacturing of commercial products that we may
develop and launch. We expect to continue to expend significant amounts on
research and development staffing, infrastructure and computer equipment to
support on-going research and development activities.

In December 1999, we partially completed a Private Placement Offering (that
extended into May of 2000) under which we sold 126,800 shares of common stock
at US$8.00 per share to accredited investors, resulting in net cash proceeds
totaling US$962,000. These shares were purchased in an arms length transaction
by private and institutional investors, none of whom had a significant
beneficial interest before the placement. Further, none of these investors are
affiliates of Path 1. These shares are also subject to resale restrictions for
one year as they were purchased in a private transaction. The price of US$8.00
per share was the highest price we were able to negotiate and still attract
the funds. The resulting discount in price from the average price of OTC
Bulletin Board transactions for the period represents the associated discount
for the resale restriction and the block of stock being offered. In connection
with the offering, we granted options for the purchase of 6,250 shares of
Class A common stock with an exercise price of US$8.00 per share through
December 2006, to brokers as payment for finders fees and incurred other
offering related expenses of US$52,000.

In April 2000, we sold 1,250,000 shares of our Class A Common Stock in a
private placement to Leitch for US$8.00 per share, resulting in gross proceeds
of US$10.0 million. We also received 200,000 shares of Leitch common stock
with a fair market value at the date of the transaction of US$3.1 million. In
conjunction with the private placement, we entered into a technology license
agreement with Leitch and provided Leitch a non-exclusive worldwide royalty
bearing license (except as to TrueCircuitTM technology in products designed
for the professional video market, which is subject to an exclusive royalty
bearing license in favor of Leitch) to utilize our intellectual property to
develop and sell products incorporating our TrueCircuitTM technology. The
technology license is subject to a five-year initial royalty-free period.
Pursuant to the terms of the agreement, Leitch is not obligated to pay us
anything in the first year of the agreement but thereafter, provided certain
conditions of the agreement are satisfied, a minimum annual fee of US$2
million in the second year, US$3 million in the third year, US$5 million in
the fourth year and US$5 million in the fifth year must be paid to us in order
to maintain the exclusive license. After the fifth year, minimum annual fees
will be mutually agreed upon. If the minimum annual fee is not made in any
year, the exclusive license reverts to a non-exclusive license. Minimum annual
fees may be in the form of product revenue, research contract revenue or any
form other than an equity investment in the company.

In May 2000, we completed a Private Placement Offering (started in 1999) that
had authorized the Company to issue up to 1,250,000 shares of Class A Common
Stock to accredited investors at a price of US$8.00 per share. Between
January 1, 2000 and May 31, 2000, we sold 600,000 shares of Class A Common
Stock to accredited investors pursuant to this offering, resulting in net cash
proceeds totaling approximately US$4.4 million. In connection with the
offering, we granted options to purchase 30,000 shares of Class A Common Stock
at an exercise price of US$8.00 per share through February 2007 as payment for
finder's fees, and incurred other offering expenses of US$379,000.

In July of 2000, we sold an additional 36,250 shares of its Class A Common
Stock to Leitch for US$8.00 per share, resulting in gross proceeds of
US$290,000. The shares were issued pursuant to the exercise of certain anti-
dilution rights maintained by Leitch.

We acquired the assets of Metar ADC, a Bucharest, Romania-based integrated
circuit design company, for US$2 million in cash. The first US$1 million is
payable upon receipt and acceptance of designated technology transfers from
Metar ADC, which occurred on February 21, 2001. The second US$1 million is
payable over a three-year period beginning October 13, 2001.

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to changes in interest rates primarily from our marketable
securities and investments in certain available-for-sale securities. We are
also exposed to fluctuations in the stock market as securities we hold are in
volatile markets. In addition, we hold stock in a company that is traded on
Toronto Stock Exchange, which may expose use to foreign currency fluctuations.
Under our current policies, we do not use interest rate derivative instruments
to manage exposure to interest rate changes. A hypothetical 100 basis point
adverse move in interest rates along the entire interest rate yield curve would
not materially affect the fair value of interest sensitive financial
instruments at December 31, 2000.

Item 8. Financial Statements

The Company's financial statements at December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 2000 and 1999, for the period from
January 30, 1998 (inception) through December 31, 1998, and for the period
from January 30, 1998 (inception) through December 31, 2000, are included in
this report on pages F-1 through F-26.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item will be set forth under the captions
"Election of Directors" and "Executive Officers" in our definitive Proxy
Statement to be filed with the Securities and Exchange Commission in
connection with the 2001 Annual Meeting of Stockholders (the "Proxy
Statement"), which is incorporated by reference herein.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Documents Filed as Part of This Report

1. The following financial statements are filed as a part of this
report under Item 8 - Financial Statements and Supplementary
Data:

Report of Ernst &Young LLP, Independent Auditors

-Consolidated Balance Sheets
-Consolidated Statements of Operations
-Consolidated Statements of Stockholders' Equity
-Consolidated Statements of Cash Flows
-Notes to Consolidated Financial Statements

2. Financial statement schedules: none.

3. Exhibits: The following exhibits are filed with this report,
or incorporated by reference as noted. Exhibits filed with
this report are marked with an asterisk (*). Exhibits that
consist of or include a management contract or compensatory
plan or arrangement are marked with an obelisk (+).

Exhibit
Number Description

3.1 Certificate of Incorporation, as amended. (1)
3.2 Amended and Restated Bylaws. (1)
10.5 1999 Stock Option/Stock Issuance Plan, as amended. (1)
10.9 Agreement of Purchase and Sale by and between us and Leitch
Technology Corporation, dated April 10, 2000. (1)
10.10 Stockholders' Agreement by and among us, Leitch
Technologies Corporation, Ronald D. Fellman, Douglas A. Palmer and
Michael T. Elliott dated as of April 10, 2000. (1)
10.11+ Technology License Agreement between us and Leitch Technology
Corporation dated April 10, 2000. (1)
10.12 Settlement Agreement and Mutual Release dated April 11, 2000. (1)
10.13# Employment Agreement between us and Michael T. Elliott dated
April 7, 2000. (1)
10.14 Sale Purchase Agreement among us, Metar ADC and Michael Florea,
dated October 13, 2000. (2)
10.15# Terms of Employment between us and Richard B. Slansky dated
May 5, 2000. (3)
10.16#* Employment Agreement between us and Michael Florea dated
October 13, 2000.
10.17#* Terms of Employment between us and William McKnight dated
December 15, 2000.
10.18 Settlement Agreement and Mutual Release among Path 1 Network
Technologies Inc., Douglas A. Palmer, Ronald D. Fellman, JYRA
Research Inc., Roderick C.H. Adams, Leslie A. Fellman, Linda
Palmer, Franklin Felber and Merril Felber dated January 4, 2001.
(4)
10.19* Product Development Agreement between Path 1 Network
Technologies Inc. and Barconet, N.V. dated February 5, 2001.
23.1* Consent of Ernst & Young LLP, Independent Auditors.

___________________________________________________________________________

(1) Filed as an exhibit to the Registrant's Form 10 filed with the Securities
and Exchange Commission (the "Commission") on May 23, 2000, as amended by Form
10/A filed with the Commission on June 8, 2000, and by Form 10/A filed with
the Commission on June 19, 2000.

(2) Filed as an exhibit to the Registrant's Form 8-K filed with the
Commission on October 30, 2000.

(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000, filed with the Commission on November
20, 2000.

(4) Filed as an exhibit to the Registrant's Form 8-K filed with the
Commission on January 31, 2001.

+-Confidential Treatment Requested
#-Management Compensation Agreement
*-Filed Herewith

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date: March 28, 2001

Path 1 Network Technologies Inc.

By: /s/ Michael T. Elliott
Michael T. Elliott
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ Michael T. Elliott President and Chief Executive Officer March 28, 2001
Michael T. Elliott and Director (Principal Executive Officer)

/s/ Richard B. Slansky Chief Financial Officer and Secretary March 28, 2001
Richard B. Slansky (Principal Financial Officer and Principal
Accounting Officer)

/s/ Ronald D. Fellman Chairman of the Board March 28, 2001
Ronald D. Fellman

/s/ John A. MacDonald Director March 28, 2001
John A. MacDonald

/s/ Reginald J. Tiessen Director March 28, 2001
Reginald J. Tiessen

/s/ John J. Splavec Director March 28, 2001
John J. Splavec

/s/ James A. Bixby Director March 28, 2001
James A. Bixby

/s/ Peter P. Savage Director March 28, 2001
Peter P. Savage

Exhibits

3.1 Certificate of Incorporation, as amended. (1)
3.2 Amended and Restated Bylaws. (1)
10.5 1999 Stock Option/Stock Issuance Plan, as amended. (1)
10.9 Agreement of Purchase and Sale by and between us and Leitch
Technology Corporation, dated April 10, 2000. (1)
10.10 Stockholders' Agreement by and among us, Leitch
Technologies Corporation, Ronald D. Fellman, Douglas A. Palmer and
Michael T. Elliott dated as of April 10, 2000. (1)
10.11+ Technology License Agreement between us and Leitch Technology
Corporation dated April 10, 2000. (1)
10.12 Settlement Agreement and Mutual Release dated April 11, 2000. (1)
10.13# Employment Agreement between us and Michael T. Elliott dated
April 7, 2000. (1)
10.14 Sale Purchase Agreement among us, Metar ADC and Michael Florea,
dated October 13, 2000. (2)
10.15# Terms of Employment between us and Richard B. Slansky dated
May 5, 2000. (3)
10.16#* Employment Agreement between us and Michael Florea dated
October 13, 2000.
10.17#* Terms of Employment between us and William McKnight dated
December 15, 2000.
10.18 Settlement Agreement and Mutual Release among Path 1 Network
Technologies Inc., Douglas A. Palmer, Ronald D. Fellman, JYRA
Research Inc., Roderick C.H. Adams, Leslie A. Fellman, Linda
Palmer, Franklin Felber and Merril Felber dated January 4, 2001.
(4)
10.19* Product Development Agreement between Path 1 Network
Technologies Inc. and Barconet, N.V. dated February 5, 2001.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
___________________________________________________________________________

(1) Filed as an exhibit to the Registrant's Form 10 filed with the Securities
and Exchange Commission (the "Commission") on May 23, 2000, as amended by Form
10/A filed with the Commission on June 8, 2000, and by Form 10/A filed with
the Commission on June 19, 2000.

(2) Filed as an exhibit to the Registrant's Form 8-K filed with the
Commission on October 30, 2000.

(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000, filed with the Commission on November
20, 2000.

(4) Filed as an exhibit to the Registrant's Form 8-K filed with the
Commission on January 31, 2001.

+-Confidential Treatment Requested
#-Management Compensation Agreement
*-Filed Herewith

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Path 1 Network Technologies Inc. Page

Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended December
31, 2000 and 1999 the period from January 30, 1998 (inception)
through December 31, 1998, and the period from January 30, 1998
(inception) through December 31, 2000 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000 and 1999 and for the period from January 30, 1998
(inception) through December 31, 1998 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2000 and 1999, the period from January 30, 1998 (inception) through
December 31, 1998, and the period from January 30, 1998 (inception)
through December 31, 2000 F-7
Notes to Consolidated Financial Statements F-8

Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Path 1 Network Technologies Inc.

We have audited the accompanying consolidated balance sheets of Path 1 Network
Technologies Inc. (a development stage company) as of December 31, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 2000 and 1999, for the
period from January 30, 1998 (inception) to December 31, 1998, and for the
period from January 30, 1998 (inception) to December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Path 1 Network Technologies
Inc. (a development stage company) at December 31, 2000 and 1999, and the
results of its operations and its cash flows for the years ended December 31,
2000 and 1999, for the period from January 30, 1998 (inception) through
December 31, 1998, and for the period from January 30, 1998 (inception) to
December 31, 2000 in conformity with accounting principles generally accepted
in the United States.

/s/ ERNST & YOUNG LLP

San Diego, California
February 9, 2001

Path 1 Network Technologies Inc.
(a development stage company)

Consolidated Balance Sheets

(in thousands, US dollars, except for per share data)

December 31,
2000 1999
-------------------

Assets
Current assets:
Cash and cash equivalents $ 7,171 $ 454
Marketable securities, available for sale 4,313 -
Other current assets 177 86
-------------------
Total current assets 11,661 540
===================

Property and equipment, net 459 59
Other assets 184 113
-------------------
Total assets $12,304 $ 712
===================

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued liabilities $ 2,175 $ 282
Accrued compensation and benefits 191 -
Deferred revenue 324 -
-------------------
Total current liabilities 2,690 282

Stockholders' equity:
Common stock, $0.001 par value; issuable in series:
Class A - 20,000,000 shares authorized; 8,183,901 and
6,087,651 shares issued and outstanding at December 31,
2000 and December 31, 1999, respectively 8 6
Class B - 10,000,000 shares authorized; no shares issued or
outstanding at December 31, 2000 and December 31, 1999 - -
Notes receivable from stockholders (114) -
Additional paid-in capital 32,295 10,264
Deferred compensation (3,005) (3,162)
Accumulated other comprehensive income 228 -
Accumulated deficit during development stage (19,798) (6,678)
-------------------
Total stockholders' equity 9,614 430
-------------------
Total liabilities and stockholders' equity $12,304 $ 712
===================

See accompanying notes to the consolidated financial statements.

Path 1 Network Technologies Inc.
(a development stage company)

Consolidated Statements of Operations

(in thousands, US dollars, except for per share data)

Period from Period from
January 30, January 30,
1998 1998
(inception) (inception)
Years ended through through
December 31, December 31, December 31,
2000 1999 1998 2000
------------------ ----------------- ---------------

Operating expenses:
Research and development $ 3,679 $ 1,046 $ 589 $ 5,314
Sales and marketing 1,184 359 291 1,834
General and administrative 4,184 984 298 5,466
Stock-based compensation (*) 4,421 1,611 1,493 7,525
------------------ ----------------- ---------------
Total operating expenses (13,468) (4,000) (2,671) (20,139)

Other income (expense):
Interest income, net 449 20 7 476
Impairment loss on investment in
Jyra Research, Inc. (101) (34) - (135)
------------------ ----------------- ---------------
Net loss $(13,120) $ (4,014) $ (2,664) $(19,798)
================== ================= ===============

Loss per common share - basic
and diluted $ (1.78) $ (0.71) $ (0.57)
================== =================
Weighted average common shares
outstanding 7,383 5,679 4,712
================== =================

* The following table shows how the Company's stock-based compensation would be allocated
to the respective expense categories:

Research and development $ 1,251 $ 302 $ 73 $ 1,626
Sales and marketing 485 - - 485
General and administrative 2,685 1,309 1,420 5,414
----------------- -------------------------------
$ 4,421 $ 1,611 $ 1,493 $ 7,525
================== ===============================

See accompanying notes to the consolidated financial statements.

Path 1 Network Technologies Inc.
(a development stage company)

Consolidated Statements of Stockholders' Equity

(in thousands, US dollars, except for per share data)
For the years ended December 31, 2000 and 1999 and the period from January 30, 1998 (inception) to December 31, 1998

Notes Accumulated
Series A Additional receivable Comprehensive
Convertible Preferred Stock Common stock paid-in from income
Shares Amount Shares Amount capital Stockholders (loss)

Balance at January 30, 1998 (inception) - $- - $- $- $- $-
Issuance of common stock at par to
founders for cash in February 1998 - - 3,600 3 (3) - -
Issuance of Series A convertible
preferred stock in exchange for stock
in Jyra Research, Inc. 1 - - - 147 - -
Issuance of common stock at $0.60 per
share for cash, net of issuance costs
of $48 - - 1,664 2 966 - -
Transfer of common stock to employees
by principal stockholders - - - - 331 - -
Issuance of stock options to consultants
for services - - - - 73 - -
Deferred compensation related to
employee stock options - - - - 2,090 - -
Amortization of deferred compensation
Comprehensive loss:
Net loss from inception through
December 31, 1998 - - - - - - -
Unrealized loss on investment in Jyra
Research, Inc. - - - - - - (19)
Net comprehensive loss
Balance at December 31, 1998 1 - 5,264 5 3,604 - (19)
Issuance of common stock at $4.00 per
share for cash, net of issuance costs
of $82 - - 420 1 1,595 - -
Issuance of common stock at $8.00 per
share for cash, net of issuance costs
of $52 - - 127 - 962 - -
Conversion of Series A preferred stock
into common stock (1) - 277 - - - -
Issuance of stock options to consultants
for services - - - - 311 - -
See accompanying notes to the consolidated financial statements

Path 1 Network Technologies Inc.
(a development stage company)

Consolidated Statements of Stockholders' Equity

(in thousands, US dollars, except for per share data)
For the years ended December 31, 2000 and 1999 and the period from January 30, 1998 (inception) to December 31, 1998

Accumulated
deficit during
the Total
Deferred development stockholders'
compensation stage equity

Balance at January 30, 1998 (inception) $- $- $-
Issuance of common stock at par to
founders for cash in February 1998 - - -
Issuance of Series A convertible
preferred stock in exchange for stock
in Jyra Research, Inc. - - 147
Issuance of common stock at $0.60 per
share for cash, net of issuance costs
of $48 - - 968
Transfer of common stock to employees
by principal stockholders - - 331
Issuance of stock options to consultants
for services - - 73
Deferred compensation related to
employee stock options (2,090) - -
Amortization of deferred compensation 1,420 - 1,420
Comprehensive loss:
Net loss from inception through
December 31, 1998 - (2,664) (2,664)
Unrealized loss on investment in Jyra
Research, Inc. - - (19)
Net comprehensive loss (2,683)
Balance at December 31, 1998 (670) (2,664) 256
Issuance of common stock at $4.00 per
share for cash, net of issuance costs
of $82 - - 1,596
Issuance of common stock at $8.00 per
share for cash, net of issuance costs
of $52 - - 962
Conversion of Series A preferred stock
into common stock - - -
Issuance of stock options to consultants
for services - - 311
See accompanying notes to the consolidated financial statements

Path 1 Network Technologies Inc.
(a development stage company)

Consolidated Statements of Stockholders' Equity

(in thousands, US dollars, except for per share data)
For the years ended December 31, 2000 and 1999 and the period from January 30, 1998 (inception) to December 31, 1998

Notes Accumulated
Series A Additional receivable Comprehensive
Convertible Preferred Stock Common stock paid-in from income
Shares Amount Shares Amount capital Stockholders (loss)

Deferred compensation related to
employee stock options - - - - 3,791 - -
Amortization of deferred compensation - - - - - - -
Comprehensive loss:
Net loss for the year ended December
31, 1999 - - - - - - -
Reversal of unrealized loss on
investment in Jyra Research, Inc. - - - - - - 19
Net comprehensive loss - - - - - - -
Balance at December 31, 1999 - - 6,088 6 10,263 - -
Issuance of common stock at $8.00 per
share for cash in February 2000, net
of issuance costs of $379 - - 600 1 4,421 - -
Issuance of common stock at $8.00 per
share for $10,120 in cash and 200,000
shares of Leitch common stock
valued at $3,100 in April 2000, net of
issuance costs of $100 - - 1,286 1 13,221 - -
Exercise of options to purchase common
stock for cash in October 2000 - - 20 - 12 - -
Exercise of options to purchase common
stock in December 2000 in exchange
for shareholder notes - - 190 - 114 (114) -
Issuance of stock options to consultants
for services - - - - 2,202 - -
Deferred compensation related to
employee stock options - - - - 2,062 - -
Amortization of deferred compensation - - - - - - -
Comprehensive loss:
Net loss for the year ended December
31, 2000 - - - - - - -
Unrealized gain on marketable
securities - - - - - - 228
Net comprehensive loss - - - - - - -
Balance at December 31, 2000 - - 8,184 $ 8 $32,295 $ (114) $ 228

See accompanying notes to the consolidated financial statements.

Path 1 Network Technologies Inc.
(a development stage company)

Consolidated Statements of Stockholders' Equity

(in thousands, US dollars, except for per share data)
For the years ended December 31, 2000 and 1999 and the period from January 30, 1998 (inception) to December 31, 1998

Accumulated
deficit during
the Total
Deferred development stockholders'
compensation stage equity

Deferred compensation related to
employee stock options (3,791) - -
Amortization of deferred compensation 1,300 - 1,300
Comprehensive loss:
Net loss for the year ended December
31, 1999 - (4,014) (4,014)
Reversal of unrealized loss on
investment in Jyra Research, Inc. - - 19
Net comprehensive loss - - (3,995)
Balance at December 31, 1999 (3,161) (6,678) 430
Issuance of common stock at $8.00 per
share for cash in February 2000, net
of issuance costs of $379 - - 4,422
Issuance of common stock at $8.00 per
share for $10,120 in cash and 200,000
shares of Leitch common stock
valued at $3,100 in April 2000, net of
issuance costs of $100 - - 13,222
Exercise of options to purchase common
stock for cash in October 2000 - - 12
Exercise of options to purchase common
stock in December 2000 in exchange
for shareholder notes - - -
Issuance of stock options to consultants
for services - - 2,202
Deferred compensation related to
employee stock options (2,062) - -
Amortization of deferred compensation 2,218 - 2,218
Comprehensive loss:
Net loss for the year ended December
31, 2000 - (13,120) (13,120)
Unrealized gain on marketable
securities - - 228
Net comprehensive loss - - (12,892)
Balance at December 31, 2000 $ (3,005) $ (19,798) $ 9,614

See accompanying notes to the consolidated financial statements.

Path 1 Network Technologies Inc.
(a development stage company)

Consolidated Statements of Cash Flows

(in thousands, US dollars, except for per share data)

Period from Period from
January 30, January 30,
1998 1998
(inception) (inception)
Years ended through through
December 31, December 31, December 31,
2000 1999 1998 2000
-------------------- ----------------- ---------------

Operating activities:
Net loss $(13,120) $ (4,014) $(2,664) $(19,798)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 143 12 19 174
Amortization of deferred
compensation 2,218 1,300 1,419 4,937
Common stock issued to employees by
principal stockholders - - 331 331
Common stock options issued for
services 2,202 311 73 2,586
Impairment loss on investment in Jyra
Research, Inc. 101 34 - 135
Changes in assets and liabilities:
Other current assets (91) (76) (10) (177)
Other assets (172) - - (172)
Accounts payable and accrued
liabilities 1,893 227 55 2,175
Accrued compensation and benefits 191 - - 191
Deferred revenue 324 - - 324
-------------------- ----------------- ---------------
Cash used in operating activities (6,311) (2,206) (777) (9,294)

Investing activities:
Purchase of marketable securities (209,668) - - (209,668)
Sale and maturity of marketable
securities 208,679 - - 208,679
Purchases of property and equipment (543) (17) (73) (633)
-------------------- ----------------- ---------------
Cash used in investing activities (1,532) (17) (73) (1,622)

Financing activities:
Issuance of common stock for cash 14,548 2,558 969 18,075
Exercise of stock options for cash 12 - - 12
-------------------- ----------------- ---------------
Cash provided by financing activities 14,560 2,558 969 18,087

Increase in cash and cash equivalents 6,717 335 119 7,171

Cash and cash equivalents, beginning
of period 454 119 - -
-------------------- ----------------- ---------------
Cash and cash equivalents, end of period $ 7,171 $ 454 $ 119 $ 7,171
==================== ================= ===============

Supplemental disclosure of noncash investing
activities:
Issuance of Series A convertible preferred
stock in exchange for investment in Jyra
Research, Inc. $ - $ - $ 147 $ 147
==================== ================= ===============
Issuance of common stock for marketable
securities $ 3,096 $ - $ - $ 3,096
==================== ================= ===============
Unrealized gain in marketable securities $ 228 $ - $ - $ 228
==================== ================= ===============
Exercise of stock options for
stockholder notes $ 114 $ - $ - $ 114
==================== ================= ===============

See accompanying notes to the consolidated financial statements.

Path 1 Network Technologies Inc.
(a development stage company)

Notes to Consolidated Financial Statements

December 31, 2000

1. Organization and Summary of Significant Accounting Policies

Organization and Business Activity

Path 1 Network Technologies Inc. (the Company) was incorporated in Delaware on
January 30, 1998 under the name Millennium Network Technologies, Inc. On March
16, 1998, the Company changed its name to Path 1 Network Technologies Inc.

The Company is engaged in the development of proprietary, internet protocol
("IP") and Ethernet based, network technology which, when developed, will
manage and alleviate network traffic congestion, enabling simultaneous data,
telephone and video transmissions over an IP/Ethernet network with improved
quality of service. From inception to date, management of the Company has
devoted substantially all of its efforts in developing its products and
technology, organizing the Company and raising capital necessary to fund
planned operations. Accordingly, at December 31, 2000, the Company is still
considered to be in the development stage.

Principles of Consolidation

The Company's consolidated financial statements include its wholly owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated.

Basis of Presentation

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of its
liabilities in the normal course of conducting business. In the period from
January 30, 1998 (inception) through December 31, 2000, the Company incurred
losses totaling US$19.8 million. The Company's ability to transition from the
development stage and ultimately, to attain profitable operations, is
dependent upon obtaining sufficient working capital to complete the successful
development of its products and technology, achieving market acceptance of
such products and technology and achievement of sufficient levels of revenue
to support the Company's cost structure. Management believes that the
Company's existing capital resources will enable the Company to fund
operations for the next twelve months. However, the Company is currently
seeking additional funding to expand its research and development activities
and its infrastructure. will be available on terms acceptable to the Company,
if at all. Without additional financing, the Company will be required to
delay, reduce the scope of, or eliminate one or more of its research and
development projects and significantly reduce its expenditures on
infrastructure.

Management Estimates and Assumptions

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 at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates. For example, the
Company recorded an estimated reserve of US$1.4 million for legal settlement
costs during the quarter ended December 31, 2000. This reserve may need to be
adjusted in subsequent periods.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased. The carrying value of these instruments approximates fair value.
The Company generally invests its excess cash in debt instruments of the U.S.
Treasury, government agencies and corporations with strong credit ratings.
Such investments are made in accordance with the Company's investment policy,
which establishes guidelines relative to diversification and maturities
designed to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest
rates. The Company has not experienced any significant losses on its cash and
cash equivalents.

Marketable Securities

The Company determines the appropriate classification of marketable securities
at the time of purchase and reevaluates such designation as of each balance
sheet date. Available-for-sale securities are stated at fair value as
determined by the most recently traded price of each security at the balance
sheet date. The net unrealized gains or losses on available-for-sale
securities are reported as a component of comprehensive income. The specific
identification method is used to compute the realized gains and losses on
debt and equity securities.

Fair Value of Financial Instruments

The carrying value of cash, cash equivalents, marketable investments, accounts
payable, and accrued liabilities approximates their fair value.

Property and Equipment

Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, ranging from two to five years, using the
straight-line method.

Income Taxes

Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are
determined based on the difference between the financial statement bases and
the tax bases of assets and liabilities using enacted tax rates. A valuation
allowance is established to reduce a deferred tax asset to the amount that is
expected more likely than not to be realized.

Revenue Recognition

Revenue from hardware and software product sales will be recorded upon
shipment, or when delivery requirements and risk of loss passes to the
customer, if later. Revenue from services will be recorded when earned and no
significant acceptance criteria exists. Revenue on engineering design
contracts, including technology development agreements, will be recognized
using the percentage-of-completion method, based on costs incurred to date
compared with total estimated costs. Billings on uncompleted contracts in
excess of incurred cost and accrued profits will be classified as deferred
revenue. License fees will be recognized when delivery requirements have been
met and collection is probable. Royalty revenue will be recorded as earned in
accordance with the specific terms of each license agreement when reasonable
estimates of such amounts can be made.

Research and Development Expenses

Research and development expenditures are charged to expense as incurred. The
Company expenses amounts paid to obtain patents or acquire licenses, as the
ultimate recoverability of the amounts paid is uncertain.

Advertising Expense

Advertising expenditures are charged to expense as incurred. The Company
expensed US$219,000, US$57,000, and US$37,000 for the years ended December 31,
2000 and 1999, and for the period from January 30, 1998 (inception) through
December 31, 1998, respectively.

Stock Based Compensation

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

In March 2000, the Financial Accounting Standards Board, or FASB, released
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, and interpretation of APB Opinion No. 25," (FIN 44) which
provides clarification of APB 25 for certain issues such as the determination
of who is an employee, the criteria for determining whether a plan qualifies
as a non-compensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
the accounting for an exchange of stock compensation awards in a business
combination. We believe that our practices are in conformity with this
guidance, and therefore FIN 44 had no impact on our financial statements.

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

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

Net Loss per Share

Basic and diluted net loss per share has been computed in accordance with SFAS
No. 128, Earnings Per Share, using the weighted-average number of shares of
common stock outstanding during the period including any dilutive common stock
equivalents. Common stock equivalents for the twelve months ended December
31, 2000, 1999 and for the period from January 30, 1998 (inception) to
December 31, 1998 consisting of options outstanding to purchase approximately
3,355,000, 1,217,000 and 1,079,000 shares of common stock, respectively, were
not included in the calculation of diluted earnings per share because of the
anti-dilutive effect.

Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
98, common shares, if any, issued in each of the periods presented for nominal
consideration would be included in the per share calculations as if they were
outstanding for all periods presented. No such shares have been issued.

New Accounting Standards

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities.
In May 1999, the FASB delayed the effective date of SFAS 133 by one year. The
Company will be required to adopt SFAS 133 for fiscal year 2001. This
statement establishes a new model for accounting for derivatives and hedging
activities. Under SFAS 133, certain derivatives must be recognized as assets
and liabilities and measured at fair value. The Company is not currently
engaged in derivative or hedging activities.

In December 1999, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements.

1. Organization and Summary of Significant Accounting Policies (continued)

In June 2000, the SEC staff amended SAB 101 to provide registrants with
additional time to implement SAB 101. The Company adopted SAB 101 in the
fourth quarter of fiscal 2000. The adoption of SAB 101 did not have a material
effect on its consolidated financial position or results of operation, as the
Company has not recognized revenue as of December 31, 2000.

Reclassifications

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

2. Transactions with Leitch Technology Corporation

In April 2000, the Company sold 1,250,000 shares of its Class A Common Stock
in a private placement to Leitch Technology Corporation ("Leitch") for US$8.00
per share, resulting in gross proceeds of US$10.0 million. The Company also
received 200,000 shares of Leitch common stock with a fair value at the date
of the transaction of US$3.1 million. Leitch's common stock is publicly
traded on the Toronto Stock Exchange under the symbol "LTV" and on the Nasdaq
National Market under the symbol "LVID". In conjunction with the private
placement, the Company entered into a technology license agreement with Leitch
and provided Leitch a non-exclusive worldwide royalty bearing license (except
as to TrueCircuitTM technology in products designed for the professional video
market, which is subject to an exclusive royalty bearing license in favor of
Leitch) to utilize the Company's intellectual property to develop and sell
products which incorporate its proprietary TrueCircuitTM technology. The
technology license is subject to a five-year initial royalty- free period.
The shares of Class A Common Stock sold to Leitch are subject to Rule 144
restrictions on resale as they were unregistered securities purchased in a
private transaction.

In July 2000, the Company sold an additional 36,250 shares of its Class A
Common Stock to Leitch for US$8.00 per share, resulting in gross proceeds of
US$290,000. The shares were issued pursuant to the exercise of certain anti-
dilution rights maintained by Leitch.

3. Composition of Certain Balance Sheet Captions

December 31,
2000 1999
------------ ------------
(in thousands, US dollars)
Property and equipment:
Computer equipment $ 441 $ 83
Test equipment 146 -
Furniture and fixtures 46 7
------------ ------------
633 90
Less accumulated depreciation (174) (31)
------------ ------------
$ 459 $ 59
============ ============

Accounts payable and other accrued
liabilities:
Accounts payable $ 564 $ 162
Reserve for legal settlement 1,400 -
Other 211 120
------------ ------------
$ 2,175 $ 282
============ ============

4. Marketable Securities

Marketable securities available for sale consist primarily of corporate stock
and corporate debt securities. The costs and estimated fair market value as
of December 31, 2000 are as follows (in thousands, US dollars):

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------

Short-term Investments Available for Sale:
Corporate Debt Securities 996 - - 996
Equity Securities 3,100 217 - 3,317
$4,096 $217 - $4,313

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
Cash 490 - - 490
Cash Equivalents:
Commercial Paper 6,646 11 - 6,657
Money Market Fund 24 - - 24
$7,160 $11 $7,171

As of December 31, 2000 the Company had investments in equity securities and
corporate debt securities of approximately US$4,313,000 available for sale.
The Company uses the specific identification method in determining cost on
these investments. The contractual maturities of commercial paper and
corporate debt securities of US$996,000 classified as available for sale as of
December 31, 2000 are due within one year.

5. Commitments

The Company leases its office facilities and certain office equipment under
operating lease agreements that expire at various times through June 2003. The
leases are payable in monthly installments of approximately US$15,000, subject
to annual rate increases. Rent expense totaled US$124,000 for the year ended
December 31, 2000, US$126,000 for the year ended December 31, 1999, US$28,000
for the period from January 30, 1998 (inception) through December 31, 1998 and
US$278,000 for the period from January 30, 1998 (inception) through December
31, 2000.

Annual future minimum lease obligations for operating leases as of December
31, 2000 are as follows (in thousands, US dollars):

Year Ended December 31, Amount
----------------------- -------
2001 $176
2002 79
2003 2
$257

6. Stockholders' Equity

Founders Stock

On January 31, 1998, the Company issued 1,000 shares of common stock to the
Company's founders for US$1,100 in cash.

Stock Split

On March 15, 1998 the Board of Directors authorized a 3,600 for 1 stock split
of all outstanding common stock. All share and per share amounts (except in
"Founders Stock" above)and stock option data within the financial statements
have been restated to reflect the stock split.

Authorized Shares

On March 16, 1998, the Company amended its Certificate of Incorporation to
increase the Company's authorized shares of common stock to 20,000,000 with a
par value of US$0.001 per share.

On April 13, 1999, the Company amended its Certificate of Incorporation to
authorize 10,000,000 shares of Class B Common Stock with a par value of
US$0.001 per share, and classify the Company's existing common stock as Class
A common stock.

Convertible Preferred Stock

On December 7, 1999, Jyra Research, Inc. converted ten shares of the Company's
Series A Preferred Stock, which was authorized on March 15, 1998 by the
Company's Board of Directors, into 277,018 shares of the Company's Class A
Common Stock. As of December 31, 2000 there is no authorized preferred stock.

Class B Common Stock

The Class B Common Stock has no voting rights and the holders are not entitled
to receive any dividends. Class B Common Stock will convert into shares of
Class A Common Stock, on a one-for-one basis, upon the occurrence of any one
of the following four events:

(1) The Company (or 50% or more of its stock or assets) is acquired by a
person or an affiliated group by merger, reverse triangular merger,
private stock sale, direct stock issuance, consolidation or otherwise.

(2) The Company sells, leases, or exclusively licenses all or substantially
all of its assets (excluding sales of inventory in the ordinary course of
business).

(3) The Company reports for any fiscal year revenues from operations equal to
US$10,000,000 or more and reports for such fiscal year EBITDA (earnings
before interest, taxes, depreciation, amortization and extraordinary
items) of US$2,000,000 or more, as determined in accordance with generally
accepted accounting principles in the United States.

(4) The Company consummates the sale of its Class A Common Stock in a bona
fide, firm commitment underwriting pursuant to a registration statement
under the Securities Act of 1933, as amended, the public offering price
of which is not less than US$25,000,000 in the aggregate.

Private Placement Offerings

In May 1998, the Company completed a Private Placement offering under which it
sold 1,614,833 shares of common stock at US$0.60 per share to accredited
investors, resulting in net cash proceeds totaling US$968,000. In connection
with the offering, the Company issued 49,500 Class A common shares to brokers
as payment for finders fees and incurred other offering related expenses of
US$48,000.

In April 1999, the Company completed a Private Placement Offering under which
it sold 419,500 shares of common stock at US$4.00 per share to accredited
investors, resulting in net cash proceeds totaling approximately US$1.6
million. In connection with the offering, the Company granted options for the
purchase of 20,975 shares of Class A common stock with an exercise price of
US$4.00 per share through May 2009, to brokers as payment for finders fees and
incurred other offering related expenses of US$82,000.

In December 1999, the Company completed a Private Placement Offering under
which it sold 126,800 shares of common stock at US$8.00 per share to
accredited investors, resulting in net cash proceeds totaling approximately
US$962,000. These shares were purchased in an arms length transaction by
private and institutional investors, none of whom had a significant beneficial
interest before the placement. Further, none of these investors are affiliates
of the Company. These shares were also subject to resale restrictions for one
year as they were purchased in a private transaction. The cash proceeds of
US$8.00 per share were the highest price the Company was able to negotiate
and still attract the funds. The resulting discount in price from the average
price of OTC-Bulletin Board transactions for the period represents the
associated discount for the resale restriction and the block of stock being
offered. In connection with the offering, the Company granted options to
purchase of 6,250 shares of Class A common stock with an exercise price of
US$8.00 per share through December 2006, to brokers as payment for finders
fees and incurred other offering related expenses of US$52,000.

Between January 1, 2000 and May 31, 2000, the Company sold 600,000 shares of
Class A Common Stock at US$8.00 per share to accredited investors pursuant to
a Private Placement Offering that commenced in 1999, resulting in net cash
proceeds totaling approximately US$4.4 million. In connection with the
offering, the Company granted options to purchase 30,000 shares of Class A
Common Stock at an exercise price of US$8.00 per share through February 2007
as payment for finder's fees, and incurred other offering expenses of
US$379,000.

1999 Stock Option/Stock Issuance Plan

On August 3, 1999, the Company adopted the 1999 Stock Option/Stock Issuance
Plan (the 1999 Plan) that provides for the grant of incentive and non-
statutory stock options for the purchase of Class B Common Stock to employees,
directors or consultants of the Company. The 1999 Plan, as amended, authorizes
the Company to issue up to 3,500,000 shares of Class B common stock. The 1999
Plan provides that incentive stock options will be granted at no less than the
fair value of the Company's Class B common stock as determined by the Board of
Directors at the date of the grant. The options generally vest and become
exercisable either immediately or over one to four years. Generally, any
unvested shares underlying unexercised options will be canceled in the event
of termination of employment or engagement. Options expire no more than ten
years after the date of grant, or earlier if the employment terminates or as
determined by the Board of Directors.

2000 Stock Option/Stock Issuance Plan

Prior to the adoption of the 1999 Plan and outside of any existing stock
option plan, the Company granted non-statutory stock options for the purchase
of Class A Common Stock to employees, directors or consultants of the Company.
On August 21, 2000, the Company adopted the 2000 Stock Option/Stock Issuance
Plan (the 2000 Plan) that provides for the grant of non-statutory stock
options for the purchase of Class A Common Stock to employees, directors or
consultants of the Company. The 2000 Plan authorizes the Company to issue up
to 10,000 shares of Class A Common Stock. The options generally vest and
become exercisable either immediately or over one to four years. Options
expire no more than ten years after the date of grant, or earlier if the
employment terminates or as determined by the Board of Directors.

The following table summarizes all options outstanding and exercisable as of
December 31, 2000 (in thousands, US dollars, except year and per share data):

Weighted
average Weighted Weighted
remaining average average
Exercise Number contractual exercise Options exercise of
price outstanding life (years) price exercisable exercisable
- --------------------------------------------------------------------------
Class A:
$0.60 629 4.44 $0.60 496 $0.60
$2.00 11 4.25 $2.00 8 $2.00
$2.50 25 4.67 $2.50 15 $2.50
$4.00 21 4.67 $4.00 21 $4.00
$8.00 46 5.54 $8.00 46 $8.00

Class B:
$2.00 256 5.98 $2.00 122 $2.00
$4.35 2,367 6.43 $4.35 968 $4.35
3,355 5.98 $3.49 1,676 $3.14

All stock option transactions are summarized as follows (in thousands, US
dollars, except per share data):

Class A Weighted Class B Weighted
Stock Average Stock Average
Option Exercise Option Exercise
Shares Price Shares Price
-------------------------------------------
Balance at January 30, 1998
(inception) - $ - - $ -
Granted 827 0.66 - -
Exercised - - - -
Cancelled (25) 0.60 - -
-------------------------------------------
Balance at December 31, 1998 802 0.66 - -
Granted 128 1.70 495 2.33
Exercised - - - -
Cancelled (39) 2.00 (169) 2.00
-------------------------------------------
Balance at December 31, 1999 891 0.75 326 2.51
Granted 51 8.00 2,546 4.35
Exercised (210) 0.60 - -
Cancelled - - (249) 4.35
-------------------------------------------
Balance at December 31, 2000 732 $1.25 2,623 $4.12
===========================================
Exercisable at December 31, 2000 586 $1.37 1,090 $4.09
===========================================

Stock Based Compensation

During the twelve months ended December 31, 2000, the Company granted
approximately 2,598,000 stock options to employees and consultants with
vesting periods ranging from immediate to four years. The options are for the
purchase of approximately 51,000 shares of Class A Common Stock at an exercise
price of US$8.00 per share and approximately 2,547,000 shares of Class B
Common Stock at an exercise price of US$4.35 per share. During the twelve
months ended December 31, 2000, the Company recorded stock-based compensation
expense of US$4.4 million related to options outstanding to employees and
consultants.

The Company has adopted the disclosure-only provision of SFAS No. 123,
Accounting for Stock Based Compensation. Accordingly, no compensation expense
has been recognized for the stock options issued to employees or directors in
accordance with SFAS No. 123. If compensation expense had been determined
consistent with SFAS No. 123, as compared to the intrinsic method in
accordance with APB 25, the Company's net loss would have been changed to the
following pro forma amounts (in thousands, US dollars):

2000 1999 1998
---------- ---------- ----------
Net loss, as reported $(13,120) $(4,014) $(2,664)
Net loss, pro forma (16,907) (4,147) (2,774)

Net loss per share, as reported (1.78) (0.71) (0.57)
Net loss per share, pro forma (2.29) (0.73) (0.59)

The effects are not likely to be representative of the effects on pro forma
net income or loss in future years.

The fair value of options granted in 2000, 1999 and for the period from
January 30, 1998 (inception) to December 31, 1998 is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected life of three to four years; expected
dividend yield of zero percent; expected volatility of 100 percent; and risk-
free interest rate of six percent. The weighted-average fair value of the
options granted to employees during 2000, 1999 and the period from
January 30, 1998 to December 31, 1998 was US$8.01, US$10.82 and US$3.19,
respectively.

Common Shares Reserved for Future Issuance

At December 31, 2000, common shares reserved for future issuance under the
1999 Plan, the 2000 Plan and non-Plan outstanding stock options consist of the
following (in thousands):

Total Class A Class B
------------------------------
Stock options issued and outstanding 3,355 732 2,623
Shares reserved for future issuance 1,157 280 877
------------------------------
Total reserved 4,512 1,012 3,500
==============================

7. Income Taxes

Significant components of the Company's deferred tax assets are shown below. A
valuation allowance of US$7,883,000 has been recognized at December 31, 2000
to offset the deferred tax assets as realization of such assets is uncertain
(in thousands, US dollars):

December 31,
2000 1999 1998
-------------------------------
Deferred tax assets:
Net operating loss carryforwards $5,360 $1,369 $ 413
Research and development credits 591 133 37
Deferred compensation 1,889 - -
Other, net 43 68 14
-------------------------------
Total deferred tax assets 7,883 1,570 464
Valuation allowance (7,883) (1,570) (464)
-------------------------------
Net deferred tax assets $ - $ - $ -
===============================

At December 31, 2000, the Company has federal and California net operating
loss carryforwards of approximately US$13,100,000 and US$13,250,000,
respectively. The federal and California tax loss carryforwards will begin
expiring in 2019 and 2007, respectively, unless previously utilized. The
Company also had federal and California research tax credit carryforwards of
approximately US$400,000 and US$280,000, respectively, which will begin to
expire in 2019 unless previously utilized.

Pursuant to Internal Revenue Code Sections 382 and 383, the annual use of the
Company's net operating loss carryforwards may be limited in the event of a
cumulative change in ownership of more than 50% which occurs within a three
year period. However, the Company does not believe such limitation will have a
material impact upon the utilization of these carryforwards.

8. Legal Proceedings

On September 20, 1999, the Company filed a complaint against certain
stockholders and their affiliates for breach of oral contract, professional
negligence, breach of fiduciary duty, constructive trust, breach of the
covenant of good faith and fair dealing and unfair business practice,
primarily in connection with the allocation of founders stock of the Company.
On November 29, 1999, Dr. Franklin Felber, a former officer and director of
the Company, who was a defendant in the September 20, 1999 complaint, filed a
cross-complaint against the Company, certain of our directors and Jyra
Research, Inc. alleging fraud, breach of fiduciary duty, breach of the
covenant of good faith and fair dealing, and misrepresentation in connection
with the exercise by Jyra's assignees of Jyra's arrangement to purchase from
him for US$4.00 per share, 30,000 shares of our Class A Common Stock in
February 1999 and 225,640 shares of the Company's Class A Common Stock in July
1999.

In April 2000, this complaint and all counterclaims arising out of it were
settled as to all parties other than Dr. Felber. Other than with respect to
Dr. Felber, the parties released the original complaint and all counterclaims
against each other and certain directors of Path 1.

9. Employee Benefits

In November of 2000 the Company adopted a voluntary deferred compensation plan
under Section 401(k) of the Internal Revenue Code. Employees who are at least
21 years of age are eligible to participate in the plan. Under the terms of
the plan, the Company matches thirty percent of the employee's contribution, up
to six percent of their annual salary. Matching contributions made by the
Company for the year ended December 31, 2000 were approximately US$2,000.

10. Subsequent Events

Felber Litigation

Under a Settlement Agreement and Mutual Release dated January 4, 2001, the
Company settled its lawsuits and signed a mutual general release with Dr.
Franklin Felber. Each party agreed that the settlement was not to be construed
as an admission of any liability or wrongdoing by anyone. To settle the
lawsuits, the Company paid Dr. Felber US$300,000 and placed in escrow
US$200,000 and 400,000 shares of Class A Common Stock. On January 10, 2002,
Dr. Felber will receive from escrow some or all of the cash and stock, based
on the following table (US dollars):

If for the 30 trading days immediately Then Felber shall receive
preceding January 10, 2002, the average from the escrow the following
closing price ("ACP") of our Class A number of shares of our Class Plus the following
Common Stock is: A Common Stock: amount of cash:
- --------------------------------------- ----------------------------- ------------------

A. $11.00 or more The quotient of $1,000,000 $0
divided by the ACP
B. Between $6.00 and $10.99 100,000 $0
C. Between $4.00 and $5.99 100,000 The difference
between $600,000
and the product of
100,000 times the ACP
D. Between $1.00 and $3.99 The quotient of $400,000 $200,000
divided by the ACP
E. Less than $1.00 400,000 $200,000

Any of the cash and stock not delivered to Dr. Felber under this settlement
agreement will be returned to the Company. The Company recorded a reserve for
settlement costs of US$1.4 million at December 31, 2000, its maximum exposure
under the terms of the settlement agreement.

Metar Acquisition

Effective February 1, 2001, the Company completed the purchase of assets of
Metar ADC, a Bucharest, Romania-based integrated circuit design company.
Under the terms of the purchase agreement, the Company is to pay US$2 million
in cash for the assets of Metar ADC. The first US$1 million is payable upon
receipt and acceptance of designated technology transfers from Metar ADC..
The second US$1 million is payable over a three-year period on the anniversary
date of technology acceptance as follows: US$150,000 in year one, US$250,000
in year two and US$600,000 in year three.

The acquisition will be accounted for as a purchase in accordance with the
provisions of APB No. 16. The present value of the future payments due to
Metar ADC using a discount rate of fifteen percent is US$698,000. In addition
to the US$1.7 million purchase price, Path 1 expects to incur approximately
US$100,000 in acquisition-related costs.

Based on the consideration issued in the transaction, and the related costs,
the total purchase price of Metar ADC is approximately US$1.8 million
determined as follows (in thousands, US dollars):

Amount
---------
Cash $1,000
Present value of future payments due to Metar ADC 698
Acquisition costs 100
---------
$1,798
=========

Although the Company has not conducted an independent valuation of the
tangible and intangible assets acquired in order to allocate the purchase
price in accordance with APB No. 16, the purchase price will be allocated as
follows based on management's best estimate of the acquired tangible and
intangible assets (in thousands, US dollars):

Amount
---------
Property and equipment $ 7
Intangible assets 1,791
---------
Total consideration $1,798
=========

The acquired intangible assets will be amortized over an estimated useful life
of three years.

11. Summary of Quarterly Results of Operations (unaudited)

Fiscal Quarters (Year ended December 31,)
(In thousands, US Dollars, except for per share data)

1st 2nd 3rd 4th
-----------------------------------------------------

2000
Loss From Operations $ (2,935) $ (6,217) $ (361) $ (3,955)
Net Loss (2,966) (6,140) (186) (3,828)

Basic and Diluted Loss Per Share $ (0.47) $ (0.82) $ (0.02) $ (0.48)
Weighted Average Shares Used
In Calculation 6,325 7,513 7,932 7,985

1999
Loss From Operations $ (735) $ (683) $ (784) $ (1,798)
Net Loss (734) (679) (777) (1,824)

Basic and Diluted Loss Per Share $ (0.14) $ (0.13) $ (0.14) $ (0.30)
Weighted Average Shares Used
In Calculation 5,388 5,403 5,684 6,080