** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-K**

 

**ý****                                ****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Fiscal Year Ended June30, 2003**

 

**o****                                  ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom                          to                          **

 

**Commission File Number: 000-24999**

 

## **LOTUSPACIFIC, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    |   | **52-1947160**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S.Employer  Identification Number) |

 

### **2402 Michelson Drive,Suite 220, Irvine, CA 92612**

(Address of principal executive offices, Zip code)

 

Registrant’s telephone number, including area code: **949-475-1880**

 

Securities registered pursuant toSection 12(b) of the Act: **None**

Securities registered pursuant toSection 12(g) of the Act: **Common Stock, par value $0.001****per share**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding 12 months (or forsuch period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

(1) Yes o No ý  (2) Yes ý No o

 

Indicate by check markif disclosure of delinquent filer pursuant to Item 405 of Registrant S-K is notcontained herein, and will not be contained to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.(  )

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2). 

Yes o No ý

 

The aggregate marketvalue of the registrant’s voting Common Stock held by non-affiliates of theregistrant was approximately $2,329,554 (computed using the adjusted closingsales price of $0.08 per share of Common Stock on June 30, 2004 as reported bythe Pink Sheets).  Shares of CommonStock held by each officer and director and each person who owns 5% or more ofthe outstanding Common Stock have been excluded in that such persons may bedeemed affiliates.  The determination ofaffiliate status is not necessarily a conclusive determination for otherpurposes.

 

The number of shares of Common Stockoutstanding as of August 15, 2004 was 50,723,604.

 

----

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

##### None.

 

 

----

 

##### **PART I**

 

**Item1.  Business**

 

***ExplanatoryNote - Delays in Reporting***

 

This Annual Report on Form 10-K forLotus Pacific, Inc. (the “Company” or “Lotus Pacific”) for fiscal year endedJune 30, 2003 is being filed after the required due date as a result ofrestating financial information included in Form 10-K for the fiscal year endedJune 30, 2002 as previously filed with the Securities and Exchange Commission(“SEC”) on April 16, 2004.  

 

As previously reported, on June 29,2001, a majority of the Company’s stockholders, led by T.C.L. IndustriesHoldings (H.K.) Limited (“TCL”), were successful in a solicitation to gaincontrol of the Company and to replace prior management of the Company.  On June 29, 2001, new directors and officerswere appointed and the then existing directors and officers were immediatelyremoved from office.

 

Following the replacement of priormanagement, the new management began an extensive review of varioustransactions undertaken by and involving old management prior to June 29,2001.  Due to the preliminary results,the Company dismissed its then existing independent accountants and replacedthem with new independent accountants. On March 25, 2002, the new independent accountants were engaged to auditfiscal 2002.  As previously reported,during its preliminary investigation, new management of the Company identifiedvarious transactions involving Regent Electronics Corporation (“Regent”), aformer subsidiary of Lotus Pacific, and other transactions undertaken by priormanagement which impacted reported financial and operating results with respectto its consolidated financial statements for fiscal 2001, 2000 and 1999 andultimately concluded that a reaudit of the financial statements for fiscal2001, 2000 and 1999 was required.  OnJuly 24, 2002, the Company engaged its new independent accountants to performsuch reaudit and the Company concluded that it would be required to restatethese prior periods.   As previouslyreported, new management concluded the restatements would include adjustments,among others, to the Company’s previously reported revenues, cost of sales, netloss, earnings per share and related party transactions.  The Company completed such restatements inits Form 10-K for fiscal 2002 filed April 16, 2004. Additionally, the Companyis currently working to complete all required reports for subsequent periodsand will file them as soon as they are available.

 

***ExplanatoryNote – Updated Information Subsequent to Fiscal 2003***

 

Because this report relates to fiscal2003, except as otherwise noted herein, this report speaks as of June 30, 2003.The Company has not updated the disclosures in this report to speak as of alater date, except as specifically referenced in the following sections:

 
|   | • | Item 1.  Business;                                                                                                       |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|--------|
|   | • | Item 2.  Properties;                                                                                                     |   |
|   | • | Item 3. Legal Proceedings;                                                                                               |   |
|   | • | Item 5. Market for Registrant’s common equity  and related stockholder matters;                                     |   |
|   | • | Item 8. Financial Statements and Supplementary  Data Note 1 – Business and Background and Note18 Subsequent Events. |   |
|   | • | Item 10. Directors and Executive Officers of  the Registrant;                                                            |   |
|   | • | Item 12. Security Ownership of Certain  Beneficial Owners and Management;                                                |   |
|   | • | Item 13. Certain Relationships and Related  Transactions;                                                                |   |
|   | • | Item 14. Principal Accounting Fees and  Services; and                                                                    |   |
|   | • | Item 15. Exhibits                                                                                                        |   |

 

Accordingly, the disclosure in thisreport does not contain complete and updated information regarding the Companyand its operations as of the date of filing this report.  All such information contained in this reporttherefore is subject to updating and supplementing to be provided by theCompany in its reports to be filed with the SEC for periods subsequent tofiscal 2003.  

 

***ExplanatoryNote – Disclaimer of Audit Opinion***

 

As previously reported, the Company soldits controlling interest in ARESCOM Inc (“Arescom”).  Following such sale, during the reaudit described above, theCompany’s independent accountants were unable to audit the

 

2

----

 

financial statements of Arescom, asignificant subsidiary, for the year ended June 30, 2001, as the subsidiarywould not provide the necessary information to allow the independentaccountants to complete the audits.  Dueto Arescom’s lack of cooperation, the Company’s independent accountants wereunable to attain satisfaction about Arescom’s account balances by means ofother auditing procedures.  As a result,the Company’s independent accountants did not express an opinion on theconsolidated financial statements for the year June 30, 2001.

 

###### ***Company Overview and BusinessStrategy***

 

On March 7, 2004, the Company’s board ofdirectors adopted resolutions proposing and approving a change of the Company’sname from “Lotus Pacific, Inc.” to “Opta Corporation.”  On June 29, 2004, the Company filed aPreliminary Information statement, Schedule 14C, with the SEC to inform allstockholders of the approval of an amendment to the Company’s Certificate ofIncorporation providing for the name change. Holders of a majority of the Company’s outstanding shares consented inwriting to the name change.  A letterwas mailed to all Lotus shareholders on July 12, 2004 informing them of thename change.  The name change willbecome effective upon filing the Definitive Information statement, Schedule14C, with the SEC.  As the name changehas not been finalized as of the date of this filing, all references in thisForm 10-K will be to Lotus Pacific.  Andunless otherwise noted, references to “Lotus Pacific,” the “Company,” “we,”“our” or “us” mean Lotus Pacific, Inc., and its subsidiaries. 

 

The Company incorporated in Delaware onJune 25, 1985.  Under prior management,the Company was significantly restructured and changed its name to LotusPacific, Inc. in September 1994.  LotusPacific is a holding company that conducts business through its subsidiaries.The Company develops, manages, and operates emerging consumer electronics andcommunications companies, focusing on developing next generation consumerelectronics and communication products. The Company provides its subsidiarieswith capital and strategic and infrastructure services.

 

Following the takeover of the Board ofDirectors of the Company on June 29, 2001, new management of the Companybegan a thorough review of all aspects of the business operations of theCompany and its subsidiaries and has engaged in numerous transactions torestructure the Company’s business.

 

Under new management, the Company’sprimary strategy for business operations has been to restructure or shut downits unprofitable businesses, acquire undervalued or underutilized companies andfocus on profitable growth.  The Companyhas moved aggressively to sell, restructure or shutdown its businesses whichwere not operating profitably and/or which may or would have requiredsignificant cash investments. The Company continues to identify marketopportunities that will create and accelerate the growth and success of itssubsidiary companies and to implement new business plans to improve the returnson these businesses.

 

Current management intends to focus theCompany’s business on its newly acquired subsidiary, Opta Systems, LLC (“Opta”)dba GoVideo (see “***Significant BusinessDevelopments and Subsidiary Activity During Fiscal 2003”)***, andconcentrate future business in the related industries of consumer electronicsand telecommunications.

 

The Company further seeks to improve theefficiencies of the Company’s operations and accelerate growth by utilizing itscompetitive advantages. The Company believes these competitive advantagesinclude the significant experience of current management in the communicationsand consumer electronics industry and business opportunities presented to theCompany in China and Asia through the strength of its relationships with itssignificant shareholders, including TCL. TCL is an affiliated company of TCL International Holdings Limited(HKSE: 1070) (“TCL International”), a leading multimedia consumer electronicsproduct manufacturer, with a strong brand presence in China and Asia.  TCL International’s core products includetelevisions, mobile handsets, personal computers, audio-visual equipment aswell as information technology services. Under its highly recognized and well-established TCL brand, it is one ofthe strongest players in the TV and mobile handset marketplace in China.Headquartered in China, it operates a number of highly efficient manufacturingbases in Asia.

 

***BusinessDevelopments and Subsidiary Activity Prior to Fiscal 2003***

 

In April and May 1997, the Companyacquired 70% of the common stock of Regent. In June 1997, Regent acquired Amiga-based, multimedia technology relatedassets and rights from Rightiming Electronics Corporation (“Rightiming”). OnJune 26, 2001, the Company spun-off Regent to Regent’s management.

 

3

----

 

In February 1999, the Company acquired100% of the outstanding shares of Professional Market Brokerage, Inc. (“PMB”),a Chicago-based financial trading firm that provided online trading services,and 100% of the outstanding shares of US Securities & Futures Corp.(“USSF”), a full service brokerage firm in New York, NY. In June 1999, theCompany created USS Online, Inc. (“USS Online”), a wholly-owned subsidiary, andtransferred all of its ownership interests in each of USSF and PMB to USS Onlineto run those two financial service subsidiaries. In February 2000, the Companysold 72% of its ownership in USS Online. 

 

In March 1999, the Company acquired 95%of the issued and outstanding common shares of Correlant Communications, Inc.(formerly TurboNet Communications, Inc.) (“Correlant”), representing an 81%ownership interest in Correlant.  Basedin San Diego, California, Correlant designed, developed and marketedtelecommunications products to cable operators, network service providers, andcommunications network users in the United States and Asian countries. 

 

In March 1999, the Company acquired 77%of the issued and outstanding common shares of Arescom.  Based in Fremont, California, Arescomdesigned, manufactured and marketed a broad range of high quality remote accessproducts, such as routers and remote managing software, and otherinter-networking equipment for Internet Service Providers (“ISP”), resellers,and system integrators in the North America market.  In December 2001, the Company sold approximately 92% of itsinvestment in Arescom, representing 65% of the outstanding securities ofArescom to an unrelated third party. 

 

At the time Correlant and Arescom wereacquired, Lotus Pacific’s strategy for growth was to increase its product lineand customer base through the acquisition of businesses which providedInternet-related products and services and complemented Lotus Pacific’sexisting Internet technology and resources.

 

On April 22, 1999, the Company organizedLotus World, Inc. (“Lotus World”) to offer Auction Live, an online auctionservice, to international clients.  Thewholly-owned subsidiary was incorporated in Delaware in April 1999, and was aprivate-label Asian language e-commerce service provider, targetingbusiness-to-business and business-to-customer markets, portals and ISPcompanies.  Due to the negative responsein general to e-commerce, the operations of Lotus World were suspended by priormanagement in 2001.

 

On November 13, 2000, the Companyestablished a wholly-owned subsidiary, Acumen Technology, Inc. (“Acumen”),incorporated in Delaware. In December 2000, the Company transferred all of thecapital stock it held in Correlant and Arescom to Acumen. Other than itsholdings of the Correlant and Arescom stock, Acumen had no material independentoperations.  In December 2001, Acumenwas merged into Lotus Pacific and all the assets and liabilities of Acumen wereassumed by the Company.

 

In June 2001, Acumen formed LotusPacific Communications Technology (Beijing) Co., Ltd. (“Beijing Lotus”), awholly-owned subsidiary, to support business activity in Beijing.  As of the date of this Form 10-K, BeijingLotus has no material independent operations.  

 

As previously reported, onDecember 11, 2001, the Company merged Acumen into the Company.  As a result of the merger, the Companyassumed all the rights and obligations of Acumen and acquired the assets ofAcumen that included, without limitation, shares of stock of Correlant andArescom. Acumen had no operations other than serving as a holding company forthe shares of stock of Correlant and Arescom. 

 

As previously reported, on December 11,2001, the Company sold to Solomon Extreme International Ltd. (BVI),24,234,738 shares of common stock of the Company’s subsidiary, Arescom, representingapproximately 70% of the outstanding shares of Arescom, for $10,000,000 incash.  The Company determined thatArescom would not generate consistent cash flow from operations in theforeseeable future, and decided to sell its interests for cash to pursue otherbusiness opportunities. The Company retained approximately 6% of theoutstanding common shares and 11,048 shares of subordinated preferred stock ofArescom.

 

Pursuant to the terms of the Company’sacquisition of Arescom in March 1999, an aggregate of 3,885,856 shares ofthe Company’s common stock issued to the former shareholders of Arescom inexchange for their shares of Arescom were restricted and could not be solduntil Arescom’s annual gross revenue and net income before taxes reached certainlevels.  As previously reported, inconnection with the transaction involving the sale of the Company’s controllinginterest in Arescom, the Company agreed to release the restrictions previouslyimposed on the shares of common stock of the Company held by the formershareholders of Arescom. 

 

4

----

 

As previously reported, on March 12,2002, the Company and Lotus World entered into an Asset Purchase and Assignmentand Assumption Agreement with Avtech Technology, whereby the Company assignedits rights to certain contracts and related intangibles to Avtech in exchangefor Avtech’s assumption of all of the Lotus World’s obligations under thecontracts assigned.  Subsequent to thecompletion of the transaction, the Company dissolved Lotus World.

 

***SignificantBusiness Developments and Subsidiary Activity During Fiscal 2003***

 

*Acquisition of New Subsidiary – Go Video*

 

As previously reported, in April 2003the Company loaned $5,986,000 to Opta, which was used, in addition to a depositof $250,000 paid by Opta to complete its purchase of substantially all assetsand assumption of certain liabilities of a product line known as “GoVideo” fromSONICblue Incorporated, a Delaware corporation (NASDAQ: SBLU), and Sensory ScienceCorporation, a Delaware corporation and wholly-owned subsidiary of SONICblue,pursuant to a purchase agreement and an order issued by the United StatesBankruptcy Court, Northern District of California, San Jose Division overseeingSONICblue’s bankruptcy case. 

 

Immediately subsequent to Opta’spurchase of the GoVideo product line, the Company purchased 100% of theoutstanding membership interests of Opta from Carmco Investments, LLC, aConnecticut limited liability company, for $420,000, representing the return ofthe $250,000 deposit used in the acquisition of the GoVideo product line andrelated transaction fees and expenses. Subsequent to the closing, the Companypaid an additional $294,000 in connection with these items.  In connection with this agreement, the$5,986,000 originally loaned to Opta Systems was converted to a capitalcontribution, resulting in a total purchase price, including actualout-of-pocket expenses of approximately $6,770,000.  In October 2003, the purchase price was reduced by $962,000 basedon a settlement with SONICblue concerning the purchase price of certain assetsacquired, resulting in an adjusted purchase price of $5,808,000 for GoVideo.

 

*GoVideo Business Strategy*. GoVideo’s strategy is to develop, market, and distribute innovative,high performance consumer electronic products that incorporate advancedtechnology, ease of use, and superior industrial design. We believe there is asignificant segment of the consumer electronics market that desireshigh-performance products that offer value to the consumer and profitopportunities to dealers. Because many of GoVideo’s competitors are focused onhigher volume, lower priced product lines where product and servicedifferentiation is difficult to sustain, we believe GoVideo can capitalize onits technology, engineering and industry know-how, product distribution networkand reputation for bringing innovative products to the electronics marketplaceto pursue our objectives and increase our revenues and earnings. 

 

*GoVideo Products. * The GoVideo product line, originallyestablished in 1984, designs and manufactures product lines in the consumerelectronics industry, including digital video disc (“DVD”) players, portableDVDs, DVD-Video Cassette Recorder Combos (“DVR”), Dual-Deck VCRs, DVDRecorders, DVD Recorder + VCR, and liquid crystal display (“LCD”) TVs. GoVideoholds various patents covering Dual-Deck technology as well as otherelectronics products and systems.

 

The principal consumer electronicproduct offered by GoVideo during fiscal 2003 was the DVR.  GoVideo offers several models of the DVRthat vary from one another by features and configurations.  This product has the ability to:

 

•               Play DVD discs and VHS tapes; 

•               One touch copy transfer DVD to VHStapes;

•               Progressive Scan delivers the highestquality DVD-Video on a digital TV; and

•               Schedule recordings in advance.

 

Total net revenues attributed to the DVRfrom April 18, 2003, the purchase date of GoVideo, through June 30, 2003 were$7,471,000 or approximately 80% of GoVideo’s total net revenues and 38% of theCompany’s consolidated net revenues.  

 

*GoVideo Revenue to Significant Countries. *During fiscal 2003, all GoVideo’s revenues were generated in the UnitedStates.  

 

*GoVideo Customers*. GoVideo had one customer that accounted for more than 10% of netrevenues.  Costco Wholesale Corporationaccounted for 64% of GoVideo’s net revenues and 31% of the Company’sconsolidated net revenues during fiscal 2003.    

 

5

----

 

*GoVideo Seasonality. *Generaleconomic conditions have an impact on GoVideo’s business and financial results.And as a result of competing in the consumer electronic industry, GoVideo’squarterly results reflect distinct seasonality in the sale of products.  Revenues are typically highest fromSeptember through December.   

 

#### ***GoVideo Product Development andManufacturing.*** Product development activities consist of hardware, firmware, andsoftware design and engineering as well as co-development and engineering of productswith manufacturers and technology partners. Research has been focused on thedevelopment of lower-cost consumer electronics and evaluation of potential newproducts, acquisitions, or joint ventures. Company-sponsored research and development expenses are neither materialnor meaningful to an understanding of our business.

#### ** **

#### **Independentcompanies manufacture most of GoVideo’s products.  At any one time, GoVideo has multiple contractmanufacturers.  Additionally, thesemanufacturers are constantly evaluated in order to minimize the risksassociated with outsourcing the manufacturing process.**

#### ** **

*GoVideo Sales and Marketing*. GoVideo’s current marketing strategy is to sell products with thesupport of independent sales representatives specific to certain geographicterritories throughout the US and who also represent many other brand nameconsumer electronic products.  GoVideocurrently sells its product lines directly to retailers nationwide includingnumerous national and regional chains, catalog accounts, specialty stores,warehouse clubs and home shopping channels. 

 

*GoVideo Backlog and Inventory. *GoVideo purchases completed units from contract manufacturers.  As such, GoVideo does not carry a rawmaterials inventory.  GoVideo’s practiceis to maintain sufficient finished goods inventory to fill orders promptly andnot carry a backlog of orders. Accordingly, backlog information is not meaningful to an understandingof its business and may not be indicative of actual shipments made to customersin any period.  GoVideo seeks to manageand maintain inventory in a way that will allow it to meet all expected productdemand while maintaining flexibility to reallocate manufacturing capacity toimprove efficiency and respond to changes in supply and demand.

 

#### ***GoVideo Intellectual Property.***   GoVideo developed and ownsthe proprietary operating system software used by most of its productsincluding its Dual-Deck technology. Intellectual property rights that apply to various products includepatents, trademarks and the GoVideo tradename. GoVideo maintains an active program to protect its investment intechnology by enforcing intellectual property rights.  GoVideo has filed and obtained a number of patents in theUS.  While patents are an importantelement of GoVideo’s success, business as a whole is not materially dependenton any one patent.  GoVideo believes theduration of the applicable patents granted is adequate relative to the expectedlives of products. Because of the fast pace of innovation and product development,consumer electronics are often obsolete before the patents related to themexpire.  

#### ** **

#### **Todistinguish GoVideo products from competitors’ products, GoVideo obtainedcertain trademarks and tradenames for products. **

#### ** **

GoVideo’s ability to enforce patents,trademarks and tradename is subject to general litigation risks.  Patents, trademarks, tradenames, andproprietary rights, once established, are very important in the consumerelectronics market, and the loss, denial, or infringement of such patents, trademarks,tradenames, and proprietary rights could hurt sales and profitability.  

 

#### ***GoVideo Competition. ***Themarket for consumer electronics is extremely competitive and is characterizedby rapid technological change. GoVideo’s main competitors during fiscal 2003 included Sony, Samsung,Mustek, Mintek, LG Electronics, Daewoo Electronics and JVC. 

#### ** **

#### **GoVideo’sprincipal competitive factors included:**

#### ** **

•                  Price;

•                  Quality;

•                  Product features; 

•                  Product support; and

•                  Product innovation including thepatented Dual Deck technology.

 

6

----

 

*New Joint Venture*

 

As previously reported, in January 2003,the Company finalized an agreement to form a joint venture with Beijing YoubangOnline Electronics Technology Co., Ltd. (“Youbang”), TCL Computer TechnologyCo., Ltd. and all the equity holders of Youbang, pursuant to which the Companyacquired a 50% interest in a new joint venture to own substantially all ofYoubang’s operations. Pursuant to the agreement, all of Youbang’s assets, otherthan real estate, were transferred to a newly formed Beijing, China jointventure named TCL Digital Technologies, Ltd. (“TCL Digital”), for the purposeof manufacturing computer notebooks in China. The Company agreed to contributeapproximately $5,240,000, payable in three installments and representing 50% ofthe total investment amount.  At thetime, the investment was part of the Company’s business strategy to seekbusinesses to maximize the Company’s growth potential based on its assets. TheCompany sold its 50% interest in TCL Digital. See “***Significant BusinessDevelopments and Subsidiary Activity Subsequent to Fiscal 2003.***”

 

*Correlant Communications*

 

Correlant was incorporated in Californiaon February 13, 1996 under the name TurboNet Communications, Inc. andreincorporated in Delaware on October 4, 2000 as Correlant Communications, Inc.Correlant is a significant subsidiary of Lotus Pacific and during fiscal 2002and 2001 represented essentially 100% of the Company’s consolidated revenues,cost of revenues and research and development expense included in continuingoperations. Correlant was much less significant in fiscal 2003 as a result ofpurchasing GoVideo.  

 

From inception through March 1999,Correlant was a development stage company whose operating activities relatedprimarily to establishing a research and development organization, testingprototype designs, developing a Media Access Control (“MAC”) chip, developingproduction-ready cable modems including the complete software application,developing cable modem termination system (“CMTS”) infrastructure equipment,commencing the staffing of general and administrative, marketing and technicalsupport organizations and establishing manufacturing relationships.  

 

From 1996 through March 1999, the majordomestic cable operators collaborated through the Multimedia Cable NetworkSystems consortium, of which Correlant was a contributing member, to developthe Data-Over-Cable System Interface Specification (“DOCSIS”) standard.Correlant was able to begin commercial distribution of its products in the USas a result of being awarded the DOCSIS certification for its cable modemtechnology in March 1999. Correlant continued to design, develop, and marketDOCSIS certified high-speed data-over-cable technology, including cable modemsand CMTS units for resale to corporate telecommuters, small office/home office,and residential users domestically and internationally through December 23,2003.  See “***Significant Business Developments and Subsidiary ActivitySubsequent to Fiscal 2003.***”

 

Prior to February 2002, Correlant soldDOCSIS certified cable modems and in certain instances, the MAC bundled withCorrelant’s cable modem software (“MAC+software”), both key components of thecompleted cable modem.  Correlantdeveloped and owns the proprietary software used in the cable modem.  Effective February 2002, Correlant changedits business model whereby it primarily sold the MAC+software and only sold thecompleted cable modem in specific circumstances.  Instead of focusing on selling the completed cable modem,Correlant concentrated efforts toward selling only the MAC+software.  The new business model was a result ofCorrelant’s attempt to increase gross profit percentage, streamline businessoperations and reduce operating expenses. However, this business modelultimately proved unsuccessful, as gross margins continued to decrease as aresult of increased competition in the cable modem market and more broadly, thehigh-speed Internet market.  Inaddition, many of Correlant’s major customers chose to either design andmanufacture their own DOCSIS cable modems or to utilize competitors’ platformswhich were incompatible with Correlant’s products. 

 

During this period, Correlant facedcompetition from other technologies that enabled high-speed Internet accessservices such as technologies that increase the efficiency of digitaltransmission over telephone companies’ existing copper infrastructure,high-speed Internet access service deployed over a number of other media,including fiber optic cable, digital subscriber lines (“DSL”), direct broadcastsatellite (“DBS”) and other wireless technologies. As high-speed Internetaccess services based on competing technologies became more readily available,the market for cable modem-based services was materially and adverselyaffected.

 

7

----

 

*Correlant Products*.  Correlant’s products weredivided into two categories:  

 

•                  Cable modems.  Cable modems, installed at the end user’s premises, allowedaccess to data-over-cable services; and 

•                  Infrastructure equipment.  Correlant’s CMTS was infrastructureequipment installed at the service provider’s premises, which enabled serviceproviders to provide high-speed two-way data services to their customers.

 

Cable Modems.  Correlant’s cable modems received both the *DOCSIS 1.0* and *1.1*certifications.  The cable modemsconnect to the end user’s computer via a standard Ethernet or Universal SerialBus (“USB”) connector, and to the cable network via a standard TV coaxial cableconnector.

 

The following table shows revenuesattributable to Correlant’s *DOCSIS 1.0/1.1* cable modems (*in thousands*):

 

| **Year Ended June 30,** |   | **Revenue** |   | **Percentage of  Consolidated Total  Net Revenue** |   |
|-------------------------|--------|-------------|--------|----------------------------------------------------|--------|
| 2003                    |   | $           | 133    |                                               | 1      | % |
| 2002                    |   | 34,713      |   | 62                                                 | %      |
| 2001                    |   | 253,548     |   | 96                                                 | %      |
|                         |        |             |        |                                                    |        |  |

 

MAC+Software.  As part of the aforementioned change in business model, Correlantbegan selling a key component of the completed cable modem, MAC+software,rather than the completed cable modem effective February, 2002.  The following table shows revenueattributable to MAC+Software (*in thousands*):  

 

| **Year Ended  June 30,** |   | **Revenue** |   | **Percentage of  Consolidated Total  Net Revenue** |   |
|--------------------------|--------|-------------|--------|----------------------------------------------------|--------|
| 2003                     |   | $           | 8,161  |                                               | 42     | % |
| 2002                     |   | 19,672      |   | 35                                                 | %      |
| 2001                     |   | 7,055       |   | 3                                                  | %      |
|                          |        |             |        |                                                    |        |  |

 

Infrastructure Equipment.  During fiscal 2002, Correlant completedinitial development of a CMTS to complement its cable modems.  Its CMTS was designed to enable cableoperators to provide a complete solution for two-way data transfer between theInternet and the end-user, utilizing its cable modem at one end and itshead-end equipment at the other.  CMTSsales were limited during fiscal 2003 and 2002.

 

*Correlant Revenue to Significant Countries*.* * The following table shows revenue tosignificant countries *(in thousands):*

 
|             |   | **Year Ended June 30,** |   |
|------------------|--------|-------------------------|--------|
|             |   | **2003**                |   | **2002** |   | **2001** |   |
| Japan            |   | $                       | 54     |   | $ | 30,033 |   | $ | 175,893 |   |
| Taiwan           |   | 9,446                   |   | 20,757 |   | 9,178 |   |
| United States    |   | 201                     |   | 5,090 |   | 78,121 |   |
| Europe and other |   | 476                     |   | — |   | — |   |
|             |   | $                       | 10,177 |   | $ | 55,880 |   | $ | 263,192 |   |

 

Segment disclosures and geographicalinformation for fiscal 2003, 2002 and 2001 are presented in “Item 8 FinancialStatements and Supplementary Data Note 16 – Segment and GeographicInformation.”   

 

8

----

 

*Correlant Research and Development.** ***The following table showsCorrelant-sponsored research and development expenses (*in thousands*):

 
|                     |   | **Research and development  including amortization of  deferred stock compensation** |       | **Research and development  excluding amortization of deferred  stock  compensation** |       |
|--------------------------|--------|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **Year  ended June 30,** |   | **Dollars**                                                                          | ** ** | **Percentage of  Correlant’s Total  Revenues**                                   | ** ** | **Dollars** | ** ** | **Percentage of  Correlant’s Total  Revenues** | ** ** |
| 2003                     |   | $                                                                                    | 6,906      |                                                                                  | 68         | % | $ | 6,430 |   | 63 | % |
| 2002                     |   | 9,392                                                                                |       | 17                                                                                    | %          | 8,105 |   | 15 | % |
| 2001                     |   | 16,214                                                                               |       | 6                                                                                     | %          | 9,089 |   | 3 | % |
|                          |        |                                                                                      |            |                                                                                       |            |  |  |  |  |  |  |

 

*Correlant Customers.** *** Correlant sold its data-over-cable productsto vendors who then sold the equipment under their brand name to cableoperators.  A relatively small number ofcustomers accounted for a significant percentage of Correlant’s revenues.  The percentage of Correlant’s revenuesderived from significant customers is detailed as follows:

 
|                                                                  |   | **Year Ended June 30,** |   |
|-----------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                  |   | **2003**                |   | **2002** |   | **2001** |   |
| Toshiba, a related party                                              |   | —                  | %      | 54 | % | 67 | % |
|                                                                  |   |                    |   |   |   |   |   |
| TurboComm Technologies, Inc. (“TurboComm”), a related party |   | 93                      | %      | 37 | % | 3 | % |
|                                                                  |   |                    |   |   |   |   |   |
| Terayon                                                               |   | —                  | %      | 8 | % | 13 | % |
| COM21                                                                 |   | —                  | %      | — | % | 11 | % |

 

#### **Duringfiscal years 2002 and 2001, Correlant’s revenues accounted for 100% of theCompany’s consolidated revenues. However, due to the purchase of GoVideo during fiscal 2003, Correlant’srevenues represented 52% of the Company’s consolidated revenues.  TurboComm accounted for 48% of the Company’sconsolidated revenues during fiscal 2003.**

#### ** **

At June 30, 2004 TurboComm owedCorrelant $2,253,000. On April 14, 2004, Correlant filed a lawsuit againstTurboComm in the District Court of Taiwan seeking to collect TurboComm’soutstanding debt as a result of TurboComm’s unwillingness to pay.  On July 30, 2004, Correlant reached asettlement agreement with TurboComm. Under the agreement, Correlant agreed towithdraw its lawsuit against TurboComm in exchange for the transfer of 700,000Series A and 300,000 Series C shares of Correlant Preferred Stock owned byTurboComm. Both parties mutually agreed to release and discharge any and allclaims that each may have against the other party.

 

#### ***Correlant Manufacturing andDistribution.  ***During fiscal 2003, Correlant had limited in-house manufacturingcapability at its facility in San Diego, California.  This facility was used for design, assembly and testing ofprototypes, pilot production of new modem designs, sample testing of productsreceived from other manufacturers, developing the manufacturing process anddocumentation for new products in preparation for outsourcing.

#### ** **

Correlant had an establishedrelationship and manufacturing contract with TurboComm, a company located inTaiwan that manufactured the high-speed data-over-cable technologyproducts.  From the early stages ofdesign and development, Correlant worked closely with TurboComm’s engineers toensure optimal and cost effective manufacturing. Correlant’s manufacturingagreement with TurboComm provided TurboComm would supply all of Correlant’sforecasted orders for cable modems at prices to be agreed to by Correlant andTurboComm on a quarterly basis.  Whilemanufacturing Correlant’s products, TurboComm was obligated to repair orreplace any defective cable modems and CMTS units.  Although the term of the original contract went through May 2003,both Correlant and TurboComm mutually agreed to continue the relationshipbeyond that date.  

 

9

----

 

Correlant sold its data-over-cableproducts to vendors who sold equipment under their brand name to cableoperators.  This market had, and stillhas, a limited number of existing and potential customers.  Correlant already had establishedrelationships with several existing vendors. As a result, Correlant required only a limited sales and marketinginfrastructure.

 

*Correlant Backlog.  *Correlant’sgeneral practice was to contract with TurboComm and fill orders within deliverydates required by customers, with some adjustments based on Correlant’sforecast. During fiscal 2003, substantially all Correlant’s products wereproduced in accordance with specifications and production schedules determined byCorrelant based on orders placed by its primary customers. The amount ofunfilled orders at any particular time could be affected by a number of factorsincluding, but not limited to, the availability of cable modem components, andthe manufacturing and assembly capacity of Correlant’s third partymanufacturer. Accordingly, Correlant’s backlog information is not meaningful toan understanding of its business and may not be indicative of actual shipmentsmade to customers in any period.

 

#### ***Correlant Working Capital and RawMaterials. *** As result of Correlantproducing products in accordance with customer orders and its third partymanufacturer procuring a large portion of cable modem components, Correlant wasnot required to carry finished goods inventory.  Occasionally, when Correlant did carry a raw materials inventory,the amount was not material. Accordingly, inventory requirements, and the impact of inventoryrequirements on working capital, are not meaningful to an understanding ofCorrelant’s business.  

#### ** **

#### ***Correlant Intellectual Property.***   Although Correlant developedand owns the proprietary software used in its cable modem products, Correlantnever held any patents or copyrights on its technology. Due to the rapid changein technology and the high cost associated with obtaining and defending apatent, Correlant management never applied for a patent.  Instead, Correlant entered intoconfidentiality and invention assignment agreements with employees, and enteredinto non-disclosure agreements with key suppliers, distributors and customersto limit access to and disclosure of proprietary information.  However, these contractual arrangements maynot prove sufficient to prevent misappropriation of Correlant’s technology ordeter independent third-party development of similar technologies. In addition,the laws of some foreign countries may not protect Correlant’s intellectualproperty rights to the same extent as do the laws of the US.

#### ** **

#### ***Correlant Competition***.  Correlant sold itsdata-over-cable products to vendors who sold equipment under their brand namesto cable operators.  During fiscal 2003,although Correlant concentrated on selling the MAC+Software, Correlant stillcompeted in the cable modem industry as the MAC+Software could only be used inthe production of cable modems. Correlant’s primary competitors for the sale of cable modems includedAskey, Ambit Microsystems and Motorola. Primary competitors during fiscal 2003 for the sale of the CMTS includedADC, Arris, Cisco, Com21, Motorola and Terayon.  Other potential competitors included, among others, Alcatel, BestData, Dassault, Ericcson, Future Networks, NEC, NetGear, Nortel, Pace,Phasecom, Samsung, Scientific-Atlanta, Riverstone, Sony, Thomson Consumer Electronicsand Zoom Telephonics.

#### ** **

#### **Correlant’sprincipal competitive factors included:**

#### ** **

•                  The other technologies described above;

•                  The ability to receive the DOCSIScertification; 

•                  Price;

•                  Quality;

•                  Ensuring product availability througheffective planning and procurement of key components; and

•                  Product support.

 

***SignificantBusiness Developments and Subsidiary Activity Subsequent to Fiscal 2003***

 

Significant business developments, otherthan the legal proceedings described in “**Item3. Legal Proceedings**,” subsequent to fiscal 2003, but before thefiling of this report are summarized below:

 

*Cessation of Correlant’s Historical Operations*

 

In February 2003, Lotus Pacific, as majority stockholder of Correlant,appointed four new members to Correlant’s Board of Directors, effectivelytaking control of the Board.  Prior tothis, Lotus Pacific had only one representative on Correlant’s Board ofDirectors and did not control Correlant’s Board or its operations.  Immediately thereafter, the Board ofDirectors created a new Executive Committee of the Board, comprised of twomembers who are Lotus Pacific employees, to act on behalf of the Board ofDirectors and oversee the Correlant’s management and operations. 

 

10

----

 

As previously reported, effective July31, 2003, Correlant’s President, Chief Executive Officer and co-founder ofCorrelant resigned as a director of Correlant. From that date forward he no longer served as President and CEO ofCorrelant.   As part of the separation,Lotus entered an agreement in February 2004 to repurchase all shares of Lotuscommon stock owned by Correlant’s former President.  As of June 30, 2004, Correlant’s former President no longer ownsany Lotus stock.  In connection with theresignation, Correlant entered into an Employment Separation Agreement with theformer President.  Under the terms ofthe agreement, Correlant agreed to repurchase 327,000 Correlant shares held bythe former President for $0.07 per share for a total of $23,000.  To date, this transaction has not been finalized.  From July 31, 2003 until December 23, 2003,Correlant worked to find a permanent CEO and retained outside consultants toadvise and assist during the transition period.  Such consultants were charged with evaluating Correlant’sbusiness operations, its products and demand for its products, and futurebusiness prospects. 

 

Upon recommendation of its consultants,Correlant began a substantial reduction in its workforce and operations toreduce operating expenses, reducing the number of Correlant employees from 34as of August 1, 2003 to 18 employees as of December 23, 2003 and one employeeas of June 30, 2004.  

 

As previously reported, as a result ofdeclining margins and demand for its products, Correlant’s Board of Directorsapproved the wind down and cessation of Correlant’s historical operations inthe cable modem and CMTS business effective December 23, 2003. As part of thewind down, Correlant licensed part of its technology, and could potentiallylicense other technology.  The wind down of Correlant’s operationswas substantially completed by March 31, 2004.

 

Concurrently, Correlant and Lotus havebeen exploring opportunities to acquire or invest in other businesses ortechnologies.  The Company currentlyexpects that together, Lotus and Correlant will identify market opportunitiesand implement a new business plan complementary with the Company’s business andlong-term strategies.

 

*Settlement with Arescom*

 

As previously reported, effectiveSeptember 10, 2003, Lotus Pacific divested its remaining 6% ownership inArescom by settling all legal claims against Arescom. 

 

*Sale of Joint Venture*

 

Shortly after the Company began runningthe joint venture, TCL Digital, the Company determined the joint venture’sbusiness model did not fit with the Company’s long-term business strategy, anddiverted management resources from the operations of other subsidiaries.  As previously reported, in September 2003,the Company entered into an agreement with TCL Information TechnologyIndustrial (Group) Ltd. (“TCL Information”), whereby the Company sold its 50%interest in TCL Digital for approximately $5,600,000 cash.  The transaction was completed in December2003.  TCL Information is an affiliateof TCL, a significant stockholder of the Company.  

 

*New Subsidiary*

 

On July 7, 2004, the Company’s Board ofDirectors approved the commencement of a new wholly-owned subsidiary, GoVideoDigiTech (Huizhou) Co., Ltd. (“DigiTech”), which will be located in Guangdong,China.  DigiTech will market MP3players. The Company plans to invest $500,000 in the new subsidiary. TCLMultimedia Electronics R&D Center (“TCL Multimedia”), an affiliate companyof TCL, is currently expending some resources during the start up phase ofDigiTech. 

 

***Employees***

 

As of June 30, 2003, Lotus Pacific had nineemployees in sales, general and administration.  Correlant had 43 full-time employees, including 33 in researchand development and ten in sales, general and administration.  

 

As of June 30, 2004, Lotus Pacific hadnine employees, including eight in sales, general and administration and one inresearch and development.  Correlant hadone employee in sales, general and administration.  See

 

11

----

 

“***Significant Business Developments and Subsidiary Activity Subsequent toFiscal 2003.***”  GoVideohad 60 full-time employees, including six in product management and 54 insales, general and administration.  Noemployees are represented by any collective bargaining organization, and theCompany has never experienced a work stoppage. 

 

***AvailableInformation***

 

All SEC reports and amendments toreports filed pursuant to Sections 13(a) and 15(d) of the Securities ExchangeAct of 1934, as amended, are available free of charge on our Investor Relationsweb site at www.lpfc.com/sec as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the SEC.

 

**Item2.  Properties**

 

At June 30, 2003, Lotus Pacific’sexecutive offices were located at 18200 Von Karman, Avenue, Suite 730, Irvine,California and consisted of approximately 2,250 square feet.  The lease expired in July 2003.  Currently, Lotus Pacific’s executive officesare located at 2402 Michelson Drive, Suite 220, Irvine, California and consistof approximately 2,100 square feet under a month-to-month lease.  Correlant leases approximately 26,000 squarefeet of office space in San Diego, California, which expires November2007.  

 

Due to the shut down of operations,Correlant’s interim management has moved out of the San Diego facility toreduce expenses while attempting to either sublease the San Diego facility ornegotiate a lease buy out with the landlord. Currently, Correlant operates from Lotus Pacific’s office.  Due to the weak commercial real estatemarket in San Diego, interim management has not been successful subleasing thebuilding.  Additionally, there can be noguarantees that interim management will successfully sublease the building orbuy out the lease in the future.   AfterCorrelant’s facilities closure, the Company believes its facilities will besuitable for their respective uses and adequate for the Company’s needs.  

 

GoVideo leases two facilities inScottsdale, Arizona.  One facility, usedfor warehousing, is approximately 13,100 square feet.  The lease expires October 2009, with a five year renewaloption.  The other facility, used foradministration, warehousing and distribution, is approximately 33,000 squarefeet.  The lease expires February 2006,with a three year renewal option.  Theleased space is suitable for GoVideo’s current needs.  

 

**Item3.  Legal Proceedings**

 

Legal proceedings, other than ordinaryroutine litigation incidental to the Company’s business, to which the Companybecame, or was, a party during fiscal 2003 or subsequent thereto, but before thefiling of this report are summarized below:

 

*Lotus Pacific v. William Hu and Lotus Pacific v.USSOnline et al.*

 

On January 3, 2002, Lotus Pacific fileda lawsuit in the United District Court Eastern District of New York againstWilliam Hu, and subsequently amended the complaint July 30, 2002.  In the amended complaint, Lotus Pacificbrought claims for breach of fiduciary duty, professional negligence,accounting and conversion relating to transfers in December 2000 ofapproximately $3,600,000 from Mr. Hu’s attorney trust account.  Mr. Hu was alleged to be the Company’scounsel from January 1998 and later its CEO from January 2001 to June 29,2001.  

 

On January 16, 2002, Lotus Pacific fileda lawsuit in the Supreme Court of the State of New York, New York Countyagainst USS Online, Travelway International Ltd. (“TIL”), and Huaya Lu Tung,seeking to recover approximately $1,800,000 in principal and interest due onloans made to USS Online, and seeking to pierce the corporate veil and recoversuch amounts from defendants TIL and Huaya Lu Tung.  The Company asserted that Ms. Tung was the Chairperson and soleowner of TIL and the Chairperson of USS Online and the former Treasurer ofLotus Pacific.

 

In order to avoid the costs oflitigation, after evaluation of the Company’s likelihood of recovering anyassets from the defendants in the two cases cited above and the defendants’ability to pay any judgment secured against them, if any, in February 2003, theCompany entered into a settlement agreement with USS Online, TIL, Mr. Hu, Ms.Tung, Lotus International Holdings Corp. a shareholder of the Company (“LIH”),and three individuals to settle all claims against the defendants in the twocases cited above, subject to a number of conditions.  In entering into the settlement agreement, none of the defendantsadmitted or conceded any liability in connection with the claims asserted inthe cases.  As conditions to thesettlement agreement, the Company was required to

 

12

----

 

receive: (a) 3,000,000 shares of theCompany’s common stock; (b) a promissory note of LIH in the principal amount of$4,000,000, payable on February 19, 2008, with interest accruing at a rate of3% per annum (the “Note”); (c) a stock pledge agreement, granting to theCompany a first priority security agreement in 1,000,000 shares of theCompany’s common stock as partial security for the Note (the “Pledged Shares”);(d) original stock certificates representing the Pledged Shares; (e) personalguaranty of the Note; and (f) all of the assets of USSF. The Company received3,000,896 shares but has not received the Pledged Shares or the assets ofUSSF.  The Company has made demand onthe other parties for fulfillment of the conditions to the settlement and hasentered into negotiations with the other parties to settle these demands.  To date, no settlement has beenachieved.  The Company has reserved theright to take all actions for breach of the settlement, including reinstitutingthe original actions.

 

### **Item 4.  Submission of Matters to a Vote of SecurityHolders**

### ** **

No matters were submitted to a vote ofsecurity holders during the fourth quarter of fiscal 2003. 

 

**PART II**

** **

**Item 5****.  Market forRegistrant’s common equity and related stockholder matters. **

 

Lotus Pacific’s common stock begantrading on the over-the-counter (“OTC”) Bulletin Board under the symbol “LPFC”on December 1, 1994. As previously reported, on November 5, 2002, theCompany’s shares of common stock were removed from the OTC Bulletin Board forfailure to comply with NASD Rule 6530, as a result of the Company’sinability to timely file its Form 10-K for fiscal 2002. Although Lotusfiled its Form 10-K for fiscal 2002 on April 16, 2004, Lotus is not eligible totrade on the OTC Bulletin Board until Lotus becomes current in all its requiredfilings or files a Form 10 and clears all comments with the SEC.  The Company is working to complete suchreports for subsequent periods and will file them as soon as they are available.  Effective November 5, 2002, theCompany’s shares of common stock are quoted on the National Quotation Bureau’s“Pink Sheets,” under the symbol “LPFC.PK.”  Trading in the Company’s common stock has been minimal with limited orsporadic quotations and there is no established public trading market for theCompany’s common stock.  The high andlow common stock prices per share were as follows:

 

|         |   | **High** |   | **Low** |   |
|--------------|--------|----------|--------|---------|--------|
| Fiscal 2004: |   |     |   |    |   |
| 1st Quarter  |   | $        | 0.09   |    | $      | 0.01 |   |
| 2nd Quarter  |   | 0.09     |   | 0.02    |   |
| 3rd Quarter  |   | 0.05     |   | 0.01    |   |
| 4th Quarter  |   | 0.1      |   | 0.01    |   |
|         |   |     |   |    |   |
| Fiscal 2003: |   |     |   |    |   |
| 1st Quarter  |   | $        | 0.13   |    | $      | 0.03 |   |
| 2nd Quarter  |   | 0.1      |   | 0.01    |   |
| 3rd Quarter  |   | 0.1      |   | 0.05    |   |
| 4th Quarter  |   | 0.1      |   | 0.05    |   |
|         |   |     |   |    |   |
| Fiscal 2002: |   |     |   |    |   |
| 1st Quarter  |   | $        | 1.25   |    | $      | 0.75 |   |
| 2nd Quarter  |   | 0.85     |   | 0.05    |   |
| 3rd Quarter  |   | 0.45     |   | 0.07    |   |
| 4th Quarter  |   | 0.45     |   | 0.05    |   |

 

13

----

 

These OTC market quotations reflectinter-dealer prices, without retail mark-up, mark down or commission and maynot necessarily represent actual transactions.

 

As of August 15, 2004, there were50,723,604 shares of Common Stock issued and outstanding, held by approximately800 shareholders of record as indicated on the records of the Company’stransfer agent.

 

To date, the Company has not declared orpaid any cash dividends on its common stock. The Company anticipates that itwill retain all available funds for use in operation and expansion of itsbusiness, and no cash dividends are expected to be paid on the common stock inthe foreseeable future. 

 

There were no sales of unregisteredsecurities by the Company during fiscal 2003. 

 

The Company received 3,000,896 shares ofour common stock as part of the settlement with USS Online, TravelwayInternational Ltd. and Huaya Lu Tung. See “**Item 3. Legal Proceedings**.”

 

**Item 6.  Selected Consolidated Financial Data**

 

The following selected consolidatedfinancial data should be read in conjunction with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” the ConsolidatedFinancial Statements of the Company and related notes included elsewhere inthis Annual Report on Form 10-K.

 

 
|                                                         |   | **As of or for the Fiscal Year Ended June 30,** |       |
|--------------------------------------------------------------|--------|-------------------------------------------------|------------|
| **(in thousands, except per share amounts)**                 |   | **2003 (1)**                                    |       | **2002 (2)** |   | **2001** |   | **2000 (3)** |   | **1999 (4)** |   |
|                                                         |   |                                            |       |   |   |   |   |   |   |   |   |
| **Results of Operations**                                    |   |                                            |       |   |   |   |   |   |   |   |   |
| Net revenues                                                 |   | **$**                                           | **19,503** | ** ** | $ | 55,880 |   | $ | 263,192 |   | $ | 71,839 |   | $ | 3,733 |   |
| Loss from continuing operations                              |   | **$**                                           | **(6,366** | **)** | $ | (36,529 | ) | $ | (7,433 | ) | $ | (2,249 | ) | $ | (6,606 | ) |
| Net income (loss) per common share – basic and diluted: |   |                                            | ** ** |   |   |   |   |   |   |   |   |
| Loss from continuing operations                              |   | **$**                                           | **(0.10**  | **)** | $ | (0.57 | ) | $ | (0.12 | ) | $ | (0.04 | ) | $ | (0.13 | ) |
| Total gain (loss) from discontinued operations               |   | **$**                                           | **—** | ** ** | $ | 0.27 |   | $ | (0.45 | ) | $ | (0.19 | ) | $ | (0.05 | ) |
| Net income (loss)                                            |   | **$**                                           | **(0.10**  | **)** | $ | (0.30 | ) | $ | (0.57 | ) | $ | (0.23 | ) | $ | (0.18 | ) |
| Cash dividends per share                                     |   | **$**                                           | **—** | ** ** | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| **Financial Position**                                       |   |                                            | ** ** |   |   |   |   |   |   |   |   |
| Total assets from continuing operations                      |   | **$**                                           | **52,987** | ** ** | $ | 53,342 |   | $ | 117,214 |   | $ | 121,737 |   | $ | 158,624 |   |
| Long-term obligations, less current portion                  |   | **$**                                           | **—** | ** ** | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Total stockholders’ equity                              |   | **$**                                           | **30,565** | ** ** | $ | 36,560 |   | $ | 54,328 |   | $ | 83,730 |   | $ | 94,801 |   |

 

----

(1) The results of operations for fiscal2003 included GoVideo’s activity since the April 18, 2003 purchase date.  

 

(2) Fiscal 2002 included: (a)$20,071,000 asset impairment and (b) $17,554,000 total gain from discontinuedoperations, net of related taxes, as a result of selling our former subsidiary,Arescom, on December 18, 2001. 

 

(3) Fiscal 2000 included a $50,512,000gain related to the sale of our subsidiary’s common stock.

 

(4) The results of operations for fiscal1999 included Correlant’s activity since the March 31, 1999 purchase date.  

 

14

----

 

**Item 7.****          ****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

The following discussion of thefinancial condition and results of operations should be read in conjunctionwith the Consolidated Financial Statements and Notes thereto included elsewherein this report.

 

We begin Management’s Discussion andAnalysis of Financial Condition and Results of Operations (“MD&A”) with adescription of Lotus Pacific’s business. This is followed by a discussion of why we were unable to timely fileour Form 10-K for the year ended June 30, 2003.  The next discussion relates to material acquisitions anddispositions and a comparison of our results of operations as follows:

 

•                  Fiscal 2003 compared to fiscal 2002;

•                  Fiscal 2002 compared to fiscal 2001; and

•                  Fiscal 2001 compared to fiscal 2000.

 

These comparisons are provided solelyfor readers to understand the historical results of our operations during thetime periods covered.  However, due tothe strategic change in direction of Lotus Pacific discussed in “**Item 1. Business**,” and throughout theMD&A section, these results are not indicative of future results.  

 

After the results of operations, weanalyze the changes in our cash flows, and discuss our financial commitments inthe section entitled “Liquidity and Capital Resources.”  We then address our “Business Outlook” fromJune 30, 2004.   We conclude thisMD&A with (I) a discussion of the Critical Accounting Estimates we believeare important to understanding the assumptions and judgments incorporated inour reported financial results; and (II) Recently Issued Accounting Standardsand the impact they had or will have on our results of operations.  

 

This MD&A should be read inconjunction with the other sections of this Annual Report on Form 10-Kincluding:

 

•                  Item 1. Business; 

•                  Item 6. Selected Financial Data; and

•                  Item 8. Financial Statements and Supplementary Data.  

 

The various sections of this MD&Acontain a number of forward-looking statements, all of which are based on ourcurrent expectations and could be affected by the uncertainties and riskfactors described throughout this filing and particularly in the “BusinessOutlook” section.  Our actual resultsmay differ materially from these forward-looking statements.  

 

## **Description of Business**

## ** **

Lotus Pacific, a Delaware corporation,is a holding company and we conduct our business through our subsidiaries. Wepresently develop, manage, and operate emerging consumer electronics andcommunications companies, focusing on developing next generation consumerelectronics and communication products. We provide our subsidiaries withcapital and strategic and infrastructure services.   

 

***ExplanatoryNote - Delays in Reporting***

 

On June 29, 2001, a majority of ourstockholders, led by TCL, were successful in a solicitation to gain control ofLotus Pacific and replace prior management of the Company.   On June 29, 2001, new directors andofficers were appointed and the then existing directors and officers wereimmediately removed from office. Following the termination of our relationship with prior independentaccountants, new management concluded that a reaudit of the financialstatements for fiscal 2001, 2000 and 1999 was required.  Effective July 24, 2002, we engaged our newindependent accountants to reaudit and restate these prior periods.  The Company completed such restatements inits Form 10-K for fiscal 2002 filed April 16, 2004. 

 

***Acquisitionsand Dispositions***

 

During fiscal 2003, 2002 and 2001, weengaged in multiple acquisitions and dispositions.  The details of these transactions are described in detail in “**Item 8. Financial Statements and Supplementary DataNote 3 – Acquisitions and Dispositions – Majority Owned Subsidiaries, Note 4 –Acquisitions and Dispositions – Equity Method Investees and Note 5 –Acquisitions and Dispositions – Cost Method Investees**.”  However, unless specifically addressed inMD&A, these acquisitions and dispositions were not material to our resultsof operations and the understanding of our business.  As such, the details have been omitted from MD&A.

 

15

----

 

*Regent Electronics Corporation*

 

In April and May 1997, we acquired 70%of the common stock of Regent Electronics Corporation (“Regent”).  Regent designed, developed, manufactured andmarketed Internet-related products that offered Internet access throughtelephone lines and cable television lines. In June 1997, Regent acquired Amiga-based, multimedia technology relatedassets and rights from Rightiming.  OnJune 26, 2001, we spun-off Regent to Regent’s management.  

 

*Correlant Communications, Inc*

 

Correlant Communications, Inc(“Correlant”) is a major subsidiary of Lotus.  However, due to the purchase of a new subsidiary and the strategicchange in direction of Lotus Pacific discussed in “**Item 1. Business**,” and throughout the MD&A section,Correlant was much less significant to our results of operations during fiscal2003 as compared to fiscal 2002 and 2001. During fiscal 2003, Correlant accounted for 52% of our consolidated revenuesas compared to essentially 100% in fiscal 2002 and 2001.

 

On March 31, 1999, we entered into ashare exchange agreement which provided for the acquisition of 94.5% of theissued and outstanding common shares of Correlant, representing an 81%ownership interest in Correlant in consideration for the issuance of 9,657,000common shares of the Company valued at $7.21 per share plus contingentlyissuable shares of up to 1,435,000. The contingent shares were issuable asCorrelant options specified in the agreement were exercised.  For each option exercised, 81% of suchshares were to be transferred to us in exchange for 0.5364 shares of LotusPacific common stock for each share of Correlant stock transferred.   At the acquisition date, the excess of thepurchase price and related costs over the value assigned to the net tangibleassets acquired was $74,545,000 and was assigned to goodwill.  During fiscal 2003, we recorded $21,000 asadditional goodwill, and subsequently expensed as an impairment of assets, as aresult of issuing 3,000 of the contingently issuable shares.  During fiscal 2001 and 2000, we recorded anadditional $18,000 and $554,000, respectively as additional goodwill as aresult of issuing 79,000 of the contingently issuable shares. As of August 15,2004 there were only 3,000 contingently issuable shares outstanding.    

 

During March 2000, we sold, to unrelatedparties, 3,657,000 shares of Correlant stock, which reduced our ownership to65%.  During September 2000, we sold tounrelated parties, 656,000 shares of Correlant stock, which further reduced ourownership to 62%. 

 

*Change in Correlant’s Business Model*

 

Prior to January 31, 2002, Correlantsold Data-Over-Cable System Interface Specification (“DOCSIS”) certified cablemodems and in certain instances, the Media Access Controller (“MAC”) bundledwith cable modem software (“MAC+software”), which were both key components ofthe completed cable modem.  Correlantdeveloped and owns the proprietary software used in the cable modem.  Effective January 31, 2002 Correlant changedits business model whereby they only sold the completed cable modem in certaincircumstances.  Instead of focusing onselling the completed cable modem, Correlant concentrated efforts towardselling only the MAC+software.  The newbusiness model was a result of Correlant’s attempt to increase gross profitpercentage, streamline business operations and reduce operating expenses.  This change had the following impacts to ourresults of operations, cash flows and financial position:

 

*•**                 **Decreased revenues cost of revenues, inventory, accountsreceivable and accounts payable*.  Because the sales price andthe related cost of the MAC+software were substantially lower than thecompleted cable modems, our revenues, cost of revenues, inventory, accountsreceivable and accounts payable all decreased. 

*•**                 **Unchanged gross profit dollars*. Previous to the change in Correlant’s business model, all the profitrealized from selling the completed cable modem was attributable to theMAC+software.  Therefore on a per unitbasis, gross profit dollars remained unchanged.

*•**                 **Increased gross profit percentage*. Because gross profit dollars remained unchanged while the sales pricedecreased, gross profit percentage increased.

*•**                 **Decreased selling, general and administrative expense.* As a result of the change in business model, Correlant closed its Taiwanbranch. 

 

*Demand for Correlant’s products*

 

During the first half of calendar year2000, cable modem manufacturers experienced shortages and long lead times forcomponent materials such as flash memory and capacitors.  Due to these shortages, the production of

 

16

----

 

cable modems was constrained and ourcustomers placed substantial orders for our cable modems.  We believe cable operators also overboughtin the second half of calendar year 2000 to ensure they had sufficient productto meet subscriber demand.  As a result,we believe there was an inflated demand for cable modems for the first sixmonths of fiscal 2001, June 2000 through December 2000.  Starting in January 2001, our customerorders began dropping sharply resulting in lower demand as end customersstarted to work through their inventory levels.  This lower demand continued until the cessation of Correlant’shistorical operations discussed below.

 

The extremely competitive nature of themarket for broadband access systems resulted in significant price erosion overtime.  We experienced downward pressureon our completed cable modem average selling price per unit.  This downward pressure on the completedcable modem selling price places downward pressure on cable modem components,including the MAC+software.  Therefore,Correlant experienced continued price erosion under its new business model.  This price erosion continued until Correlantdiscontinued selling cable modem and cable modem-related products as discussedbelow.  

 

*Cessation of Correlant’s Historical Operations*

 

Effective July 31, 2003, Correlant’sPresident, Chief Executive Officer and co-founder resigned as a director ofCorrelant.  From that date forward, heno longer served as President and CEO of Correlant. From August 1, 2003 untilDecember 23, 2003, Correlant worked to find a permanent CEO and retainedoutside consultants to advise and assist during the transition period.  Such consultants were charged withevaluating Correlant’s business operations, its products and demand for itsproducts, and future business prospects. 

 

Upon recommendation of its consultants,Correlant began a substantial reduction in its workforce and operations toreduce operating expenses, reducing the number of Correlant employees from 34as of August 1, 2003 to 18 employees as of December 23, 2003.

 

On December 23, 2003, upon recommendation of its consultants,Correlant’s Board of Directors approved the wind down and cessation ofCorrelant’s historical operations in the cable modem and cable modem softwarebusiness.  The wind down wassubstantially complete by March 31, 2004. As of June 30, 2004, Correlant has one employee to maintain corporaterecords and to comply with statutory reporting requirements.  

 

Concurrently, Correlant has beenexploring opportunities to acquire or invest in other businesses ortechnologies.  We expect Correlant toidentify market opportunities and implement a new business plan complementarywith our business and long-term strategies. See “Business Outlook.”

 

The decline in demand for Correlant’sproduct and the change in Correlant’s business model had a material impact toour results of operations, financial position and cash flows as of or for theyears ended June 30, 2003, 2002, and 2001. Due to the cessation of Correlant’s historical operations, futurefinancial statements will not be comparable to our historical financialstatements.

 

*Lotus World, Inc.*

 

On April 22, 1999, we organized LotusWorld to offer Auction Live, an online auction service, to internationalclients.  The wholly-owned subsidiarywas incorporated in Delaware in April 1999, and was a private-label Asianlanguage e-commerce service provider, targeting business-to-business andbusiness-to-customer markets, portals and Internet Service Provider (“ISP”)companies.  Due to the negative responsein general to e-commerce, the operations of Lotus World were suspended in 2001.  On March 12, 2002, we entered into an AssetPurchase and Assignment and Assumption Agreement with Avtech Technology,whereby we assigned our rights to certain contracts and related intangibles toAvtech in exchange for Avtech’s assumption of all of Lotus World’s obligationsunder the contracts assigned. Subsequent to the completion of the transaction, we dissolved LotusWorld.

 

*GoVideo*

 

In April 2003, we loaned $5,986,000 toOpta Systems, which was used, in addition to a deposit of $250,000 paid by OptaSystems to complete its purchase of substantially all assets and assumption ofcertain liabilities of a product line known as “GoVideo” from SONICblueIncorporated, a Delaware corporation (NASDAQ: SBLU), and Sensory ScienceCorporation, a Delaware corporation and wholly-owned subsidiary of SONICblue,pursuant to a purchase agreement and an order issued by the United StatesBankruptcy Court, Northern District of California, San Jose Division overseeingSONICblue’s bankruptcy case. 

 

17

----

 

Immediately subsequent to Opta System’spurchase of the GoVideo product line, we purchased 100% of the outstandingmembership interests of Opta Systems from Carmco Investments, LLC, aConnecticut limited liability company, for $420,000, representing the return ofthe $250,000 deposit used in the acquisition of the GoVideo product line andrelated transaction fees and expenses. Subsequent to the closing, we paid anadditional $294,000 in connection with these items.  In connection with this agreement, the $5,986,000 originallyloaned to Opta Systems was converted to a capital contribution, resulting in atotal purchase price, including actual out-of-pocket expenses of approximately$6,770,000.  In October 2003, thepurchase price was reduced by $962,000 based on a purchase price adjustment,resulting in an adjusted purchase price of $5,808,000 for GoVideo.

 

The GoVideo product line, established in1984, designs and manufactures product lines in the consumer electronicsindustry, including digital video disc (“DVD”) players, portable DVDs,DVD-Video Cassette Recorder (“VCR”) Combos, Dual-Deck VCRs, DVD Recorders, DVDRecorder + VCRs, and liquid crystal display (“LCD”) TVs. GoVideo holds variouspatents covering Dual-Deck technology as well as other electronics products andsystems.

 

Current management intends to rebuildthe Company’s business based on its newly acquired subsidiary, GoVideo, andconcentrate its future business in the related industries of consumerelectronics and telecommunications.

 

## **Results of Operations**

## ** **

**Comparison of Fiscal 2003 to Fiscal 2002**

 

The following table summarizes certainaspects of our results of operations for fiscal 2003 compared to fiscal 2002 (*inthousands):*

 
|                                 |   | **June 30,** |   |     |   |         |   |
|--------------------------------------|--------|--------------|--------|----------|--------|--------------|--------|
|                                 |   | **2003**     |   | **2002** |   | **$ Change** |   | **% Change** |   |
|                                 |   |         |   |     |   |         |   |   |   |
| Revenues                             |   | $            | 19,503 |     | $      | 55,880       |   | $ | (36,377 | ) | (65 | )% |
|                                 |   |         |   |     |   |         |   |   |   |
| Gross profit                         |   | 4,071        |   | 5,939    |   | (1,868       | )      | (31 | )% |
| As a percentage of revenues          |   | 21           | %      | 11       | %      |         |   |   |   |
|                                 |   |         |   |     |   |         |   |   |   |
| Selling, general and administrative  |   | 9,097        |   | 6,019    |   | 3,078        |   | 51 | % |
| Depreciation and amortization        |   | 486          |   | 12,048   |   | (11,562      | )      | (96 | )% |
| Research and development             |   | 6,906        |   | 9,392    |   | (2,486       | )      | (26 | )% |
| Impairment of assets                 |   | 498          |   | 20,071   |   | (19,573      | )      | (98 | )% |
|                                 |   |         |   |     |   |         |   |   |   |
| Total other income (expense), net    |   | 4,068        |   | 638      |   | 3,430        |   | 538 | % |
|                                 |   |         |   |     |   |         |   |   |   |
| Provision (benefit) for income taxes |   | (109         | )      | (3,181   | )      | (3,072       | )      | (97 | )% |
|                                      |        |              |        |          |        |              |        |  |  |  |  |  |

 

*Revenues*

 

Revenues for fiscal 2003 as compared tofiscal 2002 were positively impacted by the purchase of our subsidiary,GoVideo, on April 18, 2003.  Althoughfiscal 2003 only included GoVideo’s revenues from April 18, 2003 through June30, 2003, GoVideo accounted for 48% of our consolidated revenues.    The majority of GoVideo’s revenues duringfiscal 2003 were generated from sales of DVD Recorders, DVD players, portableDVDs, DVD-VCR Combos and to a lesser extent, sales from the Dual-Deck VCRs, DVDRecorder + VCRs, and LCD TVs.  We expectGoVideo revenue as a relative percentage of revenue to grow as currentmanagement continues to rebuild the Company’s business based on GoVideo andconcentrate future business in the related industries of consumer electronicsand telecommunications.

 

18

----

 

The positive impact ofGoVideo was more than offset by the significant economic slowdown in the cablemodem industry, both domestic and international.  Correlant continued to experience a slowdown in customer ordersduring fiscal 2003.  Additionally, theaverage sales price of cable modems continued to decline, which in turn placedprice pressure on the cable modem components. Ultimately, this significant slowdown and continued pricing pressureresulted in the cessation of Correlant’s historical operations in the cablemodem industry in December 2003.  Thesignificant decrease in overall revenues for fiscal 2003 as compared to fiscal2002 was primarily attributable to the following factors:

 

•                  Unit sales of DOCSIScable modems sold by Correlant decreased approximately 99%;

•                  The average sellingprice of DOCSIS cable modems decreased approximately 37%;

•                  Unit sales of MAC+Softwaresold by Correlant decreased approximately 34%; and

•                  Average sales price ofMAC+Software decreased approximately 54%. 

 

Revenues generated by internationalsales as a percentage of total revenues decreased to 51% in fiscal 2003 from91% in fiscal 2002 as a result of the purchase of GoVideo.  GoVideo’s revenues from the date of purchasethrough June 30, 2003 were all generated from sales to domestic customers.  We expect international sales as a relativepercentage of total revenues to decrease as GoVideo’s revenues as a percentageof total revenues continue to increase. 

 

*Gross Profit*

 

The decrease in gross profit dollars forfiscal 2003 compared to fiscal 2002 was a direct result of reduced revenue fromdeclining MAC+Software unit sales and severe price competition.  This decrease was somewhat offset by theincrease in gross profit dollars attributed to GoVideo.

 

Although the gross profit dollarsdecreased, the overall gross profit percentage dramatically increased as aresult of the purchase of GoVideo and a higher portion of overall revenuesgenerated from the sale of Correlant’s MAC+software.  GoVideo’s products and the MAC+Software both had higher grossprofit percentages in fiscal 2003 than cable modems during fiscal 2002.

 

*Operating Expenses*

 

Selling, general and administrative(“SG&A”).  SG&A expense consistsprimarily of personnel costs, including amortization of deferred stockcompensation for our administrative and support personnel, allowance fordoubtful accounts, and legal and accounting fees.  The increase in SG&A expense for fiscal 2003 as compared tofiscal 2002 was primarily due to the following factors:

 

•                  $1,935,000 increase in allowance fordoubtful accounts to $1,979,000 in fiscal 2003 from $44,000 in fiscal 2001.$1,949,000 of the fiscal 2003 allowance related to Correlant’s main customerTurboComm.  On April 14, 2004, Correlantfiled a lawsuit against TurboComm in the District Court of Taiwan seeking tocollect TurboComm’s outstanding debt as a result of TurboComm’s unwillingnessto pay.  On July 30, 2004, Correlantreached a settlement agreement with TurboComm. Under the agreement, Correlant agreed to withdraw its lawsuit againstTurboComm in exchange for the transfer of 700,000 Series A and 300,000 Series Cshares of Correlant preferred stock owned by TurboComm. Both parties mutuallyagreed to release and discharge any and all claims that each may have againstthe other party.  The remaining $30,000allowance for doubtful accounts in fiscal 2003 related to GoVideo’s slow payingcustomers.  Fiscal 2002 allowancerelated to Correlant’s smaller customers not being able to pay due to thesignificant economic slowdown in the downturn in the cable modem industry.  

•                  Purchase of GoVideo,which added $1,144,000 to SG&A; 

•                  $400,000 increased legal and accountingfees resulting from the previously discussed takeover of Lotus Pacific by TCLand the subsequent replacement of prior Lotus Pacific management, and thesubsequent reaudit and restatement of previously reported financial results;and

•                  $500,000 settlement of a legal disputewith a Correlant vendor.

 

The above increaseswere partially offset by a decrease of $253,000 in amortization of deferredstock compensation as a result of accounting for stock options under theaccelerated provisions allowed by Financial Accounting Standards Board (“FASB”)Interpretation (“FIN”) 44, *Accounting for Certain Transactions Involving StockCompensation – An Interpretation of APB Opinion No. 25*.

 

19

----

 

Depreciation and amortization(“D&A”).  D&A expense consistsof depreciation of property and equipment and goodwill amortization related tothe purchase of Correlant.  The decreasein D&A expense was due to no goodwill amortization during fiscal 2003 as comparedto goodwill amortization of $11,454,000 during fiscal 2002.  Goodwill was deemed impaired at June 30,2002 and fully written off.  Theremaining decrease was a result of the non-renewal of research and developmentsoftware maintenance due to the shutdown of Correlant’s historicaloperations.  

 

Research and development(“R&D”).  R&D expense consistsprimarily of personnel costs, including amortization of deferred stockcompensation of employees engaged in research, design and developmentactivities and, to a lesser extent, design prototype material expenditures andexpensed equipment and supplies required to develop new products and enhanceexisting products.  The decrease inR&D expense for fiscal 2003 as compared to fiscal 2002 was primarily attributableto the following factors:

 

•                  $811,000 decrease inamortization of deferred stock compensation;

•                  $533,000 decrease in DOCSIScertification fees associated with Correlant’s decreased product offerings; and

•                  Decreased salary expense associated withnatural attrition without replacing vacant positions.

 

Impairment ofassets.  The majority of the impairmentof assets during fiscal 2003 related to the cessation of Correlant’s historicaloperations.  As such, $477,000 ofCorrelant’s fixed assets were deemed impaired and written off.  Impairment of assets during fiscal 2002related to the goodwill associated with the purchase of Correlant.  As of June 30, 2002, we deemed the goodwillimpaired due to the competitive nature of Correlant’s industry and its significantreduction in revenues.  As a result, the$20,071,000 of remaining goodwill was fully written off.

 

*Total other income (expense)*

 

Total other income (expense) consists ofinterest income, interest expense foreign exchange gain (loss) and other non-operatingitems.  We experienced net other incomeduring fiscal 2003 due to a $3,500,000 dispute settlement with priorauditors.  Additionally, we received3,000,896 shares of our common stock as part of the settlement with USS Online,Travelway International Ltd. and Huaya Lu Tung.  See “**Item 3. Legal Proceedings.**”The shares are accounted for as treasury stock and valued at the adjustedclosing sales price of $0.05 per share as reported by the National QuotationBureau’s “Pink Sheets” on the date the shares were acquired which totaled$150,000.  The remaining other incomeduring fiscal 2003 was a result of interest income earned on our cash accountand investments, slightly offset by our interest expense.  We experienced net other income duringfiscal 2002 primarily due to interest income earned on our cash andinvestments, which was offset slightly by our foreign exchange loss from ourTaiwan branch and interest expense.  

 

*Provision (benefit) forincome taxes*

 

We record an asset orliability for tax assessments based on our estimate of the potentialassessments.  Among other reasons, newlaws and new interpretations of laws and rulings may affect the liability forpotential tax assessments by tax authorities. Due to the subjectivity and complex nature of the underlying issues,actual payments or refunds or assessments may differ from our estimates.  To the extent our estimates differ fromactual payments or refunds or assessments, income tax expense is adjusted.  In June 2003, we were notified by the InternalRevenue Service (“IRS”) that it would be reviewing our tax returns for theyears ended June 30, 2001, 2000 and 1999.   Subsequently, we filed amended returns for the years ended June 30,2001, 2000 and 1999.  The amendmentsrelate to the restatement of our financial statements as well as thedeconsolidation of consolidated tax returns and subsequent filing of separatereturns by us and each of our subsidiaries. Because we filed tax returns separate from our subsidiaries, we could nolonger offset income from its sale of stock in subsidiaries against operatinglosses within its subsidiaries. However, because we experienced losses in subsequent years these losseswere available to carryback against these gains.  

 

20

----

 

**Comparison of Fiscal 2002 to Fiscal 2001**

 

The following table summarizes certainaspects of our results of operations for fiscal 2002 compared to fiscal 2001 (*inthousands):*

 
|                                 |   | **June 30,** |   |     |   |         |   |
|--------------------------------------|--------|--------------|--------|----------|--------|--------------|--------|
|                                 |   | **2002**     |   | **2001** |   | **$ Change** |   | **% Change** |   |
|                                 |   |         |   |     |   |         |   |   |   |
| Revenues                             |   | $            | 55,880 |     | $      | 263,192      |   | $ | (207,312 | ) | (79 | )% |
|                                 |   |         |   |     |   |         |   |   |   |
| Gross profit                         |   | 5,939        |   | 32,591   |   | (26,652      | )      | (82 | )% |
| As a percentage of revenues          |   | 11           | %      | 12       | %      |         |   |   |   |
|                                 |   |         |   |     |   |         |   |   |   |
| Selling, general and administrative  |   | 6,019        |   | 14,072   |   | (8,053       | )      | (57 | )% |
| Depreciation and amortization        |   | 12,048       |   | 12,020   |   | 28           |   | — | % |
| Research and development             |   | 9,392        |   | 16,214   |   | (6,822       | )      | (42 | )% |
| Impairment of assets                 |   | 20,071       |   | —   |   | 20,071       |   | N/A |   |
|                                 |   |         |   |     |   |         |   |   |   |
| Total other income (expense), net    |   | 638          |   | (2,937   | )      | 3,575        |   | 122 | % |
|                                 |   |         |   |     |   |         |   |   |   |
| Provision (benefit) for income taxes |   | (3,181       | )      | (6,434   | )      | (3,253       | )      | (51 | )% |
|                                      |        |              |        |          |        |              |        |  |  |  |  |  |

 

*Revenues*

 

The significantdecrease in overall revenues for fiscal 2002 as compared to fiscal 2001 wasprimarily attributable to the following factors:

 

•                  Unit sales of DOCSIScable modems sold by Correlant decreased approximately 80%;

•                  An industry-widedownturn in broadband equipment purchase as cable operators, and in turn ourcustomers, worked through their excess inventory;

•                  Average sales price ofour DOCSIS cable modems sold by Correlant declined approximately 9% due toheavy price competition; and

•                  The aforementionedchange in Correlant’s business model.

 

Revenues generated by internationalsales as a percentage of total revenues increased to 91% from 70% during fiscal2002 as compared to fiscal 2001.  Thelarge increase was primarily attributable to the loss of Correlant’ssignificant US customers, as a result of customers developing their own DOCSIScable modems, and to a lesser extent the aforementioned change in Correlant’sbusiness model.  

 

Due to the significant economic slowdownin the cable modem industry, both domestic and international, we experienced aslowdown in customer orders during fiscal 2002.  Subsequent to fiscal 2002, revenues continued to be negatively impacted.  Additionally, the average sales price ofcable modems continued to decline, which in turn placed price pressure on thecable modem components.  Ultimately,this significant slowdown and continued pricing pressure resulted in thecessation of Correlant’s historical operations in the cable modem industryDecember, 2003.

 

*Gross Profit*

 

The decrease in gross profit dollars forfiscal 2002 compared to fiscal 2001 was a direct result of reduced revenue fromdeclining cable modem unit sales and severe price competition.  Cable modem selling prices decreased fasterthan the associated product cost reductions, which resulted in selling cablemodems at negative gross profit in order to keep market share.

 

Although the gross profit dollarsdecreased, and the gross profit percentage realized from cable modem salesdecreased, the overall gross profit percentage remained fairly constant forfiscal 2002 compared to fiscal 2001. This was due to a higher proportion of overall revenues generated fromthe sale of Correlant’s MAC+software, which experienced a higher gross profitpercentage than cable modems.

 

21

----

*Operating Expenses*

 

SG&A. The decrease in SG&A expense for fiscal 2002 as comparedto fiscal 2001 was due to the following factors:

 

•      $4,433,000 decrease in allowance fordoubtful accounts to $44,000 in fiscal 2002 from $4,477,000 in fiscal 2001. For2002 details, see **“Comparison of Fiscal 2003to Fiscal 2002.”** Fiscal 2001 allowance related to the forgiveness of$4,098,000 due from our subsidiary, Regent, in connection with the spin off ofRegent. The remaining allowance for doubtful accounts in fiscal 2001 was due toa $300,000 cash advance to our former subsidiary PMB, who subsequentlydefaulted, and $79,000 accrued interest on our loans to USS Online and PMB.

•      Decrease of $1,696,000 in amortization ofdeferred stock compensation;

•      Decrease of $1,000,000 legal andaccounting fees associated with a contemplated initial public offering (“IPO”)Correlant in 2001, which in 2002 was put on hold indefinitely;

•      Closure of Correlant’s Taiwan branchoffice; and

•      Decreased salary expense associated with areduction in force.

 

The above decreases were slightly offset by an increase in legal andaccounting fees resulting from the previously discussed takeover of LotusPacific by TCL and the subsequent replacement of prior Lotus Pacificmanagement.

 

D&A. Goodwill amortization stayed fairly constant from fiscal 2002 comparedto fiscal 2001 as there were no significant business acquisitions ordispositions resulting in a change to goodwill amortization.  Depreciation expense increased slightly ascapital expenditures increased to support our expanding technologyinfrastructure during fiscal 2002.  

 

R&D. The decrease in R&D expense for fiscal 2002 as compared to fiscal2001 was primarily attributable to the following factors:

 

•      Decrease of $5,838,000in amortization of deferred stock compensation; and

•      Decreased salaryexpense associated with natural attrition without replacing vacant positions.

 

The above decreaseswere partially offset by increased fees related to the DOCSIS cable modemcertification process.  

 

Impairment ofassets.  Impairment of assets duringfiscal 2002 related to the goodwill associated with the purchase ofCorrelant.  As of June 30, 2002, wedeemed the goodwill impaired due to the competitive nature of Correlant’sindustry and its significant reduction in revenues.  As a result, the $20,071,000 of remaininggoodwill was fully written off.

 

*Totalother income (expense)*

* *

We experienced net other income duringfiscal 2002 primarily due to interest income earned on our cash andinvestments, which was offset slightly by our foreign exchange loss from ourTaiwan branch and interest expense.  Weexperienced net other expense during fiscal 2001 primarily due to the followingtransactions undertaken by prior management:

 

•                  In January 2001, prior management agreedto refund, in exchange for stock, $7,100,000 to several investors who hadpurchased a total of 355,000 shares of Correlant common stock during fiscal2000.  Prior management gave $7,100,000to Hywin Investments Limited (“Hywin”), a shareholder of the Company, who wasto return the funds to the individual investors and return the stock to LotusPacific.  However, the shares were neverreturned to the Company.   In connectionwith the refund, Hywin refunded to us $1,065,000 of commissions relating to theshares to be returned. The Company investigated the transaction and was unableto recover the funds.  As a result, thenet amount of $6,035,000 was expensed.

 

22

----

 

•                  In December 2000, prior managementagreed to refund, in exchange for stock, $1,500,000 received in connection withLotus Pacific’s previous sale of shares of Arescom stock.  Lotus Pacific gave the refund amount toWilliam Hu, the Company’s attorney at that time, to process the refund.   However, the refund was never returned tothe investors and the shares were never returned to us.  We investigated the transaction and have beenunable to recover the funds.  See “**Item 3. Legal Proceedings.**”  As a result, the $1,500,000 was expensed. 

•                  In October 2000, prior management soldshares of Correlant common stock owned by the Company to various unrelatedparties.  Although the Correlant shareswere transferred to the parties, the Company did not receive any of theproceeds. We investigated the transaction and have been unable to recover thefunds, and as a result we expensed $2,266,000.

 

The above fiscal 2001expenses were offset by the $3,886,000 gain on the spin off of Regent andinterest income earned on our cash and investments.

 

**Comparison of Fiscal 2001to Fiscal 2000**

** **

The following table summarizes certainaspects of our results of operations for fiscal 2001 compared to fiscal 2000 (*in thousands*):

 
| ** **                           | ** ** | **Year ended June 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------|------------|-------------------|------------|
| ** **                           | ** ** | **2001**                | ** ** | **2000**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                 |       |                    |       |       |       |              |       |   |   |
| Revenues                             |       | $                       | 263,192    |       | $          | 71,839            |       | $ | 191,353 |   | 266 | % |
|                                 |       |                    |       |       |       |              |       |   |   |
| Gross profit                         |       | 32,591                  |       | 14,607     |       | 17,984            |       | 123 | % |
| As a percentage of revenues          |       | 12                      | %          | 20         | %          |              |       |   |   |
|                                 |       |                    |       |       |       |              |       |   |   |
| Selling, general and administrative  |       | 14,072                  |       | 16,618     |       | (2,546            | )          | (15 | )% |
| Depreciation and amortization        |       | 12,020                  |       | 14,629     |       | (2,609            | )          | (18 | )% |
| Research and development             |       | 16,214                  |       | 7,126      |       | 9,088             |       | 128 | % |
| Impairment of assets                 |       | —                  |       | 3,486      |       | (3,486            | )          | (100 | )% |
|                                 |       |                    |       |       |       |              |       |   |   |
| Total other income (expense), net    |       | (2,937                  | )          | 46,424     |       | (49,361           | )          | (106 | )% |
|                                 |       |                    |       |       |       |              |       |   |   |
| Provision (benefit) for income taxes |       | (6,434                  | )          | 21,099     |       | (27,533           | )          | (130 | )% |
|                                      |            |                         |            |            |            |                   |            |  |  |  |  |  |

 

*Revenues*

* *

The significantincrease in overall revenues for fiscal 2001 as compared to fiscal 2000 wasprimarily attributable to the 333% increase in unit sales of DOCSIS cablemodems.  The increase in cable modem unitsales was somewhat offset by the decrease in the average selling price of ourcable modems as discussed below.  Revenues generated by international sales as a percentage of totalrevenues remained fairly constant with 70% and 72% of revenue generated frominternational sales for fiscal 2001 and 2000, respectively.   

 

*Gross Profit*

* *

The increase in gross profit dollars wasa result of the increased revenues as discussed above.  The decrease in gross profit percentage was dueto the following:

 

•               An approximate 41% decrease in theaverage sales price of our DOCSIS cable modems sold by Correlant as a result ofheavy price competition.  Selling pricesdecreased faster than the associated product cost reductions, which reducedapproximately 24%;

 

23

----

 

•               Loss on purchase commitments of cablemodem components as Correlant adjusted inventories to reflect the decrease inforecasted product demand; and

•     Write down of component inventories to market value.

 

*Operating Expenses*

 

SG&A.  The decrease in SG&A was due to adecrease in cash transfer and exchanges between entities under common controlto $3,000 in fiscal 2001 from $9,260,000 in fiscal 2000.  Our subsidiaries, Regent and Lotus World,engaged in extensive transactions with companies owned and managed by priormanagement.  These transactions includedadvances, lease expense for the use of facilities, payroll expense for the useof employees, consulting expense, and other office expense.  This decrease was offset by the following:

 

•               $3,122,000 increase inallowance for doubtful accounts to $4,477,000 in fiscal 2001 from $1,355,000 infiscal 2000. For 2001 details, see “**Comparison of Fiscal 2002to Fiscal 2001.**”  Fiscal 2000allowance related to a promissory note with our former subsidiary USS Online of$1,300,000 principal and $55,000 accrued interest. 

•      $1,663,000 increasedamortization of deferred stock compensation;

•      $1,000,000 increaselegal and accounting fees associated with Correlant’s contemplated IPO; and 

•      Increased salaryexpense associated with an increased staff to support Correlant’s contemplatedIPO.  

 

D&A. We sold 656,000 shares of our Correlant stock, which reduced ourownership percentage from 65% to 62%.  Asa result of the ownership decrease, the associated amortization of goodwilldecreased.  Depreciation expenseincreased slightly as capital expenditures increased to support our growingstaff and to support Correlant’s contemplated IPO.   

 

R&D. The increase in R&D expense for fiscal 2001 as compared to fiscal2000 was primarily attributable to the following factors:

 

•      $5,500,000 increase inamortization of deferred stock compensation; and

•                  Increased salaryexpense associated with a 52% increase in headcount to support the growingdemand for current and anticipated future products. 

 

Impairment ofassets.  We evaluated our long-livedassets as of June 30, 2001 and concluded the carrying value of all our assetsexceeded the expected future cash flows from the use of our assets.  Therefore, there was no impairment of assetsduring fiscal 2001.  During fiscal 2000,we incurred an impairment of assets related to the following:

 

•                  Our $3,106,000investment in USS Online.  As of June 30,2000, we determined the investment was impaired and wrote it off; and

•                  Write off of obsoleteproperty and equipment with a net book value of $380,000. 

 

*Totalother income (expense)*

* *

We experienced netother expense during fiscal 2001 as previously described at “**Comparison of Fiscal 2002 to Fiscal 2001.**”  We experienced net other income during fiscal2000 primarily due to the $50,512,000 gain realized from the sale of 3,657,000shares of Correlant stock.  This wasslightly offset by a loss on the sale of a joint venture.  On June 28, 1999 we entered into an agreementwith TCL Holdings (BVI) Co., Ltd. (“TCL BVI”)to establish TCL International(US), Inc., a 50-50 joint venture. At June 30, 2003, TCL BVI’s parent companyowned 18.9% of our outstanding common stock. During fiscal 2000 we invested $4,814,000 in the joint venture. Thepurpose of the joint venture was to develop and market a set top box (“STB”)for the China market.  The STB accessedthe Internet via a television and was marketed to households with no computerInternet access.  Once the STB wasinstalled, the joint venture planned to provide Internet access for a monthlyfee.  However, because technology forcomputer Internet access was deployed so quickly in China, there was virtuallyno demand for the STB once the joint venture completed the productdevelopment.  As such, the joint ventureceased operations.  On June 16, 2000 wesold our stock in TCL International to a related party for a note in the amountof $560,000, which was deemed to be the fair value of our portion of thewinding down joint venture.  We recordeda loss of $4,254,000 on the disposition. The remaining other income (expense)related to interest income earned on our cash and investments and interestexpense.

 

24

----

 

**Liquidityand Capital Resources**

** **

The following table summarizes ourliquidity position and cash flows as of and for the year ended June 30, 2003 (*in thousands*):

 
| Cash and cash equivalents             |   | $       | 12,044 |   |
|---------------------------------------|--------|---------|--------|--------|
| Short-term investments                |   | 13,964  |   |
| Working Capital                       |   | 31,445  |   |
| Cash used by operating activities     |   | (10,597 | )      |
| Cash used by investing activities     |   | (16,289 | )      |
| Cash provided by financing activities |   | 6,283   |   |

 

As of June 30, 2003, our principalsource of liquidity included cash and cash equivalents and short-terminvestments of $26,008,000.  We used$10,597,000 to fund operating activities during fiscal 2003.  Cash used in operating activities was due toan increase in both GoVideo’s inventory and accounts receivable.  These increases were a result of GoVideo comingout of bankruptcy, with liquidated assets and liabilities, and moving toward acompany with growing operations.  Othercash used in operations included paying vendors according to current paymentterms.  Cash used in operations wasslightly offset by cash collected on accounts receivable from related partiesdue to the slowdown of Correlant’s operations. We expect future cash provided (used) by operating activities tofluctuate, primarily as a result of fluctuations in our operating results, thetiming of product shipments, accounts receivable collections, inventorymanagement and the timing of vendor payments.

 

During fiscal 2003, our principalinvesting activities included: (1) purchase of our joint venture, Youbang; (2)purchase of our subsidiary, GoVideo; and (3) net purchases of short-terminvestments.  Cash used by investingactivities was partially offset by payments received on notes receivable fromrelated parties.  

 

During fiscal 2003, ouronly financing activity was GoVideo’s loan of $6,283,000 from TCL Industriesand Asia Focus Industrial Ltd., entities affiliated with TCL, to fund inventorypurchases and operating expenses.  Theseadvances, which accrue interest at annual rates of approximately 4% and areguaranteed by Lotus, are due at various dates during 2004.  The advances have not been repaid, andGoVideo and TCL Industries are currently negotiating an extension on the duedates for those notes that have matured. 

 

*Cash and Working CapitalRequirements*

* *

At June 30, 2003, we had working capitalof $31,445,000 compared to $46,962,000 at June 30, 2002.  The decrease in working capital was primarilyto fund our consolidated net loss and to purchase GoVideo.  

 

In July 2003, GoVideo entered into afinancing agreement last amended and restated in May 2004.  The maximum line of credit available was$40,000,000 (reduced to $30,000,000 on July 15, 2004) limited by a borrowingbase determined by specific inventory and receivable balances, and provides forcash loans, letters of credit and acceptances. The financing agreement, as amended, states that the line of credit willmature July 21, 2007.  Interest ischarged at prime plus 1/2 percent subject to a minimum of not less than $15,000per calendar month.  GoVideo pays amonthly fee on the unused balance of the line of credit of 0.25 percent peryear.  The line of credit iscollateralized by all of GoVideo’s assets and up to $5,000,000 of the creditfacility is guaranteed by Lotus.  Underthe current credit facility, GoVideo is required to comply with certainfinancial covenants and conditions including minimum levels of net income.  During April and June, 2004 GoVideo did notcomply with the financial covenants by not earning the required minimum netincome.  GoVideo received a waiver letterfrom the lender for the April 2004 noncompliance.  However, the lender will not waive the June2004 noncompliance.  As a result,interest charged could increase from prime plus 1/2 percent to prime plus threepercent.  GoVideo is currently attemptingto negotiate amendments to the credit agreement to reduce the thresholdsrequired by the financial covenants.

 

For the 12 months following the date ofthis filing, our cash and working capital requirements will be primarily tofund operations as well as operations of our subsidiary, GoVideo.  This may include research and development,capital expenditures and cash acquisitions that we may undertake. We expect ourcash and cash equivalents on hand and cash that may be generated fromoperations will be sufficient to meet our cash requirements for the 12 monthsfollowing the date of this filing. However, should our capital requirementsexceed cash available from operations we cannot assure that additional sourcesof financing would be available to us on commercially favorable terms, or atall.  

 

25

----

 

*Contractual Obligations*

* *

The following table summarizes ourcontractual obligations at June 30, 2003, and the effect such obligations areexpected to have on our liquidity and cash flows in future periods (*in thousands*):

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Total**                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than  5 Years** | ** ** |
|                               |       |                       |       |   |   |   |   |   |   |   |   |
| Operating lease obligations        |       | $                          | 3,192      |   | $ | 856 |   | $ | 1,632 |   | $ | 493 |   | $ | 211 |   |
| Capital lease obligations          |       | —                     |       | — |   | — |   | — |   | — |   |
| Inventory purchase obligations     |       | 10,738                     |       | 10,738 |   | — |   | — |   | — |   |
| Total contractual cash obligations |       | $                          | 13,930     |   | $ | 11,594 |   | $ | 1,632 |   | $ | 493 |   | $ | 211 |   |

 

Substantially all our operating leaseobligations are building leases.  

 

*Off-Balance SheetArrangements*

* *

At June 30, 2003, we did not have anyrelationship with unconsolidated entities or financial partnerships, whichother companies have established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes as definedin Item 303(a)(4)(ii) of SEC Regulation S-K. Therefore, we are not materiallyexposed to any financing, liquidity, market or credit risk that could arise ifwe had engaged in such relationships.

 

***Business Outlook***

*** ***

Our business outlook has not changedsince we completed our Form 10-K for fiscal 2002, filed with the SEC April 16,2004.  

 

Following the takeover of the Board ofDirectors of the Company on June 29, 2001, new management of the Companybegan a thorough review of all aspects of the business operations of theCompany and its subsidiaries.  Since thetakeover, we have engaged in numerous transactions to restructure and refocusour business.  

 

Since the takeover, our primary strategyfor business operations has been to restructure our unprofitable businesses,acquire undervalued companies (such as GoVideo) and focus on profitablegrowth.  We aggressively sold,restructured or shutdown our businesses which were either not consistentlygenerating cash from operations or which could have required future significantcash investments to become consistently cashflow positive.  As a result of this effort, we currently haveone subsidiary with operations (GoVideo) and one subsidiary with no operations(Correlant) but with significant cash and other assets.  We seek to identify market opportunities thatcomplement current operations, create and accelerate the growth and success ofGoVideo and to implement new business plans to improve the returns on thesebusinesses.

 

We plan to further improve theefficiencies of our consolidated operations and accelerate growth by utilizingour competitive advantages. We believe our competitive advantages include, butare not limited to, the following:

 

•      Significant experience of current managementin the consumer electronics and communications industry; 

•                  Business opportunities in China and Asiathrough the strength of our relationships with significant shareholders,including TCL.  TCL is an affiliatedcompany of TCL International (HKSE: 1070), a leading multimedia consumerelectronics product manufacturer, with a strong brand presence in China andAsia.  TCL International’s core productsinclude televisions, mobile handsets, personal computers, audio-visualequipment as well as information technology services.  Under its highly recognized andwell-established TCL brand, it is one of the strongest players in the TV andmobile handset marketplace in China. Headquartered in China, it operates anumber of highly efficient manufacturing bases in Asia.

 

26

----

 

On November 3, 2003,TCL International and Thomson (Euronext Paris: 18453; NYSE: TMS) signed amemorandum of understanding to form a joint venture company named TCL-ThomsonElectronics for the development, manufacturing and distribution of televisionsets and related products and services.  The joint venture’s operations commenced August 1, 2004.  Its objectives are to consolidate its globalTV leader position, offer a complete and high-quality product range from basicto high-end innovative products, address all key markets competitively byleveraging an efficient cost structure, and seize development opportunities inthe fast-growing Chinese market.  

•      GoVideo brand recognition; and

•                  The ability to increase market share byintroducing TCL products into the US using GoVideo’s existing distributionchannels.

 

As we look to the future, we areplanning for growth in annual revenues as a result of revenues generated fromGoVideo.  And although consumerelectronics historically have slightly lower gross margins than our past grossmargins realized from MAC+software and cable modem-related products, we expectgross margin dollars to increase as a result of increased revenue.  Our strategy will remain within our corecompetency of consumer electronics and telecommunications as we attempt to gainstrength, momentum and market share in the US and abroad.  

 

Our future results of operations and theother forward-looking statements contained in this filing, including thisMD&A, involve a number of risks and uncertainties—in particular, thestatements regarding plans to cultivate new businesses that complement existingconsumer electronics business, revenue and gross margin.  In addition to various factors discussedabove, a number of other factors could cause actual results to differmaterially from our expectations. 

 

***Critical Accounting Policies***

*** ***

The discussion and analysis of ourfinancial condition and results of operations are based on the consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the US. The preparation of these financial statements requires estimates andassumptions that affect the reported amounts and disclosures.  

 

We believe the following, among others,to be critical accounting policies.  Thatis, they are both important to the portrayal of our financial condition andresults of operations, and they require critical management judgments andestimates about matters that are inherently uncertain.  Although we believe our judgments andestimates are appropriate and correct, actual future results may differ fromour estimates.  

 

*•**                 **Revenue recognition.* We recognize revenue upon passage of title of our product in accordancewith SEC Staff Accounting Bulletin 101*, Revenue Recognition inFinancial Statements* (SAB 101), as amended by SAB 101A and101B.  At the time revenue is recognized,GoVideo records an allowance for estimated sales returns based on estimatesderived from historical trends.  Salesreturns are recorded with net revenues. GoVideo also establishes an allowance for estimated payment termdiscounts expected to be taken by customers based on analysis of historicaltrends.  Payment term discounts grantedare recorded in other expense.  

 

*•**                 **Warranty Reserves*. Go Video provides limited labor and parts warranties on certain of itsproducts for a maximum of one year.  GoVideo records a warranty reserve based upon historical experience and anestimate of total exposure associated with products sold to consumers throughretail outlets.  Correlant did notprovide a product warranty.  The warrantyliability for defective cable modems was the responsibility of the third-partymanufacturer*.* 

 

*•**                 **Bad debt reserves*. We conduct business and extend credit based on an evaluation of ourcustomers’ financial condition generally without requiring collateral. Exposureto losses on trade receivables is expected to vary by customer due to thefinancial condition of each customer. We monitor exposure to credit losses andmaintain allowances for anticipated losses considered necessary under thecircumstances. Delinquent notes and trade accounts receivable are chargedagainst the allowance for doubtful accounts once uncollectibility has beendetermined. The allowance is determined through an analysis of the aging ofaccounts receivable and assessments of risk based on historical trends and anevaluation of the impact of current and projected economic conditions.  We evaluate the past-due status of our notesand related parties and trade receivables based on contractual terms of sale.If the financial

 

27

----

 

condition of ourcustomers were to deteriorate, resulting in an impairment of ability to makepayments, additional allowances may be required.

 

*•**                 **Related party transactions.* We have significant related party transactions and agreements; many ofwhich are complex.  We believe suchtransactions have been accounted for at fair value.  We utilized our best estimate of the value ofthese transactions and agreements.  Hadalternative assumptions been used, the values obtained may have been different.

 

*•**                 **Inventories.* GoVideo’s inventory consists offinished goods, which are mostly in transit from its contractmanufacturer.  Correlant’s inventoryconsisted primarily of integrated circuits and other components to be used inthe manufacture of cable modems. Inventories are stated at the lower of cost or market with cost beingdetermined on a first-in, first-out basis. We write down our inventory for estimated obsolescence or unmarketableinventory equal to the difference between the cost of the inventory and theestimated market value based upon assumptions about future demand and marketconditions.  Due to the aforementionedchange in Correlant’s business model and the timing of Correlant’s product lifecycle, the inventory was fully reserved at June 30, 2003. It remained fullyreserved until the shutdown of Correlant’s historical operations in the cablemodem and cable modem-related market.  

 

*•**                 **Investments.* Our investments consist primarily of debt securities.  Investments are stated at fair value based onquoted market prices obtained from an independent banker.  Investments are classified as available-for-salebased on management’s intended use.  Asof June 30, 2003 short-term investments and any difference between thefair market value and the underlying cost of such investment is disclosed at “**Item 8. Financial Statements and SupplementaryData  Note 2 – Significant AccountingPolicies**.”  Currently we do not have any equityinvestments in publicly traded companies. During the period covered by this Annual Report, we held noncontrollinginterests in private companies with no active market, which required fairvalues to be estimated.  We recorded aninvestment impairment charge when we believe an investment has experienced adecline in value that is other than temporary. 

 

*•**                 **Valuation of goodwill and otheridentifiable intangible assets. * We actively pursued the acquisition ofbusinesses, which resulted in significant goodwill and other identifiableintangible assets.  We assess theimpairment of goodwill and other identifiable intangible assets whenever eventsor changes in circumstances indicate the carrying value may not berecoverable.  Factors which trigger animpairment review include, but are not limited to, the following: (1)significant negative industry or economic trends; (2) current, historical or projectedlosses that indicate continuing losses; and (3) a significant decline in ourmarket capitalization relative to net book value.  When we determine there is an indicator thecarrying value of the goodwill or other identifiable intangible assets may notbe recoverable, we measure impairment based on estimates of future cashflow.  These estimates includeassumptions about future conditions within the Company as well as the entireindustry.

 

*•**                 **Impairment of other long-livedassets.*  Other long-lived assets, such as property andequipment, are amortized or depreciated over their estimated useful lives.These assets are reviewed for impairment whenever events or circumstancesprovide evidence that suggest that the carrying amount of the asset may not berecoverable, with impairment being based upon an evaluation of the identifiableundiscounted cash flows. If the asset has been impaired, the resulting chargereflects the excess of the asset’s carrying cost over its fair value. 

 

*•**                 **Income taxes*. We record a valuation allowance to reduce the deferred tax assets to theamount that is more likely than not to be realized in the future.  We considered future taxable income andongoing tax planning strategies in assessing the need for the valuationallowance. If we determine that we will not realize all or part of our netdeferred tax assets in the future, we will make an adjustment to the deferredtax assets, which will increase income tax expense in the period of suchdetermination.

 

***Recently Issued AccountingStandards***

*** ***

In June 2002, the FASB issued SFAS 146, *Accounting for Costs Associated with Exit or Disposal Activities*(“SFAS 146”), which addresses accounting for restructuring and similar costs.SFAS 146 supersedes previous accounting guidance, principally Emerging IssuesTask Force (“EITF”) Issue 94-3, *Liability Recognition for*

 

28

----

 

*Certain EmployeeTermination Benefits and Other Costs to Exit an Activity* (including Certain Costs Incurred in aRestructuring) (“EITF 94-3”).  SFAS 146requires the liability for costs associated with an exit or disposal activitybe recognized when the liability is incurred. Under EITF 94-3, a liability foran exit cost was recognized at the date of the Company’s commitment to an exitplan. SFAS 146 also states the liability should initially be measured andrecorded at fair value. Accordingly, SFAS 146 may affect the timing ofrecognizing future restructuring costs as well as the amounts recognized.  We adopted SFAS 146 during fiscal 2003. Theadoption did not have a material effect on our financial position, results ofoperations, or cash flows as of or for the year ended June 30, 2003.

 

In November 2002, the FASB issued FASBInterpretation (“FIN”) 45, *Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others* (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, the guarantor mustrecognize a liability for the fair value of the obligation it assumes underthat guarantee. The provisions for initial recognition and measurement areeffective on a prospective basis for guarantees issued or modified afterDecember 31, 2002, irrespective of a guarantor’s year-end. The disclosurerequirements of FIN 45 are applicable to the Company’s product warranty liabilityand other guarantees.  We adopted FIN 45during fiscal 2003. The adoption did not have a material effect on ourfinancial position, results of operations, or cash flows as of or for the yearended June 30, 2003.

 

In December 2002, the FASB issued SFAS148, *Accounting for Stock-Based Compensation—Transitionand Disclosure* (“SFAS 148”), which amends SFAS 123.  SFAS 148 provides alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for stock-based employee compensation. It also amends thedisclosure provisions of SFAS 123 to require prominent disclosure about theeffects an entity’s accounting policy decisions with respect to stock-basedemployee compensation have on reported net income in both annual and interimperiods.  We adopted SFAS 148 duringfiscal 2003. The adoption did not have a material effect on our financialposition, results of operations, or cash flows as of or for the year ended June30, 2003.

 

In January 2003, the FASB issued FIN 46,*Consolidation of Variable Interest Entities*(“FIN46”). FIN 46 was revised in December 2003. FIN 46 establishes accounting guidance for consolidation of a variableinterest entity (“VIE”), formerly referred to as special purpose entities. FIN46 applies to any business enterprise, both public and private, that has acontrolling interest, contractual relationship or other business relationshipwith a VIE. FIN 46 provides guidance for determining when an entity (PrimaryBeneficiary) should consolidate a VIE that functions to support the activitiesof the Primary Beneficiary. The application of FIN 46 is required for periodsending after December 15, 2003.   TheCompany has no contractual relationship or other business relationship with aVIE, and therefore the adoption of FIN46 will have no effect on our financialposition, results of operations, or cash flows.

 

In January 2003, the EITF published EITFIssue 00-21, *Revenue Arrangements with MultipleDeliverables* (“EITF 00-21”), which requires companies to determinewhether an arrangement involving multiple deliverables contains more than oneunit of accounting. In applying EITF 00-21, revenue arrangements with multipledeliverables should be divided into separate units of accounting, if thedeliverables in the arrangement meet certain criteria. Arrangementconsideration should be allocated among the separate units of accounting basedon their relative fair values. This issue is effective for revenue arrangementsentered into in fiscal periods beginning after June 15, 2003. The Company doesnot expect the adoption of EITF 00-21 to have a material impact on itsfinancial position, results of operations, or cash flows.  

 

In April 2003, the FASB issued SFAS 149,*Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities*(“SFAS 149”).  SFAS 149 amends andclarifies financial accounting and reporting for derivative instruments andhedging activities.  SFAS 149 is effective for contracts entered into ormodified after June 30, 2003.  The Company does not expect SFAS 149 tohave a material impact on its financial position, results of operations, orcash flows.  

 

In May 2003, the FASB issued SFAS 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*(“SFAS 150”).  SFAS 150 representsthe first phase of the FASB’s project to clarify the accounting treatment ofcertain instruments that possess characteristics of both liabilities andequity.  SFAS 150 generally requires that freestanding financial instrumentsthat obligate the issuer to redeem the holders’ shares, or are indexed to suchan obligation, and are settled in cash or settled with shares meeting certainconditions be treated as liabilities.  The provisions of SFAS 150 areeffective immediately for instruments

 

29

----

 

entered into or modified after May 31,2003 and to all other instruments that exist as of the beginning of the firstinterim financial reporting period beginning after June 15, 2003, with theexception of mandatorily redeemable instruments of non-public companies, whichbecome subject to SFAS 150 for fiscal periods beginning after December 15,2003.  The Company does not expect SFAS 150 to impact the classificationof its outstanding preferred stock instruments upon the Company’s adoptioneffective July 1, 2003.

 

***Certain Factors That May AffectFuture Results***

*** ***

*Forward LookingStatements. *This Annual Report on Form 10-K containscertain statements that are forward looking within the meaning of Section 27Aof the Securities and Exchange Act of 1933, as amended, and Section 21E of theSecurities and Exchange Act of 1934, as amended, that involve risks anduncertainties.  Any statements containedherein (including, without limitation, statements to the effect that theCompany or management “estimates,” “expects,” “anticipates,” “plans,”“believes,” “projects,” “continues,” “may,” or “will” or statements concerning“potential” or “opportunity” or variations thereof or comparable terminology orthe negative thereof), that are not statements of historical fact should beconstrued as forward looking statements.  All statements that address operating performance, events ordevelopments that our management expects or anticipates to incur in the future,including statements relating to sales and earnings growth or statementsexpressing general optimism about future operating results, are forward-lookingstatements.  These forward-lookingstatements are based on our management’s current views and assumptionsregarding future events and operating performance.  Many factors could cause actual results todiffer materially from estimates contained in our management’s forward-lookingstatements including the factors listed at pages 30-32.   The differences may be caused by a varietyof factors, including but not limited to adverse economic conditions,competitive pressures, inadequate capital, unexpected costs, lower revenues,net income and forecasts, the possibility of fluctuation and volatility of ouroperating results and financial condition, inability to carry out marketing andsales plans and loss of key executives, among other things.  Because of these and other factors that mayaffect our operating results, past performance should not be considered an indicatorof future performance and investors should not use historical results toanticipate results or trends in future periods.

 

*The restatement andreaudit of our financial statements and the potential for review of ourfinancial disclosure could materially impact our business and results ofoperations. *Following the replacement of priormanagement, the new management began reviewing various transactions undertakenby old management prior to June 29, 2001. During its preliminary investigation, new management identified certainmaterial transactions undertaken by prior management that impact reportedfinancial and operating results with respect to its consolidated financialstatements for the fiscal years ended June 30, 2001, 2000 and 1999.  Due to the preliminary results, the Companydismissed the then existing independent accountants, hired new independentaccountants and re-audited all periods under investigation.  The Company completed the restatement ofpreviously reported financial statement in its Form 10-K for fiscal 2002 filedwith the SEC April 16, 2004.

 

As a result of therestatement and reaudit of our financial statements for fiscal 2001, 2000 and1999 and the resulting delay in filing SEC reports, the SEC or othergovernmental authorities may choose to review our SEC filings.  If we are required to respond to the SEC orother governmental authorities or otherwise take actions in response to,arising out of, or relating to the restatement and reaudit of our financialstatements, such actions may require significant attention and resources ofmanagement and, regardless of the outcome, could materially impact our businessand results of operations. 

 

If we become subject tosuch heightened scrutiny, this could adversely affect investor confidence, ourability to access the capital markets and cause the trading price for oursecurities to decline. In addition, we cannot assure you that we will not haveto further restate earnings or further revise our reports for prior periods asa result of any SEC review.  Any suchrestatement could further impact investor confidence, our ability to access thecapital markets and the trading price of our securities.

 

*The Company faces toughcompetition.*TheCompany’s current subsidiary GoVideo plays a unique niche in a highlycompetitive industry: consumer electronics. GoVideo competes against many well established companies including manyoriginal equipment manufacturers (“OEM”) who have substantially greaterfinancial and other resources than the Company. Additionally, the consumer electronics industry is empirically facing atrend of declining gross margin resulted from emerging global market andcompetition. While GoVideo was profitable in fiscal 2003, the competitivenature of the industry may negatively affect the Company’s earnings if GoVideois unable to quickly adapt to the technological and market changes of theindustry.

 

30

----

 

*GoVideo utilizes contractmanufacturers and a combination of technologies from its own intellectualproperty as well as third parties*. Hence, there are no assurances GoVideo can continue to obtain newconsumer electronic products that will be competitive in today’s constantlychanging marketplace.

 

*We may not be able toproduce sufficient quantities of our products as we obtain components from, anddepend on, a limited number of key suppliers. *All ourTV and DVD player products contain one or more components that are availablefrom a single supply source and other components that are available fromlimited sources.  We depend on thesesources to meet our production requirements. We do not have any long term supply contracts.  Although we do not presently anticipate adisruption in this source of supply, if it is necessary for us to obtain thesekey components from an alternative supplier, it could take several monthsbefore receiving adequate supplies, and during this time we would be unable tosatisfy our customers’ demands.  In suchevent, prolonged delays could result in the cancellation of orders and the lossof customers*.*

* *

*GoVideo purchases productsfrom countries in Asia, including China, South Korea and Taiwan, where thereare risks associated with the potential change in social, political andregulatory and economic conditions. *Significant changes in the social,political and regulatory and economic conditions could adversely affect GoVideothrough increased costs, unavailability of goods or increased tariffs.  As a result of trade disputes, the US hasoccasionally imposed tariffs, regulatory procedures and importation bans oncertain products.  Trade sanctions orregulatory procedures involving a country in which we conduct a substantialamount of business could have a material adverse effect on our operations.  

 

*GoVideo is responsible forproduct warranties and defects*.  Although GoVideo outsourcesall product manufacturing, itprovides limited labor and parts warranties on certain of its products for amaximum of one year.  Therefore, GoVideois highly dependent upon the quality of its suppliers.

 

*Our new products may notbe well accepted.*  Our future success depends on GoVideo’sability to continue to design and develop and win acceptance of its productsand services, which are offered in highly competitive markets characterized bycontinual product introductions, rapid development in technology, andsubjective and changing consumer preferences.

 

*The introduction orexpected introduction of new products or technologies may depress sales ofexisting products and technologies*. This may result in declining prices and inventory obsolescence.As GoVideo maintains a substantial investment in product inventory,declining prices and inventory obsolescence could have a material adverseeffect on our business and financial results.

 

*We are exposed to therisks associated with the recent decision to cease cable modem-related businessby Correlant, our subsidiary.*The Company is actively seeking a viable business model for Correlantto maximize our shareholders’ interest. Even if a viable business model is found that will correspond withCorrelant’s available cash size, there is still no guarantee the model willsucceed. 

 

*Our stock price may notcome back. *The Company’s stock was removed from OTCBulletin Board as a result of the Company’s failure to timely submit the Form10-K for fiscal 2002. Although Lotus filed its Form 10-K for fiscal 2002 onApril 16, 2004, Lotus is not eligible to trade on the OTC Bulletin Board untilLotus becomes current in all its required filings or files a Form 10 and clearsall comments with the SEC. The current trading of the Company’s stock issporadic and minimal and there is no established public trading market for ourcommon stock. In addition, the stock market has experienced extreme price andvolume fluctuations that have affected the market price of many technologycompanies, in particular, and that have often been unrelated to the operatingperformance of these companies. These factors, as well as general economic andpolitical conditions, may materially adversely affect the market price of ourcommon stock in the future. Additionally, volatility or a lack of positiveperformance in our stock price may adversely affect our ability to retain keyemployees. * *

* *

*Our executive officers andkey personnel are critical to our business and the loss of their services coulddisrupt our operations and our customer relationships. *Our success depends to a significant degree upon the continuingcontributions of our key management, technical, marketing and sales employees.  There can be no assurance that we will besuccessful in retaining our key employees or that we can attract and retainadditional skilled personnel as required. The loss of the services of keypersonnel could significantly harm our results of operations and business.

 

31

----

 

*GoVideo may needadditional capital resources*.  We believe GoVideo’s cash flowfrom operations and borrowings under its credit facility are sufficient to fundexisting operations for the foreseeable future. See   “**Liquidityand Capital Resources.” **However,GoVideo may need additional capital to operate if:

 

•      Market conditions change;

•      Business plans or assumptions change;

•      Acquisitions are pursued;

•      Material increases in capital expendituresor working capital become necessary; or

•                  GoVideo’s lender calls or acceleratesthe repayment of its line of credit due to noncompliance with debt covenants aspreviously discussed.

 

Because of these and other factorsaffecting our operating results, past financial performance should not beconsidered an indicator of future performance, and investors should not usehistorical trends to anticipate results or trends in future periods.

 

**Item 7A.  Quantitative and Qualitative Disclosuresabout Market Risk**

** **

*Interest Risk*.  Our exposure to market risk for changes in interest rates relatesprimarily to our investment portfolio. We do not use derivative financialinstruments in our investment portfolio. We place our investments with high credit quality issuers and, bypolicy, limit the amount of credit exposure to any one issuer.  We are averse to principal loss and ensurethe safety and preservation of invested funds by limiting default risk, marketrisk, and reinvestment risk.  We minimizeour risk by investing in only the safest and highest credit quality securitiesand by constantly positioning our portfolio to respond appropriately to asignificant reduction in a credit rating of any investment issuer orguarantor.  Our portfolio includes onlycorporate debt securities and municipal bonds. 

 

*Foreign Currency Risk*.  Until January 31, 2002 a large portion of Correlant’s business wastransacted in Taiwan.  However, thefunctional currency of our Taiwan branch was the US dollar.  Only a small number of transactions weredenominated in the Taiwan dollar and exposed to foreign currency exchange raterisk.  Subsequent to January 31, 2002, aspart of the change in Correlant’s business model, we closed our Taiwan branch.  All transactions, with the exception of BeijingLotus, which has no material independent operations, are now denominated in theUS dollar.  Therefore, we do not have anyhedging or similar foreign currency contracts. To date, we have not experienced any material foreign currency exchangerate gains or losses associated with transactions denominated in the Taiwandollar or the Chinese RMB and do not expect any significant changes in foreigncurrency exposure in the near future. 

 

**Item 8****.  Financial Statements**

** **

The information required by Item 8 isincluded at pages F-1 to F-35. 

 

**Item9.  Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure **

** **

(a) There were no changes in ordisagreements with accountants on accounting and financial disclosure duringfiscal 2003.

 

(b) The Company previously reported the dismissal of Larson, Allen,Weishair & Co. as its independent accountants and the appointment ofHein & Associates LLP (“Hein”) as its new independent accountantsin current reports on Form 8-K and 8-K/A as filed with the Commission on March26, March 27 and April 12, 2002. 

 

The Company previously reported thedismissal of Ernst & Young LLP as the independent accountant of Correlant,a “significant subsidiary” (as defined in Rule 1-02 of Regulation S-X) of theCompany, and the engagement of Hein as the new independent accountant ofCorrelant on April 23, 2002, in the Company’s current reports on Form 8-K and8-K/A as filed with the Commission on April 25 and June 4, 2002. 

 

(c) In connection with the change in accountants referenced above, therewere no disagreements with the former accountants on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure, which disagreements, if not resolved to the satisfaction of theformer accountants, would have

 

32

----

 

caused them to make reference to thesubject matter of the disagreement in connection with their reports. Inconnection with the change in accountants referenced above, there were no“reportable events” of the type described in Item 304(a)(1)(v).

 

**Item9A.  Controls and Procedures **

** **

**Evaluation of disclosurecontrols and procedures**

** **

The Company carried out an evaluation,under the supervision and with the participation of the Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures pursuant to Rule 13a-14 of theSecurities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that as ofJune 30, 2003, the end of the period covered by this report, the Company’sdisclosure controls and procedures were effective at the reasonable assurancelevel in timely alerting them to material information relating to the Company(including its consolidated subsidiaries) required to be included in ourExchange Act filings. 

 

**Changes in internalcontrol over financial reporting**

** **

During fiscal 2003 there were nosignificant changes in our internal control over financial reporting thatmaterially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. 

 

Except as set forth below, during fiscal2002, there were no significant changes in our internal control over financialreporting that materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. 

 

As previously reported, following thereplacement of prior management on June 29, 2001, new management began anextensive undertaking to review various transactions undertaken by andinvolving old management prior to June 29, 2001.  As a consequence of its preliminary review,effective March 25, 2002, the Company terminated its audit relationship withits then existing independent accountants and replaced such firm with newindependent accountants. As previously reported, during its preliminaryinvestigation, new management of the Company identified various transactionsinvolving a former subsidiary and other transactions undertaken by priormanagement which impacted reported financial and operating results with respectto its consolidated financial statements for the fiscal years ended June 30,2001, 2000 and 1999 and ultimately concluded that a reaudit of the financialstatements for the fiscal years ended June 30, 2001, 2000 and 1999 wasrequired. Effective July 24, 2002, the Company engaged its new independentaccountants, to perform such reaudit and the Company concluded that it mustrestate these prior periods.  During thecourse of its review and investigation of various transactions undertaken byand involving old management, and its completion of such restatement andreaudit, new management of the Company has established its own systems ofinternal controls over financial reporting. 

 

**PART III**

 

**Item 10****.  Directorsand Executive Officers of the Registrant**

** **

*(A) Lotus PacificDirectors*

* *

The Company has five Directors electedin three separate classes. One Director serves as a Class I Director, andwill serve for a term which was scheduled to expire at the 2002 Annual Meetingof stockholders, or until their successors are duly elected and qualified oruntil their death, resignation or removal. One director serves as a Class IIDirector, and will serve for a term which was scheduled to expire at the 2003Annual Meeting of stockholders, or until their successors are duly elected andqualified or until their death, resignation or removal. Three Directors serveas Class III Directors, and each will serve for a term which was scheduledto expire at the 2004 Annual Meeting of stockholders, or until their successorsare duly elected and qualified or until their death, resignation or removal.The following table sets forth certain information with respect to thedirectors and executive officers of the Company as of August 15, 2004.  

 

33

----

 
| **Name**          | ** ** | **Age** | ** ** | **Office**                                            |
|-------------------|------------|---------|------------|-------------------------------------------------------|
| LI, Dongsheng     |       | 47      |       | Chairman of the Board and Class III Director          |
| YAN, Vincent Yong |       | 41      |       | President, Chief Executive Officer, Class II Director |
| LIU, James Jian   |       | 48      |       | Class III Director                                    |
| LIN, Zuoquan      |       | 41      |       | Class I Director                                      |
| LIN, Jih-Ming     |       | 52      |       | Class III Director                                    |

 

Mr. Dongsheng Li was elected as aClass III Director of the Company on June 29, 2001. Mr. Li also hasserved as Chairman of the board of directors of the Company’s subsidiary,Correlant, since February 2003. Mr. Li has been Chairman of the board of directors and President ofTCL Corporation (formerly TCL Holdings Co., Ltd.), a People’s Republic ofChina company (and TCL’s parent company), since 1996. Mr. Li is also theChairman of the board of directors of TCL International Holdings, Ltd.  Mr. Li has 20 years of experiencein the telecommunication equipment and consumer electronics industry.Mr. Li holds a Bachelor degree in Engineering from South China Universityof Technology.  

 

Mr. Vincent Yong Yan was elected as aClass II Director of the Company on June 29, 2001. Mr. Yan has been thePresident, CEO and Secretary of the Company since June 29, 2001. Mr. Yan wasthe CFO of the Company from June 29, 2001 until November 2002.  Mr. Yan also has served as a Vice President,director and member of the Executive Committee of the board of directors ofCorrelant since February 2003.  Mr. Yanhas been Executive Director and Chief Financial Officer of TCL InternationalHoldings, Ltd., a publicly traded consumer electronics and informationtechnology company since 1999. Prior to joining TCL, Mr. Yan served as PRCCountry Manager of Tulip Computers (Asia) Ltd., a subsidiary of a Europeancomputer manufacturer. Mr. Yan has over ten years of experience in the computerand consumer goods industries. Mr. Yan holds an MBA from Stanford Universityand a Masters degree in Computer Science from Peking University.

 

Mr. James Jian Liu was appointed asa Class III Director of the Company on August 6, 2001. Mr. Liu alsohas served as a director of Correlant since February 2003. Mr. Liu servedas President of JBL International Inc., an apparel agent in New York, New York,from January 1996 to the present. He earned his BA degree from Nanjing University, China. 

 

Professor Zuoquan Lin was appointed as aClass I Director on March 25, 2002. Professor Lin also has served as a directorof Correlant since February 2003. He is currently the Dean of the Department ofInformation Science, a position he has held since 1998, and is the Director ofthe Networking Research and Development Center at Peking University, China,having held the position since 1999. His main areas of research includecomputer software, artificial intelligence, network economy and managementinformation system. Professor Lin also is currently an independent consultantin enterprise strategy and information technology. From 1995 to 1997, he wasthe Director of the Institute of Computer Sciences at Shantou University,China.  Professor Lin holds a Ph.D. incomputer science from Bei Hang University in Beijing, China.

 

Mr. Jih-Ming Lin was elected aClass III Director of the Company on June 29, 2001. Mr. Lin hasbeen Vice President of Techlab Tech Inc., a Taiwanese semiconductormanufacturer, since 1998. From 1992 to 1998, Mr. Lin served as VicePresident of National Advantages Computer, Inc., a computer productsmanufacturer. Mr. Lin has 16 years of experience in the semiconductorindustry. Mr. Lin is a graduate of Defense Medical Industry in Taiwan.

 

*(B) Lotus PacificExecutive Officers*

 
| **Name**            | ** ** | **Age** | ** ** | **Office**                                            |
|---------------------|------------|---------|------------|-------------------------------------------------------|
| YAN, Vincent Yong   |       | 41      |       | President, Chief Executive Officer, Class II Director |
| DAVIS, Steve        |       | 35      |       | Chief Financial Officer                               |
| WANG, Sean Shaojian |       | 40      |       | Chief Operating Officer                               |

 

See discussion related to Mr. Yanabove.  

 

Mr. Davis was appointed as the Company’sChief Financial Officer in March 2004 and will serve until his successor isappointed and approved.  Mr. Davispreviously served as the Company’s Controller since October 2002.  Mr. Davis also has served as Vice Presidentof Correlant since March 2003 and Chief Financial Officer of the Company’ssubsidiary Opta Systems, LLC, dba GoVideo, since July 2003.  Prior to joining the Company, Mr. Davisserved as Controller and Chief Financial Officer for a number of start-up orfinancially distressed companies including BuyGolf.com, iWear Corp and AviationDistributors, Inc. from July 1998 until October 2002.   Prior to this Mr. Davis was with Ernst &Young LLP for eight years, from September 1990 to July 1998, most recently asSenior Manager.  

 

Sean Shaojian Wang was appointed as theCompany’s Chief Operating Officer in June 2004. Mr. Wang served

 

34

----

 

as the Chief Financial Officer, from2002 to 2004, of PacificNet, Inc., a company in Minneapolis, Minnesota whoseshares are traded on NASDAQ (Symbol: PACT). PacificNet, Inc., through its subsidiaries, invests, operates andprovides value-added telecom services (“VAS”) and products solutions in China.From 1993 to 2002, Mr. Wang served as a managing director of Thian BingInvestments PTE, Ltd. in Singapore, an investment company in oil seedsplanting, edible oil processing, packing materials and the other relatedindustries. Mr. Wang graduated from Hamline University in St. Paul, Minnesotawith a Bachelor of Science in 1986 and from the University of Minnesota with aMasters of Business Administration in 1989.

 

None of the members of the Board ofDirectors or executive officers of the Company are related to one another.

 

(C)  *Section 16(a) BeneficialOwnership Reporting Compliance*

 

During fiscal 2002, the followingdirectors had delayed filings of Form 3: Li Dongsheng and Vincent Yan (10days), and James Jian Liu (20 days). The delay was due to the fact that whenthe current management took over the Company in June 2001, it needed time tocontract a professional agent to do the filing for the Company.

 

The following four directors did nottender their Form 4 when their association with the Company was terminated:Robert Lo, Chris Ching, Chung-I Chiang, and William Hu.

 

(D) *Code of Ethics *

 

The Company has adopted a code of ethicsthat applies to all employees, executive officers and all members of ourfinance department, including the principal accounting officer.  The Company will provide a copy of our codeof ethics to any person, free of charge, upon written request sent to our principalexecutive office.

 

(E) *Audit Committee*

* *

The Company has a separately designatedstanding Audit Committee of the Company’s Board of Directors established inaccordance with Section 3(a)(58)(A) of the Securities Exchange Act of1934, as amended. Jian Liu and Zuoquan Lin are the members of our AuditCommittee.  The Audit Committee shallrepresent the Board of Directors in discharging its responsibility relating tothe accounting, reporting and financial practices of the Company and itssubsidiaries and shall have general responsibility for surveillance of thesystems of internal controls, which management and the Board of Directors haveestablished, the performance and selection of independent auditors, and ouraudit and financial reporting processes.

** **

**Item11.  Executive Compensation**

 

The following table sets forth for theperiods presented the compensation for services in all capacities to theCompany of the persons who were the (i) the chief executive officer of theCompany, and (ii) the four most highly compensated executive officers,other than the chief executive officer, who received over $100,000 incompensation during the fiscal year (collectively, the “Named Officers”). 

 

**SummaryCompensation Table**

 
| ** **                      | ** ** | **Annual Compensation** | ** ** | **Long Term Compensation** | ** ** |
|---------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Name and Principal Position** | ** ** | **Year**                | ** ** | **Salary**                 | ** ** | **Bonus** | ** ** | **Other  Annual  Compensation** | ** ** | **Restricted  Stock Awards** | ** ** | **Securities  Underlying  Options** | ** ** | **LTIP  Payouts** | ** ** | **All Other  Compensation** | ** ** |
| Vincent Y Yan (1)               |       | 2004                    |       | $                          | 180,000    |   | $ | 150,000 |   | — |   | — |   | — |   | — |   | — |   |
| President, Chief Executive      |       | 2003                    |       | 120,000                    |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Officer                         |       | 2002                    |       | 120,000                    |       | — |   | — |   | — |   | — |   | — |   | — |   |
| CFO                             |       |                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Steve Davis  (2)           |       | 2004                    |       | $                          | 124,000    |   | $ | 34,000 |   | — |   | — |   | — |   | — |   | — |   |
| CFO                             |       | 2003                    |       | 120,000                    |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                            |       | 2002                    |       | N/A                        |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Sean Wang  (3)             |       | 2004                    |       | $                          | 160,000    |   | — |   | — |   | — |   | — |   | — |   | — |   |
| COO                             |       | 2003                    |       | N/A                        |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                            |       | 2002                    |       | N/A                        |       | — |   | — |   | — |   | — |   | — |   | — |   |

 

----

(1) Mr. Yan has an employment contractwith the Company signed on June 29, 2001. The contract was automaticallyextended for a year on June 30, 2004.

 

(2) Mr. Davis’s salary is paid by bothLotus and GoVideo.  During fiscal 2003,GoVideo paid $80,000 and Lotus paid $40,000. During fiscal 2004, GoVideo paid $84,000 and Lotus paid $40,000.  Lotus paid Mr. Davis a bonus of $10,000 andGoVideo paid Mr. Davis a $24,000 bonus in fiscal 2004.    

 

(3) Reflects Mr. Wang’s salary at thetime he was appointed Chief Operating Officer in June 2004.  

 

35

----

 

**Stock Options **

** **

No current executive officer or directorof the Company holds any stock options. No stock option grants were made duringfiscal 2003. No stock appreciation rights were granted during fiscal 2003. 

 

**Option Exercises andHoldings **

** **

No current executive officer or directorof the Company holds any option, and no options were exercised during fiscal2003. 

 

**Director Compensation**

** **

For fiscal 2003, non-employee directorsof the Company were each paid $1,000 for each regular meeting of the Board ofDirectors which they attended and $800 for each special or committee meeting ofthe Board of Directors which they attended, plus, in each case, actualout-of-pocket expenses for attendance. Non-employee directors were eligible toreceive an option to purchase 5,000 shares of the Company’s common stock foreach fiscal year that they serve as Directors. For fiscal 2003, no directorsreceived cash payments or stock options for their service on the Board of theDirectors. 

 

Directors who are also employees of theCompany do not receive cash payments or stock options for their service on theBoard of the Directors. 

 

**Employment Contracts,Termination of Employment, and Change in Control Agreements **

** **

None of the other employees besidesMr. Yan has any employment or severance agreement with the Company andtheir employment may be terminated at any time at the discretion of the Boardof Directors. 

 

On June 29, 2001, the Companyentered into a one-year employment agreement with Mr. Yan for thepositions of President, Chief Executive Officer, Chief Financial Officer andSecretary of the Company. This agreement may be extended for successiveone-year periods by the Company and Mr. Yan. For his services,Mr. Yan is paid an annual salary of $180,000 as of January 1, 2004 and anannual bonus to be determined in the discretion of the Special Committee of theBoard of Directors of the Company. A copy of the employment contract withVincent Yan was attached in the Company’s Form 10-K filed on October 12,2001.  During fiscal 2003, the employmentagreement entered into between the Company and Vincent Yan, CEO and Presidentof the Company, was extended for one year without any changes.

 

**Compensation CommitteeInterlocks and Insider Participation**

** **

The compensation for executive officersof the Company is reviewed and determined on an annual basis by theCompensation Committee of the Company’s Board; the Compensation Committee wasapproved by the Board in March 2004.  Themembers of the Compensation Committee, Jian Liu and Zuoquan Lin, areindependent directors and are not employees of the Company.  Neither of them are or were officers oremployees of Lotus Pacific or any of its subsidiaries.

 

Before the Compensation Committee wascreated, compensation was determined by three members of the Board ofDirectors, Jian Liu and Zuoquan Lin who are independent directors and are notemployees of the Company, and Li Dongsheng, Chairman of the Board.

 

36

----

 

**Stock Price PerformanceGraph**

** **

The line graph below compares thecumulative total shareholder return on our Lotus Pacific common stock with thecumulative total return for the Standard & Poor’s SmallCap 600 Index fromJune 30, 1999 through June 30, 2003.  Thegraph assumes the value of the investment in our Lotus Pacific common stock andthe SmallCap 600 Index was $100 at June 30, 1999.  It also assumes that all dividends paid bythose companies included in the indexes were reinvested.  No cash dividends have been declared on ourLotus Pacific common stock.

 

Comparison of 5 Year Cumulative Total Return*Lotus Pacific, Inc and Standard & Poor’s SmallCap 600 Index

 

 

----

* $100 invested on June 30, 1998 in stockor index – including reinvestment of dividends. Fiscal year ending June 30.

 
| ** **           | ** ** | **June 30,** | ** ** |
|----------------------|------------|--------------|------------|
| ** **           | ** ** | **1999**     | ** ** | **2000** | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** |
| Lotus Pacific        |       | $            | 100.00     |   | $ | 94.05 |   | $ | 9.05 |   | $ | 0.57 |   | $ | 0.38 |   |
|                 |       |         |       |   |   |   |   |   |   |   |   |
| S&P SmallCap 600 |       | 100.00       |       | 390.89 |   | 429.78 |   | 429.22 |   | 409.98 |   |
|                      |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Due to the dramatic shift in businessfocus from cable modems and cable-modem related equipment to consumerelectronics during fiscal 2003, we are unable to present any meaningfulcomparisons to peers.  Therefore, theabove graph and table include the S&P SmallCap 600 index only.  Stockholder returns over the indicated periodshould not be considered indicative of future stockholder returns.   

 

**Item 12****.  Security Ownership of Certain BeneficialOwners and Management**

** **

The following table sets forthinformation with respect to the number of shares of Common Stock beneficiallyowned as of June 30, 2004 by (i) all persons who are beneficial owners offive percent or more of the Company’s Common Stock, (ii) the Company’sexecutive officers named in the Summary Compensation Table above,(iii) each director and nominee for director of the Company, and(iv) all current executive officers and directors as a group as of August15, 2004: 

 

37

----

 
| ** **                                                                                                                                                      | ** ** | **Shares of Stock  Beneficially  Owned (1)** | ** ** | **Percentage of  Class (1)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|
| Lotus International Holdings Ltd.(2)  Suite 13 First Fl., Oliaji Trade  Center  Francis Rachel Street  Victoria, Mahe Republic Of Seychelle |       | 12,000,000                                   |       | 23.7                         | %          |
| TCL Industries Holdings (HK) Ltd.(3)  13/F TCL Tower  8 Tai Chung Road  Tsuen Wan, Hong Kong                                                |       | 9,606,671                                    |       | 18.9                         | %          |
| LI, Dongsheng                                                                                                                                                   |       | —                                       |       | —                       |       |
| YAN, Vincent Yong                                                                                                                                               |       | —                                       |       | —                       |       |
| LIU, James Jiam                                                                                                                                                 |       | —                                       |       | —                       |       |
| LIN, Zuoquan                                                                                                                                                    |       | —                                       |       | —                       |       |
| LIN, Jih-Ming                                                                                                                                                   |       | —                                       |       | —                       |       |
| DAVIS, Steve                                                                                                                                                    |       | —                                       |       | —                       |       |
| WANG, Sean                                                                                                                                                      |       | —                                       |       | —                       |       |
| All directors and executive officers as a group (consisting of 7  persons)                                                                                      |       | —                                       |       | —                       |       |

 

----

(1) All information is as of August 15,2004 and determined in accordance with Rule 13d-3 under the SecuritiesExchange Act of 1934, as amended, based solely upon information furnished bythe persons listed or contained in filings made by them with the Securities andExchange Commission. 

(2) Lotus InternationalHoldings Ltd. is controlled by TCL Industries Holdings (HK) Ltd. 

(3) TCL Industries Holdings(HK) Ltd. is an affiliate of TCL Holdings Group. 

 

In May 1997, Lotus Pacific granted1,090,000 options to certain officers and key employees with an exercise priceof $6.00 per share, which was the market price of Lotus Pacific’s common stockat the time of grant.  Options were 100%vested when granted and expired five years from grant date.   All options expired during fiscal 2002 andas such there were no options outstanding as of June 30, 2003. 

 

The shareholders approved the 2000Equity Incentive Plan (“Incentive Plan”) on April 28, 2000. The Board ofDirectors administers the Incentive Plan. Employees, directors, and consultantsof the Company and its affiliates, who in the judgment of the Board rendersignificant service to the Company, are eligible to participate. The IncentivePlan provides for the award of a broad variety of stock-based compensationalternatives such as nonstatutory stock options, incentive stock options,restricted stock, performance awards and stock appreciation rights. TheIncentive Plan provided 11,355,000 shares of common stock to be offered. Thevesting provisions of individual options may vary. The exercise price shall notbe less than 100% of the fair market value of a common stock on the grant date.No options have been granted since the Incentive Plan’s adoption.

 

As part of the 1999 acquisitions ofCorrelant and Arescom, Lotus Pacific entered into share exchange agreementswith both Correlant and Arescom.  As stipulatedby the agreements, Lotus Pacific set aside a total of 1,708,000 of contingentlyissuable shares of Lotus Pacific common stock. The contingent shares were to be issued as Correlant and Arescom stockoptions, specified in the purchase agreements, were exercised.  For each option exercised by a Correlantstock option holder, 81% of such shares were to be transferred to Lotus Pacificin exchange for 0.5364 shares of Lotus Pacific common stock for each share ofCorrelant stock transferred.  For eachoption exercised by an Arescom stock option holder, 81% of such shares were tobe transferred to Lotus Pacific in exchange for 0.02915 shares of Lotus Pacificcommon stock for each share of Arescom stock transferred.  There were a total of 1,017,000, 1,134,000and 1,550,000 Lotus Pacific shares contingently issuable in connection withboth share exchange agreements as of June 30, 2003, 2002 and 2001,respectively.  Due to the sale ofArescom, there have been no contingently issuable shares with respect to Arescomoptions since the date of the sale in December 2001.  Due to the wind down of Correlant’shistorical operations, there were 3,000 Lotus Pacific shares contingentlyissuable with respect to the Correlant shares as of June 30, 2004.

 

38

----

 

**Item 13****.  Certain Relationships and RelatedTransactions**

 

In addition to employment agreementsdiscussed in Item 11, Lotus Pacific entered into the following transactionsduring fiscal 2003 required to be reported under Item 404 of Regulation S-K: 

 

Effective January 30, 2003, LotusPacific and TCL, a Lotus Pacific stockholder with holdings of greater than 10%of Lotus Pacific’s outstanding shares, settled all disputes with priorindependent accountants of the Company concerning their audits of the Companyfor fiscal 2001 and prior. The prior auditors deny that they are liable for anydamages to Lotus Pacific, but consented to the settlement to avoid the costs oflitigation.  Pursuant to an agreementdated March 24, 2003 between Lotus Pacific and TCL, Lotus Pacific and TCLagreed on the allocation of the settlement funds, whereby TCL Industriesreceived $6,500,000 in cash, Lotus Pacific received $3,500,000 in cash andLotus Pacific will be entitled to receive up to an additional $3,500,000 incash held in an escrow account, plus interest accrued therein.  Inconnection with the agreement, Lotus Pacific and TCL agreed to forbear frombringing claims against each other with respect to the allocation of funds orotherwise.

 

Subsequent to fiscal 2003, Lotus Pacificentered into the following transactions required to be reported under Item 404of Regulation S-K: 

 

On September 30, 2003, Lotus Pacificsold its entire equity interest in TCL Digital to TCL Information for a cashprice of approximately $5,600,000 US dollars.  The Company invested $5,280,000 US dollars to acquire the sold equity inTCL Digital. TCL Information is an affiliate of TCL, a stockholder of theCompany.  Li Dongsheng and Vincent Yan,directors of the Company, are directors and officers of TCL International, apublicly traded company on the Hong Kong Stock Exchange (HKSE: 1070.HK), anaffiliate of TCL.

 

On February 17, 2004, the Lotus PacificBoard of Directors approved the repurchase of approximately 623,000 shares ofLotus Pacific common stock at $0.30 per share from Gordon Lum.  Mr. Lum was appointed as a Class II Directorof the Company on August 6, 2001.  Inconnection with the stock repurchase, Mr. Lum resigned from the Board ofDirectors.  

 

On July 7, 2004, the Company’s Board ofDirectors approved the commencement of a new wholly-owned subsidiary, GoVideoDigiTech (Huizhou) Co., Ltd. (“DigiTech”), which will be located in Guangdong,China.  DigiTech will market GoVideo’sMP3 players.  The Company plans to investapproximately $500,000 in the new subsidiary. TCL Multimedia ElectronicsR&D Center (“TCL Multimedia”), an affiliate company of TCL, is currentlyexpending some resources during the start up phase of DigiTech.  

 

**Item 14**** — Principal Accounting Feesand Services**

** **

The following table is a summary of thefees that Lotus paid or accrued for the audit and other services provided byHein from the date Hein was engaged through the date of this filing.  Hein was engaged March 25, 2002 to audit theyear ended June 30, 2002 and July 24, 2002 for the reaudit of the years endedJune 30, 2001, 2000 and 1999.  As aresult, fees included in fiscal 2002 include the fees to reaudit the yearsended June 30, 2001, 2000 and 1999.

 

| **Fee Category**   | ** ** | **Year ended  June 30,  2004** | ** ** | **Year ended  June 30,  2003** | ** ** | **Year ended  June 30,  2002** | ** ** |
|--------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Audit fees         |       | $                              | —     |                           | $          | 175,000                        |       | $ | 682,000 |   |
|               |       |                           |       |                           |       |                           |       |
| Audit-related fees |       | 7,000                          |       | 15,000                         |       | 7,000                          |       |
|               |       |                           |       |                           |       |                           |       |
| Tax fees           |       | 125,000                        |       | 93,000                         |       | —                         |       |
|                    |            |                                |            |                                |            |                                |            |  |  |  |

 

***Audit Fees***. Consists of fees billed forprofessional services rendered for the audit and restatement of ourconsolidated financial statements and review of our interim consolidatedfinancial statements included in quarterly reports and services that arenormally provided by Hein in connection with statutory and regulatory filingsor engagements.  Because the fiscal 2004audit has not commenced as of the date of this filing, there are no relatedfees included in the above table.  Allfees associated with the fiscal 2004 audit will be included in the Company’sfiscal 2004 Form 10-K, which will be filed upon completion.

 

***Audit-Related Fees.*** Consists of fees billed for assuranceand related services that are reasonably related to the performance of theaudit or review of our consolidated financial statements and are not reportedunder “Audit fees.” These services include employee benefit plan audits,accounting consultations in connection with

 

39

----

 

acquisitions, attest services that arenot required by statute or regulation, and consultations concerning financialaccounting and reporting standards. 

 

***Tax Fees***. Consists of fees billed forprofessional services for tax compliance, tax advice, and tax planning. Theseservices include assistance regarding federal, state and international taxcompliance, tax audit defense, mergers and acquisitions, and international taxplanning. 

 

***Policy Related to Audit CommitteePre-Approval of Audit and Permissible Non-Audit Services of IndependentAuditors.***  Our Audit Committee’s has a policy ofpre-approving all audit and permissible non-audit services provided by theindependent auditors. These services may include audit services, audit-relatedservices, tax services, and other services. Pre-approval is generally providedfor up to one year and any pre-approval is detailed as to the particularservice or category of services and is generally subject to a specific budget.The independent auditors and management are required to periodically report tothe Audit Committee regarding the extent of services provided by theindependent auditors in accordance with this pre-approval, and the fees for theservices performed to date. The Audit Committee may also pre-approve particularservices on a case-by-case basis. 

 

**PART IV**

 

**Item 15****.  Exhibits, Financial Statement Schedules andReports on Form 8-K**

** **

(a)          Documents filed as part of this report.

1.               FinancialStatements

 

(i)                                     Report of Hein& Associates LLP,  IndependentAuditors

(ii)                                  ConsolidatedBalance Sheets

(iii)                               ConsolidatedStatements of Operations

(iv)                              ConsolidatedStatements of Stockholders’ Equity

(v)                                 ConsolidatedStatements of Cash Flows

(vi)                              Notes toConsolidated Financial Statements

 

2.     FinancialStatement Schedules

 

Allschedules are omitted because they are not applicable or the required informationis shown in the financial statements or related notes.  

 

**3.****             ****Exhibits**

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                             | ** ** | **Method of Filing**                                                                           |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|
| 3.1                 |       | Certificate of Amendment of Certificate of Incorporation dated as  May 25, 1999                                                   |       | Incorporated by reference to Exhibit 3.1 to Form 10/A, filed June 17,  1999                    |
| 3.2                 |       | Certificate of Amendment of Certificate of Incorporation dated as  June 15, 1998                                                       |       | Incorporated by reference to Exhibit 3.1 to Form 10, filed October  27, 1998                   |
| 3.3                 |       | Certificate of Incorporation, as amended                                                                                               |       | Incorporated by reference to Exhibit 3.2 to Form 10, filed October  27, 1998                   |
| 3.4                 |       | Amended and Restated Bylaws                                                                                                            |       | Incorporated by reference to Exhibit 3.3 to Form 10—K, filed  October 13, 2000       |
| 3.5                 |       | Amendment to Bylaws                                                                                                                    |       | Incorporated by reference to Exhibit 99.1 to Form 8K, filed  July 2, 2001       |
| 10.1                |       | 2000 Equity Incentive Plan                                                                                                             |       | Incorporated by reference to Exhibit A to Proxy Statement on Schedule  14A filed April 4, 2000 |
| 10.2                |       | Agreement dated September 30, 2000, between the registrant and  TurboNet Communications (now Correlant Communications, Inc.) |       | Incorporated by reference to Exhibit 10.10 to Form 10—K, filed  October 13, 2000          |
| 10.3                |       | Lotus Pacific Inc., Executive Employment Agreement                                                                                     |       | Incorporated by reference to Exhibit 10.11 to Form 10—K, filed  October 15, 2001          |
| 10.4                |       | Opta Systems, LLC dba GoVideo Executive Employment Agreement                                                                           |       | Incorporated by reference to Exhibit 10.4 to Form 10—K, filed April  16, 2004             |
| 10.5                |       | Exchange Agreement between Registrant and ARESCOM Inc. dated December  11, 2001                                                        |       | Incorporated by reference to Exhibit 10.5 to Form 10—K, filed April  16, 2004             |
| 10.6                |       | Stock Purchase Agreement between Registrant and Solomon Extreme  International Ltd. dated December 11, 2001                            |       | Incorporated by reference to Exhibit 10.6 to Form 10—K, filed April  16, 2004             |

 

40

----

 
| 10.7  |   | Acquisition Agreement of TCL Digital dated January 18, 2003                                                                             |   | Incorporated by reference to Exhibit 10.7 to Form 10—K, filed April  16, 2004  |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|
| 10.8  |   | Opta LLC Interest Purchase Agreement between Registrant and Carmco  Investment, LLC, dated April 17, 2003                               |   | Incorporated by reference to Exhibit 10.8 to Form 10—K, filed April  16, 2004  |
| 10.9  |   | Sale agreement of TCL Digital dated December 20, 2003                                                                                   |   | Incorporated by reference to Exhibit 10.9 to Form 10—K, filed April  16, 2004  |
| 10.10 |   | Current Lease – GoVideo Office Lease                                                                                               |   | Incorporated by reference to Exhibit 10.10 to Form 10—K, filed April  16, 2004 |
| 10.11 |   | Current Lease – Go Video Lease for Commercial Space                                                                                |   | Incorporated by reference to Exhibit 10.11 to Form 10—K, filed April  16, 2004 |
| 16.1  |   | Letter re Change in Certifying Accountant                                                                                               |   | Incorporated by reference to Exhibit 16.1 to Form 8—K, filed April  12, 2002   |
| 16.2  |   | Letter re Change in Certifying Accountant                                                                                               |   | Incorporated by reference to Exhibit 16.2 to Form 8—K, filed June 4,  2002     |
| 21    |   | List of Subsidiaries                                                                                                                    |   | Filed herewith                                                                      |
| 31.1  |   | Certification of Principal Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                            |   | Filed herewith                                                                      |
| 31.2  |   | Certification of Principal Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                            |   | Filed herewith                                                                      |
| 32.1  |   | Certification of Chief Executive Officer Pursuant to  Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |   | Filed herewith                                                                      |
| 32.2  |   | Certification of Chief Financial Officer Pursuant to Section 1350  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  |   | Filed herewith                                                                      |

 

(b)  Reports on Form 8-K.

 

During the fourth quarter endedJune 30, 2003, the registrant filed the following reports onForm 8-K: 

 
| **Date Filed** | ** ** | **Item Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------|------------|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| April 1, 2003  |       | Items 5 and 9   |       | The Company announced that a Special Meeting of the Stockholders of  Correlant was held on March 28, 2003.  At the meeting, Hein &  Associates LLP was selected as independent accountants and auditors of  Correlant for the fiscal year ending June 30, 2003. The Company also  announced that members of Correlant’s management made a presentation at the  meeting regarding Correlant’s past operations and future prospects. |
|           |       |            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| April 25, 2003 |       | Item 5          |       | The Company announced that it purchased 100% of the outstanding  membership interests of Opta Systems, LLC, a Delaware limited liability  company.                                                                                                                                                                                                                                                                                                    |

 

41

----

 

**Signatures**

 

Pursuant to the requirements ofSection 13 and 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized. 

 
| **Signature**                   | ** ** | **Title** | ** **                                             | **Date** |
|---------------------------------|------------|-----------|--------------------------------------------------------|----------|
|                            |       |      |                                                   |     |
| */s/  Vincent Yong*  *YAN* |       |      | President, Chief Executive Officer, Director           |     | August 24, 2004 |
| Vincent Yong YAN                |       |      |                                                   |     |
|                            |       |      |                                                   |     |
| */s/  Steve DAVIS*              | * *   | * *  | Chief Financial Officer (Principal Accounting Officer) |     | August 24, 2004 |
| Steve DAVIS                     |       |      |                                                   |     |
|                                 |            |           |                                                        |          |  |  |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons in the capacities and on the datesindicated. 

 

 
| **Signature**                   | ** ** | **Title** | ** **                                   | **Date** |
|---------------------------------|------------|-----------|----------------------------------------------|----------|
|                            |       |      |                                         |     |
| */s/*  *Dongsheng LI*      |       |      | Chairman of the Board                        |     | August 24, 2004 |
| Dongsheng LI                    |       |      |                                         |     |
|                            |       |      |                                         |     |
| */s/  Vincent Yong*  *YAN* |       |      | President, Chief Executive Officer, Director |     | August 24, 2004 |
| Vincent Yong YAN                |       |      |                                         |     |
|                            |       |      |                                         |     |
| */s/  Jian*  *LIU*         |       |      | Director                                     |     | August 24, 2004 |
| Jian LIU                        |       |      |                                         |     |
|                            |       |      |                                         |     |
| */s/  Zouquan*  *LIN*      |       |      | Director                                     |     | August 24, 2004 |
| Zouquan LIN                     |       |      |                                         |     |
|                                 |            |           |                                              |          |  |  |  |  |

 

42

----

**Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

Index to ConsolidatedFinancial Statements

 
| Financial Statements:                                                                                                                  |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                   |   |
| Report of Independent Auditors.                                                                                                        |   |
|                                                                                                                                   |   |
| Consolidated Balance Sheets as of  June 30, 2003 and 2002                                                                         |   |
|                                                                                                                                   |   |
| Consolidated  Statements of Operations for the years ended June 30, 2003, 2002 and  2001                                          |   |
|                                                                                                                                   |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the years  ended June 30, 2003, 2002 and 2001. |   |
|                                                                                                                                   |   |
| Consolidated Statements of Cash Flows for  the years ended June 30, 2003, 2002 and 2001.                                          |   |
|                                                                                                                                   |   |
| Notes to Consolidated  Financial Statements                                                                                            |   |

 

Financial StatementSchedules:

 

All schedules are omittedbecause they are not required or the required information is included in theconsolidated financial statements or notes thereto.

 

----

 

**REPORT****OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders of

Lotus Pacific, Inc.

 

Wehave audited the accompanying consolidated balance sheets of Lotus Pacific,Inc. and subsidiaries as of June 30, 2003 and 2002, and the relatedconsolidated statements of operations, stockholders’ equity and comprehensiveincome, and cash flows for the years ended June 30, 2003, 2002 and 2001.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

Except as explained inthe following paragraph, we conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

We were unable to auditthe financial information of one of the Company’s significant subsidiaries thatis consolidated in the June 30, 2001 financial statements as discontinuedoperations because the subsidiary would not provide the necessary informationto allow us to complete the audit.  Dueto the subsidiary’s lack of cooperation, we were unable to satisfy ourselvesabout the subsidiary’s account balances by means of other auditing procedures.

 

Because of the matterdiscussed in the preceding paragraph, the scope of our work was not sufficientto enable us to express, and we do not express, an opinion on the consolidatedfinancial statements for the year ended June 30, 2001.

 

In our opinion, theJune 30, 2003 and 2002 consolidated financial statements present fairly,in all material respects, the financial position of Lotus Pacific, Inc. andsubsidiaries as of June 30, 2003 and 2002, and the results of itsoperations and cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America.

 

HEIN& ASSOCIATES LLP

OrangeCounty, California

 

June 15,2004

 

----

 

**LOTUSPACIFIC, INC.**

**CONSOLIDATEDBALANCE SHEETS**

(in thousands)

 
| ** **                                                                                                                                                                                         | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2003**          | ** ** | **2002** | ** ** |
|                                                                                                                                                                                               |       | ** **        | ** ** |   |   |
| **ASSETS**                                                                                                                                                                                         |       | ** **        | ** ** |   |   |
|                                                                                                                                                                                               |       | ** **        | ** ** |   |   |
| Current assets:                                                                                                                                                                                    |       | ** **        | ** ** |   |   |
| Cash and cash equivalents                                                                                                                                                                          |       | **$**             | **12,044** | ** ** | $ | 32,647 |   |
| Short-term investments                                                                                                                                                                             |       | **13,964**        | ** ** | 4,959 |   |
| Accounts receivable, net                                                                                                                                                                           |       | **6,847**         | ** ** | 281 |   |
| Accounts receivable from related parties, net                                                                                                                                                      |       | **39**            | ** ** | 7,075 |   |
| Inventories, net                                                                                                                                                                                   |       | **6,438**         | ** ** | — |   |
| Notes and interest receivable from related parties,  net                                                                                                                                           |       | **1,592**         | ** ** | 3,522 |   |
| Income tax receivable                                                                                                                                                                              |       | **2,475**         | ** ** | 3,201 |   |
| Prepaid expenses and other current assets                                                                                                                                                          |       | **876**           | ** ** | 283 |   |
| Total current assets                                                                                                                                                                               |       | **44,275**        | ** ** | 51,968 |   |
|                                                                                                                                                                                               |       | ** **        | ** ** |   |   |
| Property and equipment, net                                                                                                                                                                        |       | **1,068**         | ** ** | 1,323 |   |
| Tradename                                                                                                                                                                                          |       | **2,420**         | ** ** | — |   |
| Goodwill                                                                                                                                                                                           |       | **1,795**         | ** ** | — |   |
| Investment in joint  venture                                                                                                                                                                       |       | **3,378**         | ** ** | — |   |
| Other assets                                                                                                                                                                                       |       | **51**            | ** ** | 51 |   |
|                                                                                                                                                                                               |       | **$**             | **52,987** | ** ** | $ | 53,342 |   |
|                                                                                                                                                                                               |       | ** **        | ** ** |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      |       | ** **        | ** ** |   |   |
|                                                                                                                                                                                               |       | ** **        | ** ** |   |   |
| Current liabilities:                                                                                                                                                                               |       | ** **        | ** ** |   |   |
| Notes payable to related parties                                                                                                                                                                   |       | **$**             | **6,283**  | ** ** | $ | — |   |
| Accounts payable                                                                                                                                                                                   |       | **2,903**         | ** ** | 4,045 |   |
| Accounts payable to related parties                                                                                                                                                                |       | **73**            | ** ** | 247 |   |
| Accrued expenses                                                                                                                                                                                   |       | **2,792**         | ** ** | 714 |   |
| Warranty reserve                                                                                                                                                                                   |       | **688**           | ** ** | — |   |
| Income tax payable                                                                                                                                                                                 |       | **91**            | ** ** | — |   |
| Total current liabilities                                                                                                                                                                          |       | **12,830**        | ** ** | 5,006 |   |
|                                                                                                                                                                                               |       | ** **        | ** ** |   |   |
| Commitments and contingencies (Note 14)                                                                                                                                                            |       | ** **        | ** ** |   |   |
|                                                                                                                                                                                               |       | ** **        | ** ** |   |   |
| Non-controlling interest in subsidiaries                                                                                                                                                           |       | **9,592**         | ** ** | 11,776 |   |
|                                                                                                                                                                                               |       | ** **        | ** ** |   |   |
| Stockholders’ equity:                                                                                                                                                                         |       | ** **        | ** ** |   |   |
| Preferred stock Series A, $.001 par value:  100 shares authorized, 4 shares issued and  outstanding at June 30, 2003 and 2002; $10 per share liquidation preference  and June 30, 2002        |       | **—**        | ** ** | — |   |
| Common stock, $.001 par value:  100,000 shares authorized; 64,236 shares  issued and 61,233 outstanding at June 30, 2003 and 64,233 shared issued  and outstanding at June 30, 2002 |       | **64**            | ** ** | 64 |   |
| Additional paid-in capital                                                                                                                                                                         |       | **128,469**       | ** ** | 128,019 |   |
| Less: treasury stock at cost, 3,003 shares at  June 30, 2003                                                                                                                                  |       | **(150**          | **)**      | — |   |
| Accumulated deficit                                                                                                                                                                                |       | **(97,889**       | **)**      | (91,523 | ) |
| Accumulated other comprehensive income                                                                                                                                                             |       | **71**            | ** ** | — |   |
| Total stockholders’ equity                                                                                                                                                                    |       | **30,565**        | ** ** | 36,560 |   |
|                                                                                                                                                                                               |       | **$**             | **52,987** | ** ** | $ | 53,342 |   |

** **

**The accompanying notes are anintegral part of these consolidated financial statements.**

 

F-3

----

 

**LOTUSPACIFIC, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands,except per share amounts)

 
| ** **                                                                                                  | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                  | ** ** | **2003**                     | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Net  revenues:                                                                                              |       | ** **                   | ** ** |   |   |   |   |
| Products                                                                                                    |       | **$**                        | **10,049** | ** ** | $ | 5,090 |   | $ | 78,121 |   |
| Products  – related party                                                                              |       | **9,454**                    | ** ** | 50,416 |   | 183,845 |   |
| Other  – related party                                                                                 |       | **—**                   | ** ** | 374 |   | 1,226 |   |
| Total  net revenues                                                                                         |       | **19,503**                   | ** ** | 55,880 |   | 263,192 |   |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Cost of net revenues:                                                                                       |       | ** **                   | ** ** |   |   |   |   |
| Products                                                                                                    |       | **7,936**                    | ** ** | 5,395 |   | 62,695 |   |
| Products  – related party                                                                              |       | **7,258**                    | ** ** | 44,546 |   | 164,013 |   |
| Write  down of inventory to lower of cost or market                                                         |       | **238**                      | ** ** | — |   | 3,893 |   |
| Total cost of net revenues                                                                                  |       | **15,432**                   | ** ** | 49,941 |   | 230,601 |   |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Gross  profit                                                                                               |       | **4,071**                    | ** ** | 5,939 |   | 32,591 |   |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Operating  expenses:                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Selling,  general and administrative (includes amounts to related parties of $0, $46  and $3, respectively) |       | **9,097**                    | ** ** | 6,019 |   | 14,072 |   |
| Depreciation  and amortization                                                                              |       | **486**                      | ** ** | 12,048 |   | 12,020 |   |
| Research  and development                                                                                   |       | **6,906**                    | ** ** | 9,392 |   | 16,214 |   |
| Impairment  of assets                                                                                       |       | **498**                      | ** ** | 20,071 |   | — |   |
| Total  operating expenses                                                                                   |       | **16,987**                   | ** ** | 47,530 |   | 42,306 |   |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Loss  from operations                                                                                       |       | **(12,916**                  | **)**      | (41,591 | ) | (9,715 | ) |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Other  income (expense):                                                                                    |       | ** **                   | ** ** |   |   |   |   |
| Gain  on sale of investments                                                                                |       | **—**                   | ** ** | — |   | 3,560 |   |
| Interest  income                                                                                            |       | **545**                      | ** ** | 851 |   | 920 |   |
| Interest  expense                                                                                           |       | **—**                   | ** ** | (65 | ) | (24 | ) |
| Equity  in earnings of joint venture                                                                        |       | **(62**                      | **)**      | — |   | — |   |
| Other                                                                                                       |       | **3,585**                    | ** ** | (148 | ) | (7,393 | ) |
| Total  other income (expense), net                                                                          |       | **4,068**                    | ** ** | 638 |   | (2,937 | ) |
| Income  (loss) from continuing operations before income taxes and non-controlling  interest                 |       | **(8,848**                   | **)**      | (40,953 | ) | (12,652 | ) |
| Provision  (benefit) for income taxes                                                                       |       | **(109**                     | **)**      | (3,181 | ) | (6,434 | ) |
| Loss  from continuing operations before non-controlling interest                                            |       | **(8,739**                   | **)**      | (37,772 | ) | (6,218 | ) |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Non-controlling  interest in (income) loss of consolidated subsidiaries                                     |       | **2,373**                    | ** ** | 1,243 |   | (1,215 | ) |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Loss  from continuing operations                                                                            |       | **(6,366**                   | **)**      | (36,529 | ) | (7,433 | ) |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Discontinued  operations, net of tax:                                                                       |       | ** **                   | ** ** |   |   |   |   |
| Gain  from sale of discontinued operations, including applicable tax benefit of  $1,802                     |       | **—**                   | ** ** | 16,765 |   | — |   |
| Gain  (loss) from discontinued operations, less applicable tax                                              |       | **—**                   | ** ** | 789 |   | (28,973 | ) |
| Total  gain (loss) from discontinued operations, net of tax                                                 |       | **—**                   | ** ** | 17,554 |   | (28,973 | ) |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Net  loss                                                                                                   |       | **$**                        | **(6,366** | **)** | $ | (18,975 | ) | $ | (36,406 | ) |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Net  loss per common share – basic and diluted:                                                        |       | ** **                   | ** ** |   |   |   |   |
| Loss  from continuing operations                                                                            |       | **$**                        | **(0.10**  | **)** | $ | (0.57 | ) | $ | (0.12 | ) |
| Gain  (loss) on discontinued operations                                                                     |       | **—**                   | ** ** | 0.27 |   | (0.45 | ) |
| Net  loss                                                                                                   |       | **$**                        | **(0.10**  | **)** | $ | (0.30 | ) | $ | (0.57 | ) |
|                                                                                                        |       | ** **                   | ** ** |   |   |   |   |
| Weighted  average common shares outstanding – basic and diluted                                        |       | **63,144**                   | ** ** | 64,233 |   | 64,232 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-4

----

 

**LOTUSPACIFIC, INC.**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**FORTHE YEARS ENDED JUNE 30, 2003, 2002 AND 2001**

(in thousands)

 
| ** **                                                                             | ** ** | **Comprehensive** | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Stock**  | ** ** | **Treasury** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|------------------|------------|-------------------------|------------|------------|------------|--------------|------------|-----------------|------------|---------------------------------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Income**        | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**              | ** ** | **Amount** | ** ** | **Capital**  | ** ** | **Warrants**    | ** ** | **Stock**                             | ** ** | **Deficit**                   | ** ** | **Income** | ** ** | **Equity** | ** ** |
| Balances at July 1, 2000                                                          |       | $                 | —     |                | 4          |             | $          | —                  |       | 64,231     |       | $            | 64         |            | $          | 119,728                               |       | $                             | 80         |   | $ | — |   | $ | (36,142 | ) | $ | — |   | $ | 83,730 |   |
| Issuance of Common Stock upon conversion of  subsidiary stock                          |       | —            |       | —              |       | —           |       | 2                       |       | —     |       | 18           |       | —          |       | —                                |       | —                        |       | — |   | 18 |   |
| Issuance of stock by subsidiary                                                        |       | —            |       | —              |       | —           |       | —                  |       | —     |       | 41           |       | —          |       | —                                |       | —                        |       | — |   | 41 |   |
| Compensation expense recognized by subsidiaries  upon issuance of options and warrants |       | —            |       | —              |       | —           |       | —                  |       | —     |       | 6,945        |       | —          |       | —                                |       | —                        |       | — |   | 6,945 |   |
| Net loss                                                                               |       | —            |       | —              |       | —           |       | —                  |       | —     |       | —       |       | —          |       | —                                |       | (36,406                       | )          | — |   | (36,406 | ) |
| Balances at June 30, 2001                                                         |       | —            |       | 4                   |       | —           |       | 64,233                  |       | 64         |       | 126,732      |       | 80              |       | —                                |       | (72,548                       | )          | — |   | 54,328 |   |
| Issuance of stock by subsidiary                                                        |       | —            |       | —              |       | —           |       | —                  |       | —     |       | 4            |       | —          |       | —                                |       | —                        |       | — |   | 4 |   |
| Compensation expense recognized by subsidiaries  upon issuance of options and warrants |       | —            |       | —              |       | —           |       | —                  |       | —     |       | 1,203        |       | —          |       | —                                |       | —                        |       | — |   | 1,203 |   |
| Expiration of stock warrants                                                           |       | —            |       | —              |       | —           |       | —                  |       | —     |       | 80           |       | (80             | )          | —                                |       | —                        |       | — |   | — |   |
| Net loss                                                                               |       | —            |       | —              |       | —           |       | —                  |       | —     |       | —       |       | —          |       | —                                |       | (18,975                       | )          | — |   | (18,975 | ) |
| Balances at June 30, 2002                                                         |       | —            |       | 4                   |       | —           |       | 64,233                  |       | 64         |       | 128,019      |       | —          |       | —                                |       | (91,523                       | )          | — |   | 36,560 |   |
| Issuance of Common Stock upon conversion of  subsidiary stock                          |       | —            |       | —              |       | —           |       | 3                       |       | —     |       | 21           |       | —          |       | —                                |       | —                        |       | — |   | 21 |   |
| Compensation expense recognized by subsidiaries  upon issuance of options and warrants |       | —            |       | —              |       | —           |       | —                  |       | —     |       | 429          |       |            |       |                                  |       | —                        |       | — |   | 429 |   |
| Acquisition of treasury stock                                                          |       |              |       |                |       |             |       |                    |       |       |       |         |       |            |       | (150                                  | )          |                          |       |   |   | (150 | ) |
| Unrealized gain on securities                                                          |       | 71                |       |                |       |             |       |                    |       |       |       |         |       | —          |       | —                                |       |                          |       | 71 |   | 71 |   |
| Net loss                                                                               |       | (6,366            | )          | —              |       | —           |       | —                  |       | —     |       | —       |       | —          |       | —                                |       | (6,366                        | )          | — |   | (6,366 | ) |
| Balances at June 30, 2003                                                         |       | $                 | (6,295     | )                   | 4          |             | $          | —                  |       | 64,236     |       | $            | 64         |            | $          | 128,469                               |       | $                             | —     |   | $ | (150 | ) | $ | (97,889 | ) | $ | 71 |   | $ | 30,565 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-5

----

 

**LOTUSPACIFIC, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

 
| ** **                                                              | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **2003**                     | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                    |       |                         |       |   |   |   |   |
| **Operating activities**                                                |       |                         |       |   |   |   |   |
| Loss  from continuing operations                                        |       | **$**                        | **(6,366** | **)** | $ | (36,529 | ) | $ | (7,433 | ) |
| Income  (loss) from discontinued operations                             |       | **—**                   | ** ** | 17,554 |   | (28,973 | ) |
| Adjustments  to reconcile net loss to cash used in operating activities |       | ** **                   | ** ** |   |   |   |   |
| Depreciation  and amortization–continuing operations               |       | **656**                      | ** ** | 12,782 |   | 12,460 |   |
| Depreciation  and amortization–discontinued operations             |       | **—**                   | ** ** | 2,702 |   | 5,404 |   |
| Reserve  for uncollectible receivables                                  |       | **1,979**                    | ** ** | 44 |   | 4,477 |   |
| Reserve  for obsolete and excess inventories                            |       | **238**                      | ** ** | — |   | 3,893 |   |
| Stock compensation recorded by  subsidiary-continuing operations        |       | **592**                      | ** ** | 1,657 |   | 9,189 |   |
| Stock  compensation recorded by subsidiary-discontinued operations      |       | **—**                   | ** ** | — |   | 47 |   |
| Loss  (gain) on sale of property and equipment                          |       | **—**                   | ** ** | — |   | (10 | ) |
| Gain  on sale of investments                                            |       | **—**                   | ** ** | (14,963 | ) | (3,560 | ) |
| Gain  on acquisition of treasury stock                                  |       | **(150**                     | **)**      | — |   | — |   |
| Equity  in earnings of unconsolidated entity                            |       | **62**                       | ** ** | — |   | — |   |
| Impairment  of assets                                                   |       | **498**                      | ** ** | 20,071 |   | — |   |
| Non-controlling  interest in income (loss) of subsidiaries              |       | **(2,373**                   | **)**      | (1,243 | ) | 1,215 |   |
| Change  in deferred tax assets                                          |       | **—**                   | ** ** | 1,997 |   | (1,997 | ) |
| Changes  in operating assets and liabilities:                           |       | ** **                   | ** ** |   |   |   |   |
| Accounts  receivable                                                    |       | **(3,641**                   | **)**      | 5,180 |   | 727 |   |
| Accounts  receivable from related parties                               |       | **5,090**                    | ** ** | 7,747 |   | (9,169 | ) |
| Inventories                                                             |       | **(7,672**                   | **)**      | 6,483 |   | (9,739 | ) |
| Notes  and interest receivable from related parties                     |       | **—**                   | ** ** | — |   | (79 | ) |
| Notes  receivable                                                       |       | **—**                   | ** ** | 2,784 |   | — |   |
| Income  tax receivable                                                  |       | **726**                      | ** ** | (1,520 | ) | (1,681 | ) |
| Prepaid  expenses and other assets                                      |       | **(593**                     | **)**      | (117 | ) | 1,032 |   |
| Assets  of discontinued operations                                      |       | **—**                   | ** ** | 3,307 |   | 574 |   |
| Other  non current assets                                               |       | **—**                   | ** ** | (51 | ) | 367 |   |
| Accounts  payable to related parties                                    |       | **(174**                     | **)**      | (25,825 | ) | 8,089 |   |
| Accounts  payable                                                       |       | **(1,142**                   | **)**      | 1,145 |   | 1,888 |   |
| Accrued  expenses                                                       |       | **1,626**                    | ** ** | (1,847 | ) | 1,994 |   |
| Income  tax payable                                                     |       | **91**                       | ** ** | (366 | ) | (12,504 | ) |
| Warranty  reserve                                                       |       | **(44**                      | **)**      | — |   | — |   |
| Liabilities  of discontinued operations                                 |       | **—**                   | ** ** | (6,791 | ) | 7,772 |   |
| Cash  used by operating activities                                      |       | **(10,597**                  | **)**      | (5,799 | ) | (16,017 | ) |
|                                                                    |       | ** **                   | ** ** |   |   |   |   |
| **Investing activities**                                                |       | ** **                   | ** ** |   |   |   |   |
| Advances  to related parties                                            |       | **—**                   | ** ** | (10 | ) | — |   |
| Payments  received on advances to related parties                       |       | **—**                   | ** ** | — |   | 2,981 |   |
| Issuance  of notes receivable from related parties                      |       | **—**                   | ** ** | — |   | (300 | ) |
| Payments  received on notes receivable from related parties             |       | **1,930**                    | ** ** | 1,980 |   | 7,560 |   |
| Purchase  of property and equipment                                     |       | **(64**                      | **)**      | (502 | ) | (1,486 | ) |
| Proceeds  from sale of property and equipment                           |       | **—**                   | ** ** | — |   | 80 |   |
| Cash  forfeited with subsidiary sale                                    |       | **—**                   | ** ** | — |   | (484 | ) |
| Investment  in joint venture                                            |       | **(3,440**                   | **)**      | — |   | — |   |
| Purchase  of subsidiary                                                 |       | **(5,808**                   | **)**      | — |   | — |   |
| Proceeds  from sale of investments                                      |       | **—**                   | ** ** | 10,000 |   | 2,858 |   |
| Payment  of non-controlling interest on dissolution of subsidiary       |       | **—**                   | ** ** | (11 | ) | — |   |
| Purchase  of short-term investments                                     |       | **(16,552**                  | **)**      | (26,723 | ) | (9,437 | ) |
| Proceeds  from sale of short-term investments                           |       | **7,645**                    | ** ** | 31,483 |   | — |   |
| Cash  provided (used) by investing activities                           |       | **(16,289**                  | **)**      | 16,217 |   | 1,772 |   |
|                                                                    |       | ** **                   | ** ** |   |   |   |   |
| **Financing activities**                                                |       | ** **                   | ** ** |   |   |   |   |
| Proceeds  from advances from related parties                            |       | **6,283**                    | ** ** | — |   | — |   |
| Proceeds  from issuance of stock by subsidiaries                        |       | **—**                   | ** ** | 9 |   | 13,241 |   |
| Cash  provided by financing activities                                  |       | **6,283**                    | ** ** | 9 |   | 13,241 |   |
|                                                                    |       | ** **                   | ** ** |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                       |       | **(20,603**                  | **)**      | 10,427 |   | (1,004 | ) |
|                                                                    |       | ** **                   | ** ** |   |   |   |   |
| Cash  and cash equivalents at beginning of year                         |       | **32,647**                   | ** ** | 22,220 |   | 23,224 |   |
|                                                                    |       | ** **                   | ** ** |   |   |   |   |
| Cash  and cash equivalents at end of year                               |       | **$**                        | **12,044** | ** ** | $ | 32,647 |   | $ | 22,220 |   |
|                                                                    |       | ** **                   | ** ** | ** ** |   |   |   |   |   |   |
| **Supplemental disclosures of cash flow  information**                  |       |                         |       |   |   |   |   |
| Cash  paid during the year for:                                         |       |                         |       |   |   |   |   |
| Interest                                                                |       | $                            | —     |   | $ | 89 |   | $ | — |   |
| Income  taxes                                                           |       | $                            | —     |   | $ | 614 |   | $ | 7,416 |   |
| Non-cash  investing and financing activities                            |       |                         |       |   |   |   |   |
| Acquisition  of subsidiary stock with issuance of stock                 |       | $                            | 21         |   | $ | — |   | $ | 18 |   |
| Conversion  of trade receivable to note receivable                      |       | $                            | —     |   | $ | — |   | $ | 2,784 |   |
| Transfer  of restricted cash to short-term investment                   |       | $                            | —     |   | $ | 5,500 |   | $ | — |   |
| Unrealized  gain on short term investments                              |       | $                            | 98         |   | $ | — |   | $ | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-6

----

 

**LOTUSPACIFIC, INC. AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMEN****TS**

 

**Note 1 – Business and Background**

 

***Descriptionof Business***

 

LotusPacific, Inc. (“LPFC”, “Lotus” or “Company”), a Delaware corporation, is aholding company whose operations are conducted through its subsidiaries. Lotusdevelops, manages, and operates emerging consumer electronics and communicationscompanies, focusing on developing next generation consumer electronics andcommunication products.  Lotus providesits subsidiaries with capital and strategic infrastructure services.

 

InApril and May 1997, the Company acquired 70% of the common stock of RegentElectronics Corporation (“Regent”). In June 1997, Regent acquiredAmiga-based, multimedia technology related assets and rights from RightimingElectronics Corporation (“Rightiming”). On June 26, 2001, the Companyspun-off Regent to Regent’s management. See Note 3.

 

In February 1999,the Company acquired 100% of Professional Market Brokerage, Inc. (“PMB”), aChicago-based financial trading firm that provides online trading services and100% of US Securities & Futures Corp. (“USSF”), a full service brokeragefirm in New York, NY. In June 1999, the Company created USS Online, Inc.,(“USS Online”) a wholly-owned subsidiary, and transferred all of its ownershipinterests in each of USSF and PMB to USS Online to run those two financial servicesubsidiaries. In February 2000, the Company sold 72% of its ownership inUSS Online.

 

In March 1999, theCompany acquired 94.5% of the issued and outstanding common shares of CorrelantCommunications, Inc. (formerly TurboNet Communications, Inc.) (“Correlant”),representing an 81% ownership interest in Correlant. Based in San Diego,California, Correlant designed, developed and marketed telecommunicationsproducts to cable operators, network service providers, and communicationsnetwork users in the United States and Asian countries. See Note 3.

 

In March 1999, theCompany acquired 77% of the issued and outstanding common shares of Arescom,Inc. (“Arescom”).  See Note 4.  Based in Fremont, California, Arescom designs,manufactures and markets a broad range of high quality remote access products,such as routers and remote managing software, and other inter-networkingequipment for Internet Service Providers (“ISP”), resellers, and systemintegrators in the North America market. In December 2001, the Company sold approximately 92% of itsinvestment in Arescom, representing 65% of the outstanding securities ofArescom to an unrelated third party.  SeeNote 3.

 

On April 22, 1999, the Companyorganized Lotus World, Inc. (“Lotus World”) to offer Auction Live, an onlineauction service, to international clients. In May 2002, the Company dissolved Lotus World.  See Note 3.

 

On November 13, 2000, theCompany established a wholly-owned subsidiary, Acumen Technology, Inc.(“Acumen”), incorporated in the state of Delaware and in December 2000,the Company transferred all of the capital stock it held in Correlant andArescom to Acumen. Other than it’s holdings of the Correlant and Arescom stock,Acumen had no material independent operations. In December 2001, Acumen was merged into Lotus and all the assetsand liabilities of Acumen were absorbed by the Company.

 

In June 2001, Acumen formedLotus Pacific Communications Technology (Beijing) Co., Ltd. (“Beijing Lotus”),a wholly-owned subsidiary, to support business activity in Beijing.  Beijing Lotus has no material independentoperations.  See Note 18.

 

On June 29, 2001, amajority of the Company’s stockholders, led by T.C.L. Industries Holdings(H.K.) Limited (“TCL Industries”), were successful in their solicitation togain control of the Company and to replace prior management and Board ofDirectors of the Company.  OnJune 29, 2001, new directors and officers were appointed and the thenexisting directors and officers were immediately terminated.

 

Following the takeover ofthe Board of Directors of the Company on June 29, 2001, new management ofthe Company began a thorough review of all aspects of the business operationsof the Company and its subsidiaries and has engaged in numerous transactions toreorganize the Company’s business.  Undernew management, the 

 

F-7

----

 

Company’s primarystrategy for business operations has been to reorganize its unprofitablebusinesses, acquire undervalued or underutilized companies and focus onprofitable growth.  The Company has movedaggressively to sell, reorganize or shutdown its businesses which were eithernot operating profitably or may have required significant future cashinvestment.

 

InFebruary 2003, Lotus, as majority stockholder of Correlant, appointed fournew members to the Board of Directors of Correlant, effectively taking controlof Correlant’s Board of Directors. Prior to this, Lotus Pacific had only onerepresentative on Correlant’s Board of Directors and did not control Correlant’sBoard or its operations.  Immediatelythereafter, the Board of Directors created a new Executive Committee of theBoard, comprised of two members who are also Lotus Pacific employees, to act onbehalf of the Board of Directors and oversee Correlant’s management andoperations.  In July 2003,Correlant’s President, Chief Executive Officer and co-founder resigned as adirector of Correlant.  From that dateforward he no longer served as President and CEO of Correlant.  In July 2003 the Vice President ofEngineering, Secretary, and co-founder of Correlant resigned as director andsecretary of Correlant.  From that dateforward, he no longer served as VP of Engineering. In connection with theirresignations, the Company entered into Employment Separation and ConsultingAgreements with both former employees. See Note 18. Upon recommendation of itsconsultants, following the two co-founder’s resignations, Correlant began asubstantial reduction in its workforce and operations to reduce operatingexpenses, reducing the number of Correlant employees from 34 as ofAugust 1, 2003 to 18 employees as of December 23, 2003.  As a result of declining margins and demandfor its products, Correlant’s Board of Directors approved the wind down andcessation of Correlant’s historical operations in the cable modem businesseffective December 23, 2003. As part of the wind down, Correlant licensedpart of its technology, and could potentially license other technology.  Correlant’s wind down was substantiallycompleted by March 31, 2004.  As ofJune 30, 2004, Correlant has one employee to maintain corporate recordsand to comply with statutory reporting requirements.  Correlant, together with Lotus, will continueto explore either acquiring or investing in other businesses to utilize itsassets.

 

In April 2003, theCompany formed a wholly-owned subsidiary Opta Systems, LLC dba GoVideo(“GoVideo” or “Opta”), which purchased 100% of the outstanding membershipinterests of Opta Systems from Carmco Investments, LLC (“Carmco”), a Connecticutlimited liability company, which had acquired substantially all assets andassumption of certain liabilities of a product line known as “GoVideo” See Note3. GoVideo, established in 1984, designs and manufactures product lines in theconsumer electronics industry, including digital video disc (“DVD”) players,portable DVDs, DVD-Video Cassette Recorder (“VCR”) Combos, Dual-Deck VCRs, DVDRecorders, DVD Recorder + VCRs, and LCD TVs. GoVideo holds various patentscovering Dual-Deck technology as well as other electronics products andsystems. GoVideo was purchased as part of the Company’s strategic direction ofinvesting in companies which will benefit from the Company’s strategicrelationships with Asian consumer electronic manufacturers.  GoVideo’s potential for growth under theCompany’s ownership and established brand name were the primary reasons for thepurchase of GoVideo at a price resulting in goodwill being recognized.  As of December 31, 2003, GoVideo is thesole operating subsidiary of the Company. See Note 3.

 

As of June 30, 2003,the only significant subsidiaries were GoVideo and Correlant.

 

TheCompany will continue to identify market opportunities that will create andaccelerate the growth and success of its subsidiary companies and to implementnew business plans to improve the returns on these businesses.

 

Unlessthe context indicates otherwise, reference to the Company shall include all ofits wholly-owned and majority-owned subsidiaries.

 

***Delaysin Reporting***

 

Following the replacementof prior management discussed above, the new management began reviewing varioustransactions undertaken by old management prior to June 29, 2001.  During its preliminary investigation, newmanagement of the Company identified certain material transactions undertakenby prior management that impact reported financial and operating results withrespect to its consolidated financial statements for the fiscal years endedJune 30, 2001, 2000 and 1999.  Dueto the preliminary results, the Company dismissed its then existing independentaccountants, engaged new independent accountants and re-audited all periodsunder investigation.  Accordingly, Lotuswas unable to file its Form 10-K for the period ending June 30, 2002until April 16, 2004.

 

F-8

----

 

On January 30, 2003,the Company and TCL Industries, a stockholder of the Company with holdings ofgreater than 10% of the Company’s outstanding shares, settled all disputes withthe prior auditors concerning their audits of the Company for fiscal 2001 andprior. The prior auditors deny that they are liable for any damages to Lotus,but consented to the settlement to avoid the costs of litigation.  Pursuant to an agreement dated March 24,2003 between the Company and TCL Industries, the Company and TCL Industriesagreed on the allocation of the settlement funds, whereby TCL Industriesreceived $6,500,000 in cash, the Company received $3,500,000 cash, which isincluded in Other income (expense) on the consolidated statement of operations.  Additionally, the Company may be entitled toreceive up to $3,500,000 in cash held in an escrow account, plus interestaccrued therein.  In connection with the agreement, Lotus and TCL agreedto forbear from bringing claims against each other with respect to theallocation of funds or otherwise.

 

**Note 2 – Significant AccountingPolicies**

 

***Principles of Consolidation***

 

The consolidated financial statements include theaccounts of Lotus and its subsidiaries. All significant intercompany transactions and balances have beeneliminated.  Subsidiaries in which Lotusowns at least 50% are consolidated, except for investments in which control isdeemed to be temporary, in which case the equity method of accounting isused.  Equity investments in which Lotusowns at least 20% of the voting securities are accounted for using the equitymethod, except for investments in which the Company is not able to exercisesignificant influence over the investee, in which case, the cost method ofaccounting is used.  The cost method ofaccounting is used for all investments in which Lotus owns less than 20%.

 

***Estimatesand Assumptions***

 

The preparation of the consolidated financialstatements in conformity with accounting principles generally accepted in theU.S. requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Significantestimates are required as part of inventory valuation, product warrantyreserve, allowance for doubtful accounts, goodwill and long-lived assetimpairments, valuation allowances on deferred income taxes, the potential outcomeof future tax consequences of events recognized in our financial statements ortax returns, and determining when investment impairments areother-than-temporary.  Actual results andoutcomes may differ from management’s estimates and assumptions.

 

***Foreign Operations***

 

The functional currencyof the Company is the U.S. dollar.  Anyaccounts denominated in a currency other than the U.S. dollar, mainly theTaiwan dollar and the Chinese RMB, are re-measured and resultant gains and lossesare recorded in the Company’s consolidated statement of operations.  Foreign currency transaction gains (losses)are also included in the Company’s consolidated statement of operations.  Transaction gains (losses) were not materialin fiscal 2003.  In fiscal 2002 and 2001,the Company recorded transaction gains (losses) of $(161,000) and $147,000,respectively, which are included with other income (expense) on theconsolidated statement of operations.

 

***Cash and Cash Equivalents***

 

Cash and cash equivalentsconsist of cash and highly liquid investments, which include debt securitieswith remaining maturities when acquired of three months or less and are statedat cost, which approximates market value.

 

F-9

----

 

***Short-TermInvestments***

 

The Company accounts forshort-term investments in accordance with Statement of Financial AccountingStandards (“SFAS”) SFAS 115, *Accounting forCertain Investments in Debt and Equity Securities* (“SFAS 115”), andclassifies investments as available-for-sale in accordance with thatstandard.  Available-for-sale securitiesare carried at fair market value. Unrealized gains and losses, net of tax, are reported in stockholders’equity.  Realized gains and losses anddeclines in value judged to be other-than-temporary, if any, onavailable-for-sale securities are included in investment income.  The cost of securities sold is based on thespecific-identification method.  As ofJune 30, 2003 short-term investments, and any difference between the fairmarket value and the underlying cost of such investments, consisted of thefollowing (*in thousands*):

 
| ** **             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair  Market  Value** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Government  Securities |       | $                   | 9,751      |                        | $          | 39                          |       | $                       | (1         | ) | $ | 9,789 |   |
| Corporate  Bonds       |       | 4,115               |       | 60                          |       | —                      |       | 4,175                   |       |
|                   |       | $                   | 13,866     |                        | $          | 99                          |       | $                       | (1         | ) | $ | 13,964 |   |

 

Theabove unrealized gain relates to Correlant. Therefore, only Lotus’s portion of the unrealized gain, $71,000, isincluded as Other comprehensive income and the remaining $27,000 is included asnon-controlling interest in subsidiaries on the balance sheet.

 

Asof June 30, 2002, unrealized holding gains and losses on securitiesclassified as available-for-sale were not material.

 

Asof June 30, 2003 and 2002, short-term investments consisted of governmentand corporate debt securities with the following maturities (*in thousands*):

 

| ** **                   | ** ** | **Market value as of June 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **2003**                             | ** ** | **2002** | ** ** |
| One  year or less            |       | $                                    | —     |   | $ | 4,959 |   |
| Between  one and three years |       | 13,412                               |       | — |   |
| Greater  than three years    |       | 552                                  |       | — |   |
|                         |       | $                                    | 13,964     |   | $ | 4,959 |   |

 

***FairValue of Financial Instruments***

 

The estimated fair valuesof all financial instruments on the Company’s balance sheets were determined byusing available market information and appropriate valuationmethodologies.  Fair value is described asthe amount at which the instrument could be exchanged in a current transactionbetween informed willing parties, other than a forced liquidation.  However, considerable judgment is required ininterpreting market data to develop the estimates of fair value.  Accordingly, the estimates presented hereinare not necessarily indicative of the amounts the Company could realize in acurrent market exchange.  The use ofdifferent market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.  The Company does not have any off balancesheet financial instruments.

 

Cash and cashequivalents, trade accounts receivable, notes receivable, trade accountspayable and certain other current liabilities are reported on the balance sheetat carrying value which approximates fair value due to the short-termmaturities of these instruments.

 

F-10

----

 

***Concentrationof Credit Risk***

 

Credit risk representsthe accounting loss that would be recognized at the reporting date ifcounterparties failed completely to perform as contracted. Concentrations ofcredit risk (whether on or off balance sheet) that arise from financialinstruments exist for groups of customers or counterparties when they havesimilar economic characteristics that would cause their ability to meetcontractual obligations to be similarly affected by changes in economic orother conditions described below.

 

**Financialinstruments that subject the Company to credit risk are cash balancesmaintained in excess of federal depository insurance limits and accountsreceivable with no collateral or security. As of June 30, 2003 and 2002, the Company had combined balances of$11,263,000 and $31,504,000, respectively, which were not guaranteed by FederalDeposit Insurance Corporation (“FDIC”). The Company has not experienced anylosses in such accounts and believes the exposure is minimal.  As of June 30, 2003 and 2002, all theCompany’s receivables were unsecured.**

** **

A relatively smallnumber of customers account for a significant percentage of the Company’srevenues.  The percentage of revenuesderived from significant customers is detailed as follows:

 

| ** **                              | ** ** | **Year ended June 30,** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2003**                     | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                    |       |                         |       |   |   |   |   |
| Costco                                  |       | 31                           | %          | — | % | — | % |
| Toshiba  (Related party, see Note 11)   |       | —                       |       | 54 |   | 67 |   |
| TurboComm  (Related party, see Note 11) |       | 48                           |       | 37 |   | 3 |   |
| Terayon                                 |       | —                       |       | 8 |   | 13 |   |
| COM21                                   |       | —                       |       | — |   | 11 |   |

 

Gross accountsreceivable from these customers totaled $8,944,000 and $7,335,000 atJune 30, 2003 and 2002, respectively.

 

***Allowancefor Doubtful Accounts***

 

The following are recorded at netrealizable value:

 

•                  Accounts receivable, net;

•                  Accounts receivable from related parties, net; and

•                  Notes and interest receivable from related parties, net.

 

The Company does business and extendscredit based on an evaluation of the customers’ financial condition generallywithout requiring collateral. Exposure to losses on trade receivables isexpected to vary by customer due to the financial condition of each customer. TheCompany monitors exposure to credit losses and maintains allowances foranticipated losses considered necessary under the circumstances.

 

The Company records interest incomefrom interest-bearing loans using an appropriate rate of interest over the lifeof the loan. Related fees and/or costs are deferred and amortized over the lifeof the loan using the effective interest method. Interest income recognition issuspended for interest-bearing loans in default and deemed uncollectible. Anypayments received subsequently are first applied against the accrued interestbalance.  Interest income recognitiondoes not resume until the note is deemed collectible.

 

Delinquentnotes and trade accounts receivable are charged against the allowance fordoubtful accounts once uncollectibility has been determined. The allowance isdetermined through an analysis of the aging of accounts receivable andassessments of risk that are based on historical trends and an evaluation ofthe impact of current and projected economic conditions. The Company evaluatesthe past-due status of its receivables based on contractual terms of sale. Ifthe financial condition of the Company’s customers were to deteriorate,resulting in an impairment of ability to make payments, additional allowancesmay be required. There was no activity in the allowance for doubtful 

 

F-11

----

 

accountsexcept during those fiscal years shown below (*inthousands*):

 
| **Year ended June 30,**                                        | ** ** | **Beginning  Balance** | ** ** | **Expense/  (Recovery)** | ** ** | **Write off  and other** | ** ** | **Ending  Balance** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|--------------------------|------------|---------------------|------------|
| Allowance  – Accounts receivable:                              |       |                   |       |                     |       |                     |       |                |       |
| **2003**                                                            | ** ** | **$**                  | **44**     | ** **               | **$**      | **33**                   | ** ** | **$**               | **(38**    | **)** | **$** | **39** | ** ** |
| 2002                                                                |       | —                 |       | 44                       |       | —                   |       | 44                  |       |
| Allowance  – Accounts receivable from related party:           |       |                   |       |                     |       |                     |       |                |       |
| **2003**                                                            | ** ** | **$**                  | **—** | ** **               | **$**      | **1,946**                | ** ** | **$**               | **—** | ** ** | **$** | **1,946** | ** ** |
| Allowance  – Notes and interest receivable from related party: |       |                   |       |                     |       |                     |       |                |       |
| **2003**                                                            | ** ** | **$**                  | **1,734**  | ** **               | **$**      | **—**               | ** ** | **$**               | **(1,734** | **)** | **$** | **—** | ** ** |
| 2002                                                                |       | 1,734                  |       | —                   |       | —                   |       | 1,734               |       |
| 2001                                                                |       | 1,355                  |       | 4,477                    |       | (4,098                   | )          | 1,734               |       |

 

***Inventories***

 

Inventoriesare stated at the lower of cost (first-in, first-out) or market value.  As of June 30, 2003, inventories aremostly comprised of consumer electronics in transit from the manufacturer,which are generally purchased FOB shipping point.  When Correlant had inventory, it wascomprised of raw materials, primarily integrated circuits and other electroniccomponents, to be used in the manufacture of cable modems and CMTS units.  Correlant had no inventory as ofJune 30, 2003 and it was completely reserved at June 30, 2002.  The Company provides inventory reserves forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated realizable value based uponassumptions about future demand and market conditions.  The activity in the allowance for obsoleteand excess inventory is shown below (*inthousands*):

 

| **Year ended June 30,** | ** ** | **Beginning Balance** | ** ** | **Expense/ (Recovery)** | ** ** | **Write off  and other** | ** ** | **Ending  Balance** | ** ** |
|------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------------------|------------|---------------------|------------|
| **2003**                     |       | $                     | 600        |                    | $          | 238                      |       | $                   | (838       | ) | $ | — |   |
| 2002                         |       | 3,811                 |       | —                  |       | 3,211                    |       | 600                 |       |
| 2001                         |       | —                |       | 3,893                   |       | (82                      | )          | 3,811               |       |
|                              |            |                       |            |                         |            |                          |            |                     |            |  |  |  |  |

 

***Shippingand Handling Charges***

 

The Company includes costs of shipping and handling billed to customers inrevenue and the related expense of shipping and handling costs is included incost of sales.

 

***Propertyand Equipment***

 

Property andequipment are stated at cost less accumulated depreciation.  Depreciation and amortization expense isprovided using the straight-line method over the estimated useful lives of theassets, which range from 18 months to eight years.  Leasehold improvements are amortized usingthe straight-line method over the shorter of their estimated useful lives orthe lease period.

 

Total depreciationand amortization expense was $656,000, $1,329,000 and $871,000 for fiscal 2003,2002, and 2001, respectively.  Includedin this total was amortization of purchased software, a component of cost ofsales, of $170,000, $734,000 and $440,000 for fiscal 2003, 2002 and 2001,respectively.

 

***Impairmentof Long-Lived Assets***

 

The Company accounts for anyimpairment of long-lived assets in accordance with SFAS 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(“SFAS 144”). SFAS 144 supersedes SFAS 121, *Accounting for theImpairment of Long-Lived Assets and for Assets to Be Disposed Of*(“SFAS 121”), and the accounting and reporting provisions of the AccountingPrinciples Board (“APB”) Opinion 30, *Reporting the Results ofOperations Reporting*

 

F-12

----

 

*the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual and InfrequentlyOccurring Events and Transactions* (“APB 30”), for the disposal of asegment of a business (as previously defined in that opinion). SFAS 144provides a single accounting model for disposal of long-lived assets. SFAS 144also changed the criteria for classifying an asset as held for sale andbroadens the scope of businesses to be disposed of that qualify for reportingas discontinued operations and changes the timing of recognizing losses on suchoperations. The broadened definition of discontinued operations with SFAS 144affected the presentation and disclosure of the Company’s results of operationsfor the year ended 2002 and prior years presented for comparison. In accordancewith SFAS 144, long-lived assets, such as property, plant, and equipment, andpurchased intangibles subject to amortization, are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held andused is measured by a comparison of the carrying amount of an asset toestimated undiscounted future cash flows expected to be generated by the asset.If the carrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset. Assets to be disposed of wouldbe separately presented in the balance sheet and reported at the lower of thecarrying amount or fair value less costs to sell, and are no longerdepreciated. The assets and liabilities of a disposal group classified as heldfor sale would be presented separately in the appropriate asset and liabilitysections of the balance sheet.

 

During fiscal2003, the Company recorded a charge of $477,000 relating to the impairment ofCorrelant’s property and equipment resulting from the wind down and cessationof Correlant’s historical operations (see Note 1) in the cable modem industry.

 

***Tradename***

 

***The Company’s Tradename relates to the***acquisitioncost of the GoVideo Tradename used to market GoVideo products.  ***The GoVideo Tradename is notamortized in accordance with***SFAS 142, *Goodwill and Other Intangible Assets*(“SFAS 142”) as itslife is deemed indefinite***.***

 

***Goodwill***

 

The Company accounts forgoodwill in accordance with SFAS 141*,Business Combinations*(“SFAS141”), and SFAS 142. Aspart of its annual review of financial results, the Company noted indicatorsthat the carrying value of its goodwill may not be recoverable.  The impairment review was performed due tothe prolonged economic downturn affecting Correlant’s operations and revenueforecasts. As the Company determined the continued decline in market conditionswithin Correlant’s industry was significant and prolonged, the Companyevaluated the recoverability of its goodwill associated with Correlant.  Based on the annual testing performed, theCompany recorded a goodwill impairment charge of $21,000 and $20,071,000 infiscal 2003 and 2002, respectively.

 

The following table summarizes the activity in the Company’s goodwillaccount associated with all acquisitions and dispositions (*in thousands*):

 

| ** **                                           | ** ** | **Correlant** | ** ** | **Arescom** | ** ** | **GoVideo** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|---------------|------------|-------------|------------|-------------|------------|-----------|------------|
| Balance  at July 1, 2000                        |       | $             | 44,996     |        | $          | 20,497      |       | $         | —     |   | $ | 65,493 |   |
| Acquisition  of additional stock of subsidiary       |       | 18            |       | —      |       | —      |       | 18        |       |
| Sale  of investment                                  |       | (1,901        | )          | (231        | )          | —      |       | (2,132    | )          |
| Amortization  expense, year ended June 30, 2001 |       | (11,589       | )          | (5,404      | )          | —      |       | (16,993   | )          |
| Balance  at June 30, 2001                       |       | 31,524        |       | 14,862      |       | —      |       | 46,386    |       |
| Sale  of investment                                  |       | —        |       | (11,180     | )          | —      |       | (11,180   | )          |
| Amortization  fiscal 2002                            |       | (11,453       | )          | (2,702      | )          | —      |       | (14,155   | )          |
| Impairment  charge                                   |       | (20,071       | )          | (980        | )          | —      |       | (21,051   | )          |
| Balance  at June 30, 2002                       |       | —        |       | —      |       | —      |       | —    |       |
| Acquisition  of additional stock of subsidiary       |       | 21            |       | —      |       | —      |       | 21        |       |
| Acquisition  of subsidiary                           |       |          |       |        |       | 1,795       |       | 1,795     |       |
| Impairment  charge                                   |       | (21           | )          | —      |       | —      |       | (21       | )          |
| Balance  at June 30, 2003                       |       | $             | —     |        | $          | —      |       | $         | 1,795      |   | $ | 1,795 |   |

 

Correlant amortizationand impairment charge is included in loss from continuing operations.  Arescom amortization 

 

F-13

----

 

and impairment charge isincluded with gain (loss) on discontinued operations and gain on sale ofdiscontinued operations, respectively.

 

***Treasury Stock***

 

Treasury stock is recorded at cost.In the event of subsequent reissue, the treasury stock account will be reducedby the cost of such stock on the average cost basis with any excess proceedscredited to additional paid-in capital.

 

***Comprehensive Income (Loss)***

 

Comprehensive income consists of net income and other gains (losses)affecting shareholders’ equity that, under generally accepted accountingprinciples are excluded from net income in accordance with SFAS 130, *Reporting Comprehensive Income* (“SFAS 130”).  Other comprehensive income includesunrealized gains (losses) on marketable securities and foreign currencytranslation adjustments.  During fiscal2003, the Company’s other comprehensive income was comprised of Lotus’sportion, $71,000, of the unrealized gains on Correlant’s short term investmentscategorized as available-for-sale.  TheCompany did not have any other comprehensive income during fiscal 2002 or 2001.

 

***Revenue Recognition***

 

GoVideosells consumer electronics.  Revenue isrecognized when persuasive evidence of an arrangement exists, product has beenshipped, fees are fixed and determinable, collectibility is probable and whenall other significant obligations have been fulfilled.  At the time of the sale, the Company records an allowance forestimated sales returns based on estimates derived from historical trends.  The Company also establishes an allowance forestimated payment term discounts expected to be taken by customers based onanalysis of historical trends.  Paymentterm discounts granted are recorded in other expense.

 

GoVideo provides limitedlabor and parts warranties on certain of its products for a maximum of oneyear.  GoVideo records a warranty reservebased upon historical experience and an estimate of total exposure associatedwith products sold to consumers through retail outlets.  Correlant, while in the cable modem and cablemodem termination system (“CMTS”) business, did not provide a warranty for itsproducts, primarily the cable modem and CMTS. The warranty liability for defective products was the responsibility ofthe third-party manufacturer.

 

Correlant sold cablemodems, CMTS and, in certain instances, the Media Access Controller (“MAC”), akey component of the cable modem.  TheCompany developed and owns the proprietary technology used in the MAC.  However, the manufacturing of both the MAC andthe cable modem is outsourced to manufacturers. Cable modem and CMTS revenue is recognized upon shipment of thecompleted unit to the customer.  Inaddition to supplying the MAC to the cable modem manufacturer for use inCorrelant cable modems, the Company also sells the MAC for use by the cablemodem manufacturer in non-Correlant products. MAC revenue is recognized upon passage of title of the MAC for use bythe cable modem manufacturer in its own product.

 

During fiscal 2002 and2001, Correlant licensed its proprietary software.  Software license revenue wass recognized overthe life of the license.

 

***Stock-BasedCompensation***

 

SFAS 123, *Accounting for Stock-Based Compensation*(“SFAS 123”) encourages, but does not require, companies to record compensationcost for stock-based employee compensation plans at fair value. The Companyelected to continue to account for stock-based compensation using the intrinsicvalue method prescribed in APB 25, *Accountingfor Stock Issued to Employees* (“APB 25”) and relatedInterpretations. Under APB 25 and the intrinsic value method, the exerciseprice of the Company’s employee stock options equals the market price of theunderlying stock on the date of grant or, in the case of the Company’s employeestock purchase plans since the plans are non-compensatory, no compensationexpense is recognized.

 

F-14

----

 

Thefollowing table illustrates the effect on the Company’s net loss and loss pershare as if the Company had applied the fair value recognition provisions ofSFAS 123 to its stock-based employee compensation awards, and recognizedexpense over the applicable award vesting period (*in thousands, except per share amounts*):

 

| ** **                                                                                                                            | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2003**                     | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                                                                                  |       |                         |       |   |   |   |   |
| Net  loss, as reported                                                                                                                |       | **$**                        | **(6,366** | **)** | $ | (18,975 | ) | $ | (36,406 | ) |
| Add:  Stock-based employee compensation expense included in reported net loss                                                         |       | **429**                      | ** ** | 1,203 |   | 6,898 |   |
|                                                                                                                                  |       | ** **                   | ** ** |   |   |   |   |
| Less:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | **(1,169**                   | **)**      | (2,519 | ) | (7,932 | ) |
| Pro-forma  net loss                                                                                                                   |       | **$**                        | **(7,106** | **)** | $ | (20,291 | ) | $ | (37,440 | ) |
|                                                                                                                                  |       | ** **                   | ** ** |   |   |   |   |
| Basic  and diluted net loss per share, as reported                                                                                    |       | **$**                        | **(0.10**  | **)** | $ | (0.30 | ) | $ | (0.57 | ) |
|                                                                                                                                  |       | ** **                   | ** ** |   |   |   |   |
| Pro-forma  basic and diluted net loss per share                                                                                       |       | **$**                        | **(0.11**  | **)** | $ | (0.32 | ) | $ | (0.58 | ) |

 

Thesenumbers do not include Arescom as this detail was unavailable.  The pro-forma effect for the years presentedis not likely to be representative of the pro-forma effect on reported netincome or loss in future years because these amounts reflect less than fouryears of vesting.

 

TheCompany’s assumptions made for purposes of estimating the fair value of itsstock options, as well as a summary of the activity under the Company’s stockoption plan are included in Note 12.

 

***Research andDevelopment Costs***

 

**Researchand development costs are charged to operations as incurred.**

** **

***Advertising Costs***

 

Advertising costsinclude payroll, employee benefits, and other headcount-related costs as wellas expenses related to advertising, promotions and tradeshows, and are expensedas incurred. Advertising expense included in continuing operations was $87,000,$9,000 and $38,000, in fiscal 2003, 2002 and 2001, respectively.

 

***Income Taxes***

 

Currentincome tax expense or benefit is the amount of income taxes expected to bepayable or refundable for the current year. A deferred income tax asset or liability is computed for the expectedfuture impact of differences between the financial reporting and tax basis ofassets and liabilities and for the expected future tax benefit to be derivedfrom tax credits and loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized.

 

***NetIncome (Loss) per Share***

 

Basic net income (loss)per share is computed by dividing net income (loss) by the weighted averagenumber of shares of common stock outstanding during the period.  Diluted net income (loss) per share iscomputed by dividing net income (loss) by the weighted average number of sharesof common stock and common stock equivalents outstanding during theperiod.  There were no employee stockoptions or common stock warrants outstanding as of June 30, 2003 or2002.  There were 9,090,000 employeestock options and common stock warrants outstanding as of June 30, 2001and 1,017,000, 1,134,000 and 1,551,000 shares contingently issuable inconnection with share exchange agreements (See Note 3), as of June 30,2003, 2002 and 2001, respectively, which were not considered in calculatingdiluted net loss per common share as their effect would be anti-dilutive. As aresult, for all periods presented, the Company’s basic and diluted net loss pershare are the same.

 

F-15

----

The following tablecomputes basic and diluted net loss per share (*inthousands**, except per share amounts*):

 
|                                                 |   | **Year Ended  June 30,** |   |
|------------------------------------------------------|--------|-------------------------------|--------|
|                                                 |   | **2003**                      |   | **2002** | ** ** | **2001** | ** ** |
|                                                 |   |                          |   |   |   |   |   |
| Numerator:                                           |   |                          |   |   |   |   |   |
| Loss  from continuing operations                     |   | $                             | (6,366 | ) | $ | (36,529 | ) | $ | (7,433 | ) |
| Total  gain (loss) from discontinued operations      |   | —                        |   | 17,554 |   | (28,973 | ) |
| Net  loss                                            |   | $                             | (6,366 | ) | $ | (18,975 | ) | $ | (36,406 | ) |
|                                                 |   |                          |   |   |   |   |   |
| Net  loss per common share – basic and diluted: |   |                          |   |   |   |   |   |
| Loss  from continuing operations                     |   | $                             | (0.10  | ) | $ | (0.57 | ) | $ | (0.12 | ) |
| Gain  (loss) on discontinued operations              |   | —                        |   | 0.27 |   | (0.45 | ) |
| Net  loss                                            |   | $                             | (0.10  | ) | $ | (0.30 | ) | $ | (0.57 | ) |
|                                                 |   |                          |   |   |   |   |   |
| Denominator:                                         |   |                          |   |   |   |   |   |
| Common  shares outstanding – basic and diluted  |   | 63,144                        |   | 64,233 |   | 64,232 |   |

 

***Reclassifications and Adjustments***

 

Certain prior periodamounts have been reclassified to conform to the current periodpresentation.  Such reclassificationshad no effect on net loss.

 

***Recently Issued Accounting Standards***

 

In June 2002, theFinancial Accounting Standards Board (“FASB”) issued SFAS 146, *Accountingfor Costs Associated with Exit or Disposal Activities* (“SFAS 146”),which addresses accounting for restructuring and similar costs. SFAS 146supersedes previous accounting guidance, principally Emerging Issues Task Force(“EITF”) Issue 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity* (includingCertain Costs Incurred in a Restructuring) (“EITF 94-3”).  SFAS 146 requires the liability for costsassociated with an exit or disposal activity be recognized when the liabilityis incurred. Under EITF 94-3, a liability for an exit cost was recognized atthe date of the Company’s commitment to an exit plan. SFAS 146 also states theliability should initially be measured and recorded at fair value. Accordingly,SFAS 146 may affect the timing of recognizing future restructuring costs aswell as the amounts recognized.  TheCompany adopted SFAS 146 during fiscal 2003. The adoption did not have amaterial effect on the Company’s financial position, results of operations, orcash flows as of or for the year ended June 30, 2003.

 

In November 2002,the FASB issued FASB Interpretation (“FIN”) 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers* (“FIN 45”).  FIN 45requires that upon issuance of a guarantee, the guarantor must recognize aliability for the fair value of the obligation it assumes under that guarantee.The provisions for initial recognition and measurement are effective on aprospective basis for guarantees issued or modified after December 31,2002, irrespective of a guarantor’s year-end. The disclosure requirements ofFIN 45 are applicable to the Company’s product warranty liability and otherguarantees.  The Company adopted FIN 45during fiscal 2003. The adoption did not have a material effect on theCompany’s financial position, results of operations, or cash flows as of or forthe year ended June 30, 2003.

 

In December 2002,the FASB issued SFAS 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure* (“SFAS 148”), which amends SFAS 123.  SFAS 148 provides alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for stock-based employee compensation. It also amends thedisclosure provisions of SFAS 123 to require prominent disclosure about theeffects an entity’s accounting policy decisions with respect to stock-basedemployee compensation have on reported net income in both annual and interim periods.  The Company adopted SFAS 148 during fiscal2003. The adoption did not have a material effect on the Company’s financialposition, results of operations, or cash flows as of or for the year endedJune 30, 2003.

 

F-16

----

 

In January 2003, theFASB issued FIN 46, *Consolidation of Variable Interest Entities*(“FIN46”). FIN 46 was revised in December 2003.  FIN 46 establishes accounting guidance for consolidation of avariable interest entity (“VIE”), formerly referred to as special purposeentities. FIN 46 applies to any business enterprise, both public and private,that has a controlling interest, contractual relationship or other businessrelationship with a VIE. FIN 46 provides guidance for determining when anentity (“Primary Beneficiary”) should consolidate a VIE that functions tosupport the activities of the Primary Beneficiary. The application of FIN 46 isrequired for periods ending after December 15, 2003.   The Company has no contractual relationshipor other business relationship with a VIE, and therefore the adoption of FIN46will have no effect on the financial position, results of operations, or cashflows.

 

In January 2003, theEITF published EITF Issue 00-21, *Revenue Arrangements with Multiple Deliverables*(“EITF 00-21”), which requires companies to determine whether an arrangementinvolving multiple deliverables contains more than one unit of accounting. Inapplying EITF 00-21, revenue arrangements with multiple deliverables should bedivided into separate units of accounting, if the deliverables in thearrangement meet certain criteria. Arrangement consideration should beallocated among the separate units of accounting based on their relative fairvalues. This issue is effective for revenue arrangements entered into in fiscalperiods beginning after June 15, 2003. The Company does not expect theadoption of EITF 00-21 to have a material impact on its financial position,results of operations, or cash flows.

 

In April 2003, theFASB issued SFAS 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities*(“SFAS 149”).  SFAS 149 amends andclarifies financial accounting and reporting for derivative instruments andhedging activities.  SFAS 149 is effective for contracts entered into ormodified after June 30, 2003.  The Company does not expect SFAS 149to have a material impact on its financial position, results of operations, orcash flows.

 

In May 2003, the FASBissued SFAS 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*(“SFAS 150”).  SFAS 150 representsthe first phase of the FASB’s project to clarify the accounting treatment ofcertain instruments that possess characteristics of both liabilities andequity.  SFAS 150 generally requires that freestanding financialinstruments that obligate the issuer to redeem the holders’ shares, or areindexed to such an obligation, and are settled in cash or settled with sharesmeeting certain conditions be treated as liabilities.  The provisions ofSFAS 150 are effective immediately for instruments entered into or modifiedafter May 31, 2003 and to all other instruments that exist as of the beginningof the first interim financial reporting period beginning after June 15,2003, with the exception of mandatorily redeemable instruments of non-publiccompanies, which become subject to SFAS 150 for fiscal periods beginning afterDecember 15, 2003.  The Company does not expect SFAS 150 to impactthe classification of its outstanding preferred stock instruments upon theCompany’s adoption effective July 1, 2003.

 

**Note 3 – Acquisitions and Dispositions – Majority OwnedSubsidiaries**

 

***Correlant Communications, Inc.***

 

On March 31, 1999,the Company entered into a share exchange agreement which provided for theacquisition of 94.5% of the issued and outstanding common shares of Correlant,representing an 81% ownership interest in Correlant.  Consideration paid for the purchase was 9,657,000 Lotus commonshares valued at $7.21 per share plus contingently issuable shares of up to1,435,000.  The contingent shares wereissuable as Correlant options specified in the agreement were exercised.  For each option exercised, 81% of suchshares were to be transferred to Lotus in exchange for 0.5364 shares of Lotuscommon stock for each share of Correlant stock transferred.  Due to the nature of the contingentconsideration, the Company could not at the time reasonably determine whetherthe additional shares would be issued. Accordingly, pursuant to the provisionsof APB 16, *BusinessCombinations* (“APB 16”), the contingent consideration is notrecorded until such determination can be reasonably made.  At the acquisition date, the excess of thepurchase price and related costs over the value assigned to the net tangibleassets acquired was

 

F-17

----

 

$74,545,000 and wasassigned to goodwill.  The Companyrecorded $21,000 during fiscal 2003 and $18,000 during fiscal 2001 asadditional goodwill as a result issuing 3,000 and 2,000 of the contingentlyissuable shares in fiscal years 2003 and 2001, respectively.

 

In April 2000, as part of theCorrelant acquisition agreement, Lotus provided Correlant with $10,000,000 ofnon-interest bearing convertible debt financing.  The debt was converted into 10,000 shares of Series D preferredstock on September 30, 2000. Correlant has Series A, B, C and D convertible preferred stock withtotal liquidation preferences over the common stockholders of $3,450,000,$1,000,000, $4,000,000 and $10,000,000, respectively.   In the event the proceeds available for distribution areinsufficient to pay all Correlant preferred shareholders the full amount of theliquidation preference, the available proceeds shall be distributed ratablyamong Correlant’s preferred shareholders.

 

From December 1999 throughMarch 2000, the Company sold 3,657,000 of its shares in Correlant tovarious third parties, for total proceeds of $73,135,000.  In connection with the sale of the Correlantshares, the Company paid commissions totaling $10,970,000 or 15% of theproceeds received to Hywin Investments Limited (“Hywin”) and related entities,which were related parties.  The Companyrecorded a gain of $50,512,000 on the disposition.  This sale reduced the Company’s ownership in Correlant to 76% ofthe outstanding common stock, representing a 65% ownership interest.

 

During October 2000, the Companysold 656,000 shares of Correlant common stock to various unrelatedparties.  Although the Correlant shareswere transferred to the parties, the Company did not receive any of theproceeds. The Company investigated the transaction and was unable to recoverthe funds, and as a result the Company recorded a loss of $2,266,000 duringfiscal 2001.   The sale reduced theCompany’s ownership in Correlant to 73% of the outstanding common stockrepresenting a 62% ownership interest.

 

In January 2001, the Companyagreed to refund $7,100,000 to several investors that purchased a total of355,000 shares of Correlant common stock during fiscal 2000.  The Company refunded the $7,100,000 toHywin, who was to return the funds to the individual investors.  In connection with the refund, Hywinrefunded $1,065,000 of commissions relating to the shares to be returned.  However, the shares were never returned tothe Company.  The Company investigatedthe transaction and was unable to recover the funds, and as a result, the$6,035,000 was expensed by the Company and is included in Other income(expense) in the consolidated statement of operations.

 

***Arescom, Inc.***

 

On March 31, 1999,the Company entered into a share exchange agreement which provided for theacquisition of 81% of the issued and outstanding common shares of Arescom.  Consideration for the purchase was 3,886,000Lotus common shares valued at $7.25 per share plus contingently issuable sharesof up to 273,000.  The contingent shareswill be issued as Arescom options specified in the agreement areexercised.  For each option exercised,81% of such shares were to be transferred to Lotus in exchange for 0.02915shares of Lotus common stock for each share of Arescom stock transferred.  Due to the nature of the contingentconsideration, the Company cannot reasonably determine that the additionalshares will be issued. Accordingly, pursuant to the provisions of APB 16, thecontingent consideration is not recorded until such determination can bereasonably made.  At the acquisitiondate, the excess of the purchase price and related costs over the valueassigned to the net tangible assets acquired was $27,330,000 and was assignedto goodwill.  The Company has not issuedany contingently issuable shares.

 

During July 2000, Lotus sold, tounrelated parties, 300,000 shares of Arescom stock for total proceeds of$1,500,000.  Pursuant to the terms ofthe agreement, the number of Arescom shares purchased would be adjusted basedon the occurrence of an initial public offering of Arescom.  In connection with the sale, Lotus recordeda gain of $1,269,000 during fiscal 2001. On January 31, 2002, the agreements were amended to delete thesection related to the adjustment to the number of shares purchased.  As consideration for this, the Companyissued an additional 150,000 shares of Arescom stock to the parties. Since theinvestment had no value at the time the shares were issued, there was no gainor loss recorded for the issuance of the additional shares.

 

F-18

----

 

In December 2000, the Companyagreed to refund the $1,500,000 received in connection with the sale of Arescomstock.  The amount refunded to theCompany’s attorney was to be returned to the individual investors.  However, the funds were not returned to theinvestors and the shares were never returned to the Company.  The Company investigated the transaction andas a result, filed a claim against the individual. However, as the Company wasunable to recover the funds, the $1,500,000 was expensed in fiscal 2001 and isincluded in Other income (expense) in the consolidated statement of operations.

 

Effective December 18, 2001, Lotus sold, to anunrelated party approximately 92% of its investment in Arescom, representing65% of the outstanding securities of Arescom for $10,000,000.  In connection with this agreement, the ShareExchange and related Agreements from March 1999 were terminated thuseliminating the restrictions on the Company’s common stock issued to Arescomshareholders and the Company was released from all liability as a guarantor ofArescom’s indebtedness to an unrelated third party.  In addition, the Company and Arescom entered into an exchangeagreement, whereby the Company forgave $13,235,000 due from Arescom in exchangefor a new promissory note for the principal sum of $2,192,000 (See Note 8) and11,000 shares of subordinated preferred stock of Arescom.  The Company determined that there was novalue associated with the 11,000 shares of subordinated preferred stock ofArescom.  Immediately following the saleof its majority interest in Arescom, the Company determined that the value ofits remaining 6% interest in Arescom was impaired.  The Company recognized a net gain of $16,765,000, which includesa tax benefit of $1,802,000, on the sale, exchange of the debt and impairmentof the remaining value of its investment. The sale of Arescom and its related operating results have been excludedfrom the results from continuing operations and classified as a discontinuedoperation for all periods presented in accordance with the requirements of SFAS144.

 

The Company’s auditors were unable to audit thefinancial statements of Arescom, a significant subsidiary, for fiscal 2001 asthe subsidiary would not provide the necessary information to allow theauditors to complete the audit.  Due tothe subsidiary’s lack of cooperation, the Company’s auditors were unable toattain satisfaction about the subsidiary’s account balances by means of otherauditing procedures.  As a result, theCompany’s auditors did not express an opinion on the consolidated financialstatements for fiscal 2001.

 

The following is a summary of the results ofdiscontinued operations relating to Arescom for the years ended June 30,2002 and 2001 (*in thousands*).

 
|                                      |   | **Year Ended  June 30,** |   |
|-------------------------------------------|--------|-------------------------------|--------|
|                                      |   | **2002**                      |   | **2001** | ** ** |
|                                      |   | **(Unaudited)**               |   | **(Unaudited)** |   |
|                                      |   |                          |   |   |   |
| Net  revenues                             |   | $                             | 38,200 |   | $ | 31,086 |   |
| Cost  of net revenues                     |   | 27,295                        |   | 39,503 |   |
| Gross  profit                             |   | 10,905                        |   | (8,417 | ) |
|                                      |   |                          |   |   |   |
| Operating  expenses                       |   |                          |   |   |   |
| General  and administrative               |   | 7,342                         |   | 14,999 |   |
| Amortization                              |   | 2,702                         |   | 5,404 |   |
|                                      |   |                          |   |   |   |
| Loss  from operations                     |   | 861                           |   | (28,820 | ) |
| Other  income (expense)                   |   | (72                           | )      | (153 | ) |
| Gain  (loss) from discontinued operations |   | $                             | 789    |   | $ | (28,973 | ) |

 

In September 2003, the Company sold its remaining6% interest in Arescom.  See Note8.  On the sale date, the 6% ownershipinterest in Arescom had no value.

 

***Lotus World***

 

On April 22, 1999, Lotus organizedLotus World, Inc (“Lotus World”) and invested $1,000,000.  On March 12, 2002, the Company andLotus World entered into an Asset Purchase and Assignment and AssumptionAgreement with Avtech Technology, whereby the Company assigned its rights tocertain contracts and related intangible assets

 

F-19

----

 

to Avtech in exchange for Avtech’sassumption of all of the Lotus World’s obligations under the contractsassigned.  There was no gain or lossassociated with the transaction with Avtech. Subsequent to the completion of the transaction, the Company dissolvedLotus World.

 

***Regent Electronics Corporation***

 

In June 2001, theCompany entered into an Acquisition Agreement with the management of RegentElectronics Corporation (“Regent”) providing for the transfer by the Company ofits 93% ownership of the outstanding shares of capital stock of Regent to theManagement of Regent. As consideration for the transfer of these shares toRegent’s management, Regent management agreed to pay the Company $1 and 50% ofthe earnings generated by Regent starting from the date of the agreement untilthe aggregated payment totals $15,000,000. To date the Company has not received anything from Regent as Regent hashad no earnings. In connection withthe spin-off of Regent, the Company forgave amounts due from Regent in theamount of $4,098,000.   During fiscal2001, the Company recorded a net loss of $213,000 from the spin-off of Regentand forgiveness of the debt.

 

***Opta Systems, LLC dba GoVideo***

 

InApril 2003, the Company loaned $5,986,000 to Opta, which was used, inaddition to a deposit of $250,000 paid by Opta, to complete its purchase ofsubstantially all assets and assumption of certain liabilities of a productline known as “GoVideo” from SONICblue Incorporated, a Delaware corporation(NASDAQ: SBLU), and Sensory Science Corporation, a Delaware corporation andwholly-owned subsidiary of SONICblue. The purchase was pursuant to a purchase agreement and an order issued bythe United States Bankruptcy Court, Northern District of California, San JoseDivision overseeing SONICblue’s bankruptcy case.

 

Immediately subsequent to Opta’s purchase of the GoVideo product line,the Company purchased 100% of the outstanding membership interests of Opta fromCarmco Investments, LLC (“Carmco”), a Connecticut limited liability company for$420,000, representing the return of the $250,000 deposit used in theacquisition of the GoVideo product line and $170,000 for related transactionfees and expenses. In addition, Lotus agreed to pay up to an additional$200,000 for legal fees incurred by Carmco and an additional $100,000 ifcertain significant vendors continued their relationship with Opta throughOctober 2003.  Subsequent to theclosing, the Company paid an additional $294,000 in connection with theseitems.  In connection with thisagreement, the $5,986,000 originally loaned to Opta was converted to a capitalcontribution, resulting in a total purchase price, including actualout-of-pocket expenses of approximately $6,770,000.  In October 2003, the purchase price was reduced by $962,000based on a settlement with SONICblue concerning the purchase price of certainassets acquired, resulting in an adjusted purchase price of $5,808,000. The$962,000 was refunded to GoVideo and is recorded as a note payable to LotusPacific.  The following is a condensedbalance sheet showing the fair values of the assets acquired and theliabilities assumed on the date of acquisition (*in thousands*):

 

| Accounts  receivable                     |   | $      | 2,959  |   |
|------------------------------------------|--------|--------|--------|--------|
|                                     |   |   |   |   |
| Inventory                                |   | 1,361  |   |
|                                     |   |   |   |
| Equipment                                |   | 814    |   |
|                                     |   |   |   |
| Intangibles  not subject to amortization |   | 4,215  |   |
|                                     |   |   |   |
| Current  liabilities                     |   | (3,541 | )      |
|                                     |   |   |   |
| Purchase  price of net assets acquired   |   | $      | 5,808  |   |

 

***The amountallocated to intangibles includes $2,420,000 allocated to the GoVideoTradename, for*** the acquisition cost of the tradename used to market the GoVideoproducts and goodwill of $1,795,000, ***representing the excess of thecost of the acquired company over the fair value of the net assets at the dateof acquisition.  The GoVideo Tradenameand goodwill are not amortized in accordance with***SFAS142, as the lives are deemed indefinite***. For income tax purposes, theentire amount of the goodwill is deductible.***

 

F-20

----

*** ***

**Note 4 – Acquisitions and Dispositions – Equity MethodInvestess**

 

InJanuary 2003, the Company entered into an agreement to form a jointventure with Beijing Youbang Online Electronics Technology Co., Ltd.(“Youbang”), TCL Computer Technology Co., Ltd. (“TCL Computer”), an affiliateof TCL Industries and all the equity holders of Youbang, pursuant to which theCompany acquired a 50% interest in a new joint venture to own substantially allof Youbang’s operations. Pursuant to the agreement, all of Youbang’s assets,other than real estate, were transferred to a newly formed Beijing, China jointventure named TCL Digital Technologies, Ltd., and operates as a computernotebook manufacturing company in China. The Company contributed 50% of thetotal investment amount or approximately $5,240,000, payable in threeinstallments. At the time, the investment was part of the Company’s businessstrategy to seek businesses to maximize the Company’s growth potential based onits assets. However, shortly after completing its investment, the Companydeemed the joint venture’s business model did not fit with the Company’slong-term business strategy, and diverted management resources from theoperations of other subsidiaries, notably GoVideo, as discussed above.  See Note 18.

 

**Note 5 – Acquisitions and Dispositions – Cost MethodInvestees**

 

***TurboComm Technology***

 

During fiscal 2000, the Companypurchased shares of stock of TurboComm Technology, (“TurboComm”) Correlant’ssupplier and related party (See Note 11), for a total of $686,000 from anexisting shareholder of TurboComm.  Thenumber of shares acquired represented a small percentage of TurboComm, and thusthe investment was carried at cost. This investment was disposed of in fiscal 2001 through the sale to anothershareholder of TurboComm for total proceeds of $1,358,000, resulting in a gainof $672,000.

 

**Note 6 – Accounts Receivable****and AccountsReceivable from Related Parties**

 

The following summarizescomponents of accounts receivable, net  (*in thousands*):

 
|                             |   | **June 30,** |      |
|----------------------------------|--------|-------------------|-----------|
|                             |   | **2003**          |      | **2002** |   |
|                             |   |              |      |   |   |
| Accounts  receivable             |   | **$**             | **6,886** | ** ** | $ | 325 |   |
| Allowance  for doubtful accounts |   | **(39**           | **)**     | (44 | ) |
|                             |   | **$**             | **6,847** |   | $ | 281 |   |

 

The following summarizescomponents of accounts receivable from related parties, net  (*inthousands*):

 
|                                      |   | **June 30,** | ** ** |
|-------------------------------------------|--------|-------------------|------------|
|                                      |   | **2003**          |       | **2002** | ** ** |
|                                      |   |              |       |   |   |
| Accounts  receivable from related parties |   | **$**             | **1,985**  | ** ** | $ | 7,075 |   |
| Allowance  for doubtful accounts          |   | **(1,946**        | **)**      | — |   |
|                                      |   | **$**             | **39**     |   | $ | 7,075 |   |

 

F-21

----

 

**Note 7 – Inventories**

 

The following summarizescomponents of inventories (*in thousands*):

 
|                              |   | **June 30,** |       |
|-----------------------------------|--------|-------------------|------------|
|                              |   | **2003**          |       | **2002** |   |
|                              |   |              |       |   |   |
| Raw  materials                    |   | **$**             | **—** | ** ** | $ | 600 |   |
| Service  replacement parts        |   | **2,558**         | ** ** |   |   |
| Finished  goods                   |   | **3,880**         | ** ** | — |   |
|                              |   | **6,438**         |       | 600 |   |
| Allowance  for obsolete inventory |   | **—**        | ** ** | (600 | ) |
|                              |   | **$**             | **6,438**  |   | $ | — |   |

 

**Note 8 – Notes and InterestReceivable from Related Parties**

 

Thefollowing summarizes components of notes and interest receivable from relatedparty (*in thousands*):

 
|                                                |   | **June 30,** | ** ** |
|-----------------------------------------------------|--------|-------------------|------------|
|                                                |   | **2003**          |       | **2002** | ** ** |
|                                                |   |              | ** ** |   | ** ** |
| Notes  and interest receivable from related parties |   | **$**             | **1,592**  | ** ** | $ | 5,256 |   |
| Allowance  for doubtful accounts                    |   | **—**        | ** ** | (1,734 | ) |
|                                                |   | **$**             | **1,592**  |   | $ | 3,522 |   |

 

On April 7, 2000,the Company loaned $10,000,000 to TurboComm. Originally the promissory note was due one year from effective date withinterest at the rate of 6% per year. TurboComm was unable to make payments in accordance with the terms ofthe agreement and became delinquent on the note.  As a result, the Company suspended interest income accruals andall payments received were applied to the principal balance.  The principal balance due on the note was $0and $1,320,000 as of June 30, 2003 and 2002, respectively.

 

In fiscal 2000, Lotusloaned USS Online $1,300,000.  The loanwas originally due on demand, with interest at the rate of 8% per year.  As of June 30, 2000, the Company deemedthe note and the accrued interest of $55,000 uncollectible and fully reservedagainst the principal and interest due. In March 2001, the note was refinanced and interest accrued duringfiscal 2001 and 2000 totaling $134,000 was added to the note.  Subsequent to the refinancing, the Companysuspended interest income accruals.  Infiscal 2001, the Company advanced $300,000 to PMB.  There was no interest and no due date associated with theadvance.  As of June 30, 2001,Lotus deemed the advance uncollectible and fully reserved against the amountowed by PMB.  To date, the amounts havenot been collected and Lotus entered into litigation to obtain the total amountdue to them.  On February 18, 2003,the Company entered into a settlement agreement to settle all the disputes withUSS Online and subsidiaries.  See Note14.

 

Asdiscussed in Note 3, in December 2001, the Company sold, to an unrelatedparty approximately 92% of its investment in Arescom for $10,000,000.  In connection with this agreement, theCompany and Arescom entered into an exchange agreement, whereby the Companyforgave $13,235,000 due from Arescom in exchange for a new promissory note(“New Note”) for the principal sum of $2,192,000 and 11,000 shares ofsubordinated preferred stock of Arescom. The New Note, due November 3,2002 accrued interest at a rate of 4% per annum.  Accrued and unpaid interest became due and payable onNovember 3, 2002.  The payment ofprincipal under the New Note and interest thereon, was secured by the grants toLotus Pacific of a security interest in all of the Company’s right, title andinterest in all amounts owing to the Company from Microsoft Corporation underthe Modem Purchase Agreement, dated February 7, 2000 among Arescom and MicrosoftCorporation pursuant to the Loan and Security Agreement.  Arescom was unable to make payments inaccordance with the terms of the agreement and became delinquent on thenote.  In May 2003, the Company filed anaction against Arescom seeking to recover from

 

F-22

----

 

Arescom$1,704,000, representing amounts previously due on the promissory note anddamages resulting from Arescom’s failure to cooperate with the Company in itsefforts to restate and reaudit the Company’s consolidated financial statementsfor prior periods.  InSeptember 2003, the Company settled all claims against Arescom, includingall amounts previously due on the promissory note dated December 14, 2001that were paid in installments through December 15, 2003.  The balance due on note at June 30,2003 and 2003 was $1,592,000 and $2,192,000, respectively. As part of thesettlement, the Company also exchanged with certain shareholders of Arescom allof the shares of Arescom common stock and Series B Preferred Stock held by theCompany for all of the shares of the Company’s common stock held by suchshareholders.  Pursuant to the stockswap agreement, the Company was to acquire up to 3,886,000 shares of its stock.  To date, the Company has received 3,578,000shares of its stock.   Arescom agreed tohold in escrow all of the Arescom shares previously held by Lotus for a periodof one year.  At the end of such period,if any additional shareholders have not then tendered their Lotus shares and asa result, Arescom has not distributed the escrowed Arescom shares, Arescom willretain the escrowed Arescom shares and indemnify Lotus for any claims byshareholders who have not then tendered their Lotus shares.  There was no value on the Company’s booksfor the Arescom shares at the date of the transactions.

 

**Note 9 – Property and Equipment**

 

Thefollowing summarizes components of property and equipment (*in thousands*):

 
|                                       |   | **June 30,** |       |
|--------------------------------------------|--------|-------------------|------------|
|                                       |   | **2003**          |       | **2002** |   |
|                                       |   |              |       |   |   |
| Computer  hardware and purchased software  |   | **$**             | **2,086**  | ** ** | $ | 2,007 |   |
| Office  furniture and lab equipment        |   | **2,483**         | ** ** | 2,136 |   |
| Leasehold  improvements                    |   | **628**           | ** ** | 176 |   |
|                                       |   | **5,197**         |       | 4,319 |   |
| Accumulated  depreciation and amortization |   | **(4,129**        | **)**      | (2,996 | ) |
|                                       |   | **$**             | **1,068**  |   | $ | 1,323 |   |

 

**Note 10 – Notes Payable**

 

In June 2003,GoVideo borrowed $6,283,000 from TCL Industries and Asia Focus Industrial Ltd.,entities affiliated with TCL Industries, to fund inventory purchases andoperating expenses.  These advances,which accrue interest at annual rates of approximately 4% and are guaranteed byLotus, are due at various dates during 2004. The advances have not been repaid, and GoVideo and TCL Industries arecurrently negotiating an extension on the due dates for those notes that havematured.  Neither the TCL Industries northe Asia Focus advance is collateralized. Both advances are subordinate to GoVideo’s bank line of credit.  See note 18.

 

#### **Note11 – Related Party Transactions**

#### ** **

During fiscal 2002, theCompany incurred consulting expense in the amount of $46,000 to entitiesrelated to a significant shareholder of the Company.  Additionally, during fiscal 2002 the Company leased a portion ofthe building to a significant shareholder and shared employees with thesignificant shareholder.  Amounts duefrom the shareholder for such services as of June 30, 2002 were$5,000.  There were no such amounts duefrom this shareholder as of June 30, 2003. See Note 14

 

***Correlant***

 

**CooperativeResearch and Development Agreement**.  During the periods presented in this report, Correlant hadsignificant transactions with two related party stockholders.  In 1997, the Company established arelationship with Toshiba Corporation (“Toshiba”), whereby Correlant andToshiba entered into a cooperative research and development agreement.  As part of this arrangement, the Company agreedto pay Toshiba a percentage of the selling price of each developed product soldto customers, other than Toshiba, which utilized the technology developed underthe agreement.  Royalty expense toToshiba was $0, $52,000 and $819,000 for fiscal 2003, 2002 and 2001,

 

F-23

----

 

respectively.  Accounts payable to Toshiba for unpaidroyalties as of June 30, 2003 and 2002 was $0 and $9,000, respectively,and is included in accounts payable to related parties.

 

Toshiba accounted for 54%and 67% of the Company’s consolidated revenues for fiscal 2002 and 2001,respectively.  EffectiveFebruary 1, 2002, Correlant ceased selling completed cable modems directlyto Toshiba.  As a result, there was norevenue attributed to Toshiba during fiscal 2003.

 

**Manufacturing and Sales.**  During the periods presented in this report,Correlant also had an established relationship with TurboComm, a companylocated in Taiwan that manufactures high-speed data over cable technologyproducts.  Correlant purchased thecompleted cable modems and CMTS units from TurboComm.  For fiscal 2003, 2002 and 2001, purchases from TurboComm were$271,000, $20,439,000 and $221,997,000, respectively.  Accounts payable to TurboComm was $73,000 and $238,000 as ofJune 30, 2003 and 2002, respectively, and is included in accounts payableto related parties in the consolidated balance sheet.

 

Additionally,during fiscal 2001, Correlant began selling the MAC to TurboComm for use bythem in their own products.  For fiscal2003, 2002 and 2001, MAC sales to TurboComm accounted for 42%, 35% and 3% oftotal net revenues, respectively. As a result of the above transactions,accounts receivable from TurboComm amounted to $1,985,000 as of June 30,2003.  Of this receivable, $1,946,000was deemed uncollectible and reserved.   SeeNote 18.  Accounts receivable fromTurboComm as of June 30, 2002 was $7,070,000 and is included in accountsreceivable, related parties in the consolidated balance sheet.

 

**Note 12–****  Stockholders’ Equity**

 

**PreferredStock**

 

Lotushas one class of preferred stock, which is designated Series A preferredstock.  The par value is $0.001 pershare and 100,000 shares are authorized. Series A preferred stock has the same voting rights as common stock, aliquidation preference of $10 per share, is entitled to the right to receivedividends on the same per share basis as common shareholders and is redeemableby the Company, at its sole option in whole or in part, at any time at $10 pershare.  There are 4,000 shares issuedand outstanding at June 30, 2003, 2002, and 2001.

 

**Common Stock Transactions**

 

During fiscal 2003and 2001, the Company issued 3,000 and 2,000 shares of common stock valued at$21,000 and $18,000, respectively, to Correlant shareholders in connection withthe Share Exchange Agreement.  See Note3.  There were no shares issued duringfiscal 2002.

 

**Subsidiary Stock Transactions**

 

During fiscal2001, Arescom issued 31,000 shares upon the exercise of options for proceeds of$39,000, which has been recorded in the Company’s consolidated equity.  This transaction did not have a materialeffect on the Company’s ownership of Arescom.

 

During fiscal2001, Arescom granted warrants to an affiliate of a bank in connection with thereceipt of a waiver for non-compliance with required covenants under their lineof credit.  The estimated fair value ofthe warrant is $47,000, which was determined using the Black-Scholes valuationmodel.  The value of the warrants hasbeen recorded in the Company’s consolidated equity.

 

During fiscal2003, 2002 and 2001, Correlant issued 7,000, 6,000, and 6,000 shares upon theexercise of options for proceeds of $250, $9,000 and $3,000, respectively. Forfiscal 2003, 2002 and 2001, the Company recorded $0, $4,000 and $2,000 inconsolidated equity for the issuance of these shares.  The remaining amount was recorded as non-controlling interest insubsidiaries on the consolidated balance sheet. These transactions did notmaterially affect the Company’s ownership of Correlant.

 

F-24

----

 

During fiscal2003, 2002, and 2001, Correlant recognized compensation expense of $592,000,$1,657,000 and $9,189,000, respectively for the difference between the exerciseprice and fair value of stock options issued to employees. For fiscal 2003,2002 and 2001, the Company recorded $429,000, $1,203,000 and $6,898,000 inconsolidated equity for the recognition of the compensation expense.  The remaining amount was recorded asnon-controlling interest in subsidiaries on the consolidated balance sheet.

 

At the date the Company acquired a majority interest in Correlant, Correlanthad preferred stock outstanding that Lotus did not acquire.  In addition, in April and May 1999,Correlant sold preferred stock to third parties for net proceeds of $1,463,000,which was recorded as non-controlling interest in subsidiaries on theconsolidated balance sheet.  Thepreferred stock held by third parties has a liquidation preference over thecommon shareholders of $8,425,000, which was included in non-controllinginterest in subsidiaries on the consolidated balance sheets for fiscal 2003 and2002.

 

**Stock Warrants**

 

In May 1997, the Company issued8,000,000 common stock warrants for $80,000. Each warrant entitled the holder to purchase one share of the Company’scommon stock at $6 per share. All warrants expired May 5, 2002 and assuch, the $80,000 proceeds received were reclassed from warrants to additionalpaid in capital at June 30, 2002.

 

**Stock Option Plans**

 

***Lotus***

 

In May 1997, Lotusgranted 1,090,000 options to certain officers and key employees with anexercise price of $6.00 per share, which was the market price of Lotus’s commonstock at the time of grant.  Optionswere 100% vested when granted and expire five years from grant date.  As of June 30, 2001, 2000 and 1999,1,090,000 options were outstanding.  Alloptions expired during the year ended June 30, 2002 and as such there wereno options outstanding as of June 30, 2003 or June 30, 2002.

 

The shareholdersapproved the 2000 Equity Incentive Plan (“Incentive Plan”) on April 28,2000. The Board of Directors administers the Incentive Plan. Employees,directors, and consultants of the Company and its affiliates, who in thejudgment of the Board render significant service to the Company, are eligibleto participate. The Incentive Plan provides for the award of a broad variety ofstock-based compensation alternatives such as nonstatutory stock options,incentive stock options, restricted stock, performance awards and stock appreciationrights. The Incentive Plan provided 11,355,000 shares of common stock to beoffered. The vesting provisions of individual options may vary. The exerciseprice shall not be less than 100% of the fair market value of a common stock onthe grant date. No options have been granted since the Incentive Plan’sadoption.

 

***GoVideo***

 

Currently, GoVideohas no approved stock option or stock issuance plan.

 

***Correlant***

 

InMarch 1998, Correlant’s Board of Directors approved the 1998 StockOption/Stock Issuance Plan (“1998 Plan”) under which 8,500,000 shares of commonstock are authorized for issuance, and reserved for purchase upon exercise ofoptions granted.  The 1998 Plan providesfor the grant of incentive and non-statutory options and issuance of commonstock under the stock issuance program (as defined) to employees, directors,and consultants.

 

The exercise priceof incentive stock options must equal at least the fair value on the date ofgrant and the exercise price of non-statutory stock options and the issuanceprice of common stock under the stock issuance program may be no less than 85%of the fair value on the date of grant or issuance.  The options are exercisable for a period of up to ten years afterthe date of grant.  Options grantedprior to August 2001 vest over four years at the rate of 25% on eachanniversary of the vesting start date. Options granted subsequent to August 2001 vest over three years atthe rate of 33% after the first and second anniversaries and the remainderafter the third anniversary.

 

F-25

----

 

Correlant reviewedits exercise prices and arrived at the fair value for accounting purposes foreach option grant since July 1, 1999. With respect to the 597,000 options granted between July 1, 1999and June 30, 2000, the Company recorded deferred stock compensation of$5,144,000 for the difference between the exercise price per share determinedby Correlant’s Board of Directors and the fair value per share for accountingpurposes at the grant date.  Theapproximate weighted average fair value per share for accounting purposes was$14.23.  Deferred stock compensation isrecognized and amortized on an accelerated basis in accordance with FIN 28 overthe vesting period of the related options, generally four years.

 

In connection withLotus’s acquisition of Correlant in March 1999, Lotus obtained the rightto acquire up to 2,674,000 additional Correlant shares upon acquisition of suchshares by the option holders.  All optionsgranted by Correlant through December 21, 1999 are subject to an exchangeagreement, whereby Lotus acquires 81% of the shares exercised in exchange for0.5364 shares of Lotus stock for each Correlant share exchanged.  The Lotus shares into which the acquiredshares are exchangeable were restricted from sale until Correlant met certainfinancial milestones and the options were, at the time of grant, considered tobe contingent.  EffectiveAugust 31, 2000, the restrictions were removed and, accordingly, theCompany recorded deferred stock compensation for 2,613,000 previouslycontingent options that were outstanding as of the date the restrictions werelifted.  The deferred stock compensationrecorded related to these shares is being amortized over the vesting periods ofthe related options on an accelerated basis in accordance with FASBInterpretation 28, *Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans*(“FIN 28”).   The total deferred compensation relating tothe previously contingent options is $9,034,000 based on the value of theoptions on the date the contingency was removed.

 

The followingtable summarizes stock option activity under the 1998 Stock Option Plan andrelated information through June 30, 2003 (*in thousands*):

 
|                                  |   | **Options**   |       | **Weighted-  Average Exercise  Price** |       |
|---------------------------------------|--------|---------------|------------|----------------------------------------|------------|
| Outstanding  at June 30, 2000    |   | 3,277,000     |       | 1.54                                   |       |
| Granted                               |   | —        |       | —                                 |       |
| Exercised                             |   | (6,000        | )          | 0.48                                   |       |
| Cancelled                             |   | (113,000      | )          | 0.79                                   |       |
| Outstanding  at June 30, 2001    |   | 3,158,000     |       | 1.57                                   |       |
| Granted                               |   | 1,616,000     |       | 1.50                                   |       |
| Exercised                             |   | (6,000        | )          | 1.50                                   |       |
| Cancelled                             |   | (685,000      | )          | 2.60                                   |       |
| Outstanding at June 30, 2002     |   | 4,083,000     |       | $                                      | 1.37       |   |
| **Granted**                           |   | **—**    | ** ** | **—**                             | ** ** |
| **Exercised**                         |   | **(7,000**    | **)**      | **0.04**                               | ** ** |
| **Cancelled**                         |   | **(376,000**  | **)**      | **0.94**                               | ** ** |
| **Outstanding at June 30, 2002** |   | **3,700,000** | ** ** | **$**                                  | **1.41**   | ** ** |

 

As of June 30, 2003,2002 and 2001, there were 2,868,000, 2,080,000 and 1,108,000 optionsexercisable, respectively, at the weighted average prices of $1.31, $1.18 and$1.14 per share, respectively.  Therewere no options granted prior to March 1998 and 4,558,000 shares areavailable for future grant at June 30, 2003.

 

F-26

----

 

Thefollowing table summarizes all options outstanding by price range as ofJune 30, 2003 (*in thousands*):

 
|                          |           | **Options  Outstanding** |       | **Options  Exercisable**                            |       |
|-------------------------------|----------------|--------------------------|------------|-----------------------------------------------------|------------|
| **Range of  Exercise Prices** |           | **Number  Outstanding**  | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $                             | 0.038 to 0.095 |                     | 825,000    |                                                | 5.15       |   | $ | 0.07 |   | 824,000 |   | $ | 0.07 |   |
| 1.00 to 1.50                  |           | 2,751,000                |       | 6.83                                                |       | 1.22 |   | 1,951,000 |   | 1.21 |   |
| 12.00 to 15.00                |           | 124,000                  |       | 6.83                                                |       | 14.65 |   | 93,000 |   | 14.65 |   |
| $                             | 0.038 to 15.00 |                     | 3,700,000  |                                                | 6.45       |   | $ | 1.41 |   | 2,868,000 |   | $ | 1.31 |   |
|                               |                |                          |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |

 

As discussed in Note 2,the Company accounts for stock-based awards using the intrinsic value method inaccordance with APB 25 and its related interpretations. SFAS 123 requires thedisclosure of pro forma net income (loss) and earnings (loss) per share as ifthe Company had adopted the fair value method as of the beginning of 1996.There were no options granted during the year ended June 30, 2003.  The weighted-average fair value of optionsgranted during the year ended June 30, 2002 was $1.14. There were nooptions granted in 2001. The calculations were made using the Black-Scholesoption-pricing model. The fair value of the Company’s stock-based awards toemployees was estimated assuming no expected dividend and the followingweighted-average assumptions for 2002: expected volatility of 78%; risk-free interest rate of 5.5%; and aweighted-average expected life of the options of five years.  For purposes of pro forma disclosures, theestimated fair value is amortized on an accelerated basis in accordance withFIN 28 over the vesting period.

 

**Note 13 –****  IncomeTaxes**

 

The provision(benefit) for income taxes for fiscal 2003, 2002 and 2001 is comprised of thefollowing (*inthousands*):

 
|      |   | **Year Ended  June 30,** |       |
|-----------|--------|-------------------------------|------------|
|      |   | **2003**                      |       | **2002** | ** ** | **2001** | ** ** |
|      |   |                          |       |   |   |   |   |
| Current:  |   |                          |       |   |   |   |   |
| Federal   |   | **$**                         | **(111**   | **)** | $ | (5,016 | ) | $ | (4,691 | ) |
| State     |   | **2**                         | ** ** | 2 |   | (1,260 | ) |
| Foreign   |   | **—**                    | ** ** | (164 | ) | 1,514 |   |
|      |   | **(109)**                     |       | (5,178 | ) | (4,437 | ) |
| Deferred: |   |                          | ** ** |   |   |   |   |
| Federal   |   | **—**                    | ** ** | 1,564 |   | (1,564 | ) |
| State     |   | **—**                    | ** ** | 433 |   | (433 | ) |
| Foreign   |   | **—**                    | ** ** | — |   | — |   |
|      |   | **—**                    |       | 1,997 |   | (1,997 | ) |
| Total     |   | **$**                         | **(109**   | **)** | $ | (3,181 | ) | $ | (6,434 | ) |

 

F-27

----

 

The reportedprovision (benefit) for income taxes for the year ended June 30, 2003,2002 and 2001 differ from the amount computed by applying the statutory federalincome tax rate of 35 percent to the consolidated income (loss) beforeincome taxes as follows (*in thousands*):

 
|                                             |   | **Year Ended  June 30,** |       |
|--------------------------------------------------|--------|-------------------------------|------------|
|                                             |   | **2003**                      |       | **2002** | ** ** | **2001** | ** ** |
|                                             |   |                          |       |   |   |   |   |
| Provision  (benefit) computed at statutory rates |   | **$**                         | **(2,266** | **)** | $ | (13,899 | ) | $ | (4,853 | ) |
| Increase  (reduction) resulting from:            |   |                          | ** ** |   |   |   |   |
| Non-deductible  goodwill                         |   | **—**                    | ** ** | 11,979 |   | 4,056 |   |
| Non-deductible  expenses                         |   | **8**                         | ** ** | 7 |   | 50 |   |
| State  taxes, net of federal benefit             |   | **2**                         | ** ** | 435 |   | (1,534 | ) |
| Utilization  of NOLs                             |   | **(111**                      | **)**      | (4,425 | ) | (10,325 | ) |
| Utilization  of tax credits                      |   | **—**                    | ** ** | — |   | (2,278 | ) |
| Valuation  allowance                             |   | **2,258**                     | ** ** | 2,722 |   | 8,450 |   |
| Total                                            |   | **$**                         | **(109**   | **)** | $ | (3,181 | ) | $ | (6,434 | ) |

 

The components ofthe Company’s net deferred income tax asset is as follows (*in thousands*):

 
|                                                       |   | **As of  June 30,** |       |
|------------------------------------------------------------|--------|--------------------------|------------|
|                                                       |   | **2003**                 |       | **2002** | ** ** |
|                                                       |   |                     |       |   |   |
| Current  deferred tax assets:                              |   |                     |       |   |   |
| Accrued  expenses                                          |   | **$**                    | **836**    | ** ** | $ | 215 |   |
| Deferred  compensation                                     |   | **5,486**                | ** ** | 5,487 |   |
| Deferred  revenue                                          |   | **45**                   | ** ** | 126 |   |
| Inventory  reserves                                        |   | **2,054**                | ** ** | 244 |   |
| Allowance  for bad debts                                   |   | **3,170**                | ** ** | 69 |   |
| Total                                                      |   | **11,591**               | ** ** | 6,141 |   |
| Valuation  allowance for deferred tax assets (liabilities) |   | **(11,591**              | **)**      | (6,141 | ) |
| Net  deferred tax assets                                   |   | **$**                    | **—** | ** ** | $ | — |   |
|                                                       |   |                     | ** ** |   |   |
| Non-current  deferred tax assets:                          |   |                     | ** ** |   |   |
| Net  operating loss carryforwards                          |   | **$**                    | **4,247**  | ** ** | $ | 949 |   |
| Tax  credit carryforwards                                  |   | **1,539**                | ** ** | 1,027 |   |
| Basis  difference in joint venture                         |   | **25**                   | ** ** | — |   |
| Other                                                      |   | **(32**                  | **)**      | — |   |
| Total                                                      |   | **5,779**                | ** ** | 1,976 |   |
| Valuation  allowance for deferred tax assets               |   | **(5,779**               | **)**      | (1,976 | ) |
| Net  deferred tax assets                                   |   | **$**                    | **—** | ** ** | $ | — |   |

 

The net change in the total valuation allowance for fiscal 2003 and 2002 was an increase of $9,253,000 and $1,258,000, respectively.  In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical operating results and projections of taxable income for the future, the Company has determined that it is more likely than not that the deferred tax assets will not be realized through future taxable earnings. Accordingly, a valuation allowance was recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. There can be no assurance that the Company will ever be able to realize the benefit of some or all of the federal and state loss carryforwards either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards.

 

AtJune 30, 2003, the Company had a California net operating losscarryforward of $10,343,000 which will begin to expire in 2013 unlesspreviously utilized.  At June 30,2003, the Company had a Federal net operating loss carryforward of $9,522,000which will begin to expire in 2023 unless previously utilized.  The federal net operating losses generatedin fiscal 2002 and 2001 were carried back to fiscal 2000 and are reflected asan income tax receivable in fiscal 2002.

 

F-28

----

 

The Company is currently under IRS audit for tax years ending June 30, 2001, 2000, and 1999. The IRS may propose certain adjustments, which could be material in amount, in connection with its audit of these periods. The Company believes that it has provided sufficiently for all audit exposures.

 

AtJune 30, 2003, Correlant has federal and state research and developmentcredit carryforwards of $568,000 and $971,000 respectively, which will begin toexpire in 2022 unless previously utilized.

 

Federal and state tax laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change” for tax purposes as defined under Section 382 of the Internal Revenue Code.

 

On September 11,2002, the Governor of California signed into law new tax legislation thatsuspends the use of NOL carryforwards into tax years beginning on or afterJanuary 1, 2002 and 2003.  Shouldthe Company have taxable income for the year ending June 30, 2004, it maynot look to California net operating losses generated in prior years to offsettaxable income.  This suspension willnot apply to tax years beginning in 2005 and beyond.

 

**Note 14 – Commitments and Contingencies**

 

***Leases***

 

TheCompany leases its facilities and certain equipment under non-cancelableoperating leases, expiring at various dates through 2007.  During fiscal 2003 and 2002, the Companyleased a portion of the building to a significant shareholder of theCompany.  The sublease terminatedAugust 1, 2003 when the Company moved to a new building.  Sublease income totaled $1,000 and $8,000during fiscal 2003 and 2002, respectively.

 

GoVideo,which was acquired in April 2003, has an operating lease for a 33,000square foot facility that is used for both office space and warehousing.  The remaining term of the lease isapproximately two years.  Monthlyrentals are based on a fixed schedule that provides for periodic rentaladjustments during the lease term.

 

GoVideoalso leases a 13,000 square foot facility under another operating lease that isused for warehousing.  The term of thelease is for five years and began on November 11, 1999.  Monthly rentals are based on a fixedschedule that provides for periodic rental adjustments during the leaseterm.  Upon expiration of the initialterm of these leases, there is an option to extend the term for an additionalfive years.

 

Correlantleases approximately 26,000 square feet of office space in San Diego, California,which expires November 2007.  Dueto the shut down of operations, Correlant’s interim management has attempted toeither sublease the San Diego facility or negotiate a lease buy out with thelandlord.  Due to the weak commercialreal estate market in San Diego, interim management has not been successful.

 

Thefollowing is a schedule by years of future minimum lease payments underoperating leases and future non-cancelable sublease income *(inthousands):*

 

| **Years Ended June 30,** |   | **Future  Minimum Lease  Payments** |   |
|-------------------------------|--------|-------------------------------------|--------|
| 2004                          |   | $                                   | 856    |   |
| 2005                          |   | 874                                 |   |
| 2006                          |   | 758                                 |   |
| 2007                          |   | 339                                 |   |
| 2008  and thereafter          |   | 365                                 |   |
|                          |   | $                                   | 3,192  |   |

 

Rent expensetotaled $591,000, $496,000 and $595,000 during fiscal 2003, 2002 and 2001,respectively.

 

F-29

----

 

***Purchase Obligations***

 

As ofJune 30, 2003, GoVideo had inventory purchase obligations totaling$10,738,000, which were part of the normal course of business.

 

***Litigation***

 

OnApril 11, 2003 Sharp Electronics filed suit against Correlant in theUnited States District Court for the District of Delaware. The complaintalleged cancellation of a purchase order outside the allowable cancellationtimeframe under the terms of the purchase order.  The complaint sought payment of the purchase order totaling$1,150,000.  Correlant filed an answeron June 16, 2003, stating the components delivered by Sharp Electronicsdid not meet product specification and were unusable.  On that same date, Correlant filed a counter suit for seekingrecovery of components previously delivered by Sharp, which also did not meetproduct specification.  Correlant soughtto recover damages totaling $1,450,000. On January 21, 2004 Sharp agreed to settle all disputes withCorrelant for $500,000, which was accrued as of June 30, 2003.  Additionally, as part of the settlement,Correlant dropped its countersuit.

 

OnJanuary 3, 2001, Lotus Pacific filed a lawsuit in the United DistrictCourt Eastern District of New York against William Hu, which complaint wassubsequently amended July 30, 2002. In the amended complaint, Lotus Pacific brought claims for breach offiduciary duty, professional negligence, accounting and conversion relating totransfers in December 2000 of approximately $3,600,000 million from Mr.Hu’s attorney trust account.  Mr. Hu wasalleged to be the Company’s counsel from January 1998 and later its formerCEO from January 2001 to June 29, 2001.

 

OnJanuary 16, 2002, Lotus Pacific filed a lawsuit in the Supreme Court ofthe State of New York, New York County against USS Online, Travelway, and HuayaLu Tung, seeking to recover $1,800,000 in principal and interest due on loansmade to USS Online (See Note 8), and seeking to pierce the corporate veil andrecover such amounts from defendants Travelway and Huaya Lu Tung. The Companyis a holder of a 28% minority interest in USS Online, and Travelway is the 72%equity owner of USS Online.  The Companyasserted that Ms. Tung was the Chairperson and sole owner of Travelway andChairperson of USS Online and the former Treasurer of the Company.

 

InFebruary 2003, the Company entered into a settlement agreement with USSOnline, Travelway, Mr. Hu, Ms. Tung, Lotus International Holdings Corp (“LIH”),a shareholder of the Company and three individuals to settle all claims againstthe defendants in the two cases cited above, subject to a number ofconditions.  In entering into thesettlement agreement, none of the defendants admitted or conceded any liabilityin connection with the claims asserted in the cases.  As conditions to the settlement agreement, the Company wasrequired to receive: (a) 3,000,000 shares of the Company’s common stock; (b) apromissory note of LIH in the principal amount of $4,000,000, payable onFebruary 19, 2008, with interest accruing at a rate of 3% per annum (the“Note”); (c) a stock pledge agreement, granting to the Company a first prioritysecurity agreement in 1,000,000 shares of the Company’s common stock as partialsecurity for the Note (the “Pledged Shares”); (d) original stock certificatesrepresenting the Pledged Shares; (e) personal guaranty of the Note; and (f) allof the assets of USSF. To date, the Company has received 3,000,896 shares ofthe Company’s common stock.  However,the Company has not received stock certificates for the Pledged Shares or theassets of USSF and has made demand on the other parties for fulfillment of theconditions to the settlement.  TheCompany has reserved the right to take all actions for breach of thesettlement, including reinstituting the original action.  The 3,000,896 shares of common stockreceived as part of the settlement are accounted for as treasury stock andvalued at $150,000 based on the adjusted closing sales price of $0.05 per shareas reported by the National Quotation Bureau’s “Pink Sheets” and has been recorded in Other income (expense) on the consolidatedstatement of operations.

 

**Note 15 – Employee Benefit Plan**

 

Lotus has a 401(k) salarydeferral Plan (“Lotus Deferral Plan”), which is funded based on employeecontributions.  The terms of theoriginal Lotus Deferral Plan do not require Lotus to make contributions to theDeferral Plan on behalf of each eligible employee.  As such, there were no matching contributions during fiscal 2003,2002 or 2001.

 

F-30

----

 

During April 2003,GoVideo established a 401(k) plan (“GoVideo Deferral Plan”).  The terms of the GoVideo Deferral Plan donot require GoVideo to make a contribution. Rather, matching contributions are on a discretionary basis, equal to apercentage of an employee’s contribution to the GoVideo Deferral Plan for theyear.  There were no matchingcontributions during fiscal 2003.

 

Correlanthas a 401(k) salary deferral Plan (“Correlant Deferral Plan”), which is fundedbased on employee contributions.  Theterms of the original Correlant Deferral Plan provide for contributions to theCorrelant Deferral Plan on behalf of each eligible employee (as defined) in anamount equal to 50% on the first 4% of the eligible employee’s deferredcompensation contribution (as defined). Beginning January 1, 2001, Correlant changed its contribution to100% of the first 6% of the eligible employee’s deferred compensationcontributions.  Correlant’scontributions to the Deferral Plan were $213,000, $196,000 and $64,000 forfiscal 2003, 2002 and 2001, respectively. See Note 18.

 

**Note 16 –****  Segmentand Geographic Information**

 

**Segment Information**

 

FASB Statement 131, *Disclosuresabout Segments of an Enterprise and Related Information*(“SFAS131”), establishes standards for reporting information about operatingsegments. Operating segments are defined as components of an enterprise aboutwhich separate financial information is available and is evaluated regularly bythe chief operating decision maker, or decision making group.  The Company’s chief operating decision makeris the Chief Executive Officer. The Company is organized geographically and byline of business. While the Chief Executive Officer evaluates results in anumber of different ways, the primary basis for which the allocation of resourcesand financial results are assessed is by product type.  Prior to fiscal 2003, the Company operatedin one industry segment: the development, manufacture and distribution ofproducts used for broadband Internet access, including data-over-cable equipmentand digital subscriber line (“DSL”) access and networking devices.  Subsequent to the purchase of GoVideo onApril 18, 2003, the Company added an additional segment to its operations:the development, marketing, and distribution of innovative, high performanceconsumer electronic products.  As such,segment information is only shown for fiscal 2003.  The following table presents a summary of the Company’sbusinesses and operating segments (*in thousands*):

 
|                                                     |   | **As of or  for the Year  Ended June 30, 2003** |   |
|----------------------------------------------------------|--------|------------------------------------------------------|--------|
| **Broadband Internet access products:**                  |   |                                                 |   |
| Net  revenues                                            |   | $                                                    | 10,178 |   |
| Cost  of net revenues                                    |   | 7,919                                                |   |
| Gross  profit                                            |   | 2,259                                                |   |
| Loss from operations                                     |   | $                                                    | (9,971 | ) |
|                                                     |   |                                                 |   |
| Total assets                                             |   | $                                                    | 24,603 |   |
|                                                     |   |                                                 |   |
| **Consumer  electronics:**                               |   |                                                 |   |
| Net  revenue                                             |   | 9,325                                                |   |
| Cost  of net revenues                                    |   | 7,513                                                |   |
| Gross  profit                                            |   | 1,812                                                |   |
| Income from operations                                   |   | $                                                    | 669    |   |
|                                                     |   |                                                 |   |
| Total assets                                             |   | $                                                    | 20,166 |   |
|                                                     |   |                                                 |   |
| **Total  operating segments:**                           |   |                                                 |   |
| Net  revenue                                             |   | 19,503                                               |   |
| Cost  of net revenues                                    |   | 15,432                                               |   |
| Gross  profit                                            |   | 4,071                                                |   |
| Loss from operations  attributable to operating segments |   | $                                                    | (9,302 | ) |
|                                                     |   |                                                 |   |
| Total assets  attributable to operating segments         |   | $                                                    | 44,769 |   |

 

F-31

----

 

Disclosed in the tablebelow is the reconciliation of the loss from operations attributable tooperating segments to loss from continuing operations before income taxes andnon-controlling interest and total assets attributable to operating segments tototal assets (*in thousands*):

 
|                                                                                        |   | **As of or  for the  Year Ended  June 30, 2003** |   |
|---------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|
| Loss  from operations attributable to operating segments                                    |   | $                                                     | (9,302 | ) |
| Corporate  general and administrative expenses                                              |   | (3,614                                                | )      |
| Total  other income (expense), net                                                          |   | 4,068                                                 |   |
| Income  (loss) from continuing operations before income taxes and non-controlling  interest |   | $                                                     | (8,848 | ) |
|                                                                                        |   |                                                  |   |
| Total  assets attributable to operating segments                                            |   | $                                                     | 44,769 |   |
| Total  assets attributable to non-reporting segments                                        |   | 8,218                                                 |   |
| Total  assets                                                                               |   | $                                                     | 52,987 |   |

 

**GeographicInformation**

 

Duringfiscal 2003, 2002 and 2001, the Company recorded revenues throughout the UnitedStates, Taiwan, Japan and Europe as determined by the final destination of theproduct.  The following table summarizestotal net revenues attributable to significant countries (*in thousands*):

 
|             |   | **Year Ended June 30,** |       |
|------------------|--------|------------------------------|------------|
|             |   | **2003**                     |       | **2002** | ** ** | **2001** | ** ** |
| Japan            |   | **$**                        | **54**     | ** ** | $ | 30,033 |   | $ | 175,893 |   |
| Taiwan           |   | **9,446**                    | ** ** | 20,757 |   | 9,178 |   |
| United States    |   | **9,527**                    | ** ** | 5,090 |   | 78,121 |   |
| Europe and other |   | **476**                      | ** ** | — |   | — |   |
|             |   | **$**                        | **19,503** |   | $ | 55,880 |   | $ | 263,192 |   |

 

Presented below is information regarding identifiable assets fromcontinuing operations, classified by operations located in the United Statesand Asia (*inthousands*):

 
|          |   | **June 30,** | ** ** |
|---------------|--------|-------------------|------------|
|          |   | **2003**          |       | **2002** | ** ** | **2001** | ** ** |
| United States |   | **$**             | **52,586** | ** ** | $ | 52,842 |   | $ | 88,460 |   |
| Asia          |   | **401**           | ** ** | 500 |   | 28,754 |   |
|          |   | **$**             | **52,987** |   | $ | 53,342 |   | $ | 117,214 |   |

 

F-32

----

 

**Note 17– Selected Quarterly Financial Data (unaudited)**

 

The following table setsforth selected unaudited quarterly information for the Company’s last twofiscal years.  The Company believes thatall necessary adjustments (which consisted only of normal recurring adjustment)have been included in the amounts stated below to present fairly the results ofsuch periods when read in conjunction with the financial statements and relatednotes included elsewhere herein *(in thousands, except per share data):*

 
|                             |   | **First  Quarter** |       | **Second  Quarter** |       | **Third  Quarter** |       | **Fourth  Quarter** |       |
|----------------------------------|--------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Fiscal  2003:                    |   |               |       |                |       |               |       |                |       |
| Total  net revenues              |   | **$**              | **4,325**  | ** **          | **$**      | **2,725**          | ** ** | **$**               | **2,047**  | ** ** | **$** | **10,406** | ** ** |
| Gross profit                     |   | **1,569**          | ** ** | **403**             | ** ** | **63**             | ** ** | **2,036**           | ** ** |
| Net loss                         |   | **$**              | **(1,415** | **)**               | **$**      | **(2,380**         | **)**      | **$**               | **(23**    | **)** | **$** | **(2,548** | **)** |
| Net  loss per share – basic |   | **$**              | **(0.02**  | **)**               | **$**      | **(0.04**          | **)**      | **$**               | **0.00**   | ** ** | **$** | **(0.04** | **)** |
|                             |   |               | ** ** |                | ** ** |               | ** ** |                | ** ** |
| Fiscal 2002:                     |   |               |       |                |       |               |       |                |       |
| Total  net revenues              |   | $                  | 20,315     |                | $          | 13,817             |       | $                   | 11,166     |   | $ | 10,582 |   |
| Gross profit                     |   | 264                |       | 205                 |       | 2,295              |       | 3,175               |       |
| Net loss                         |   | $                  | (6,454     | )                   | $          | 14,341             |       | $                   | (3,679     | ) | $ | (23,183 | ) |
| Net  loss per share – basic |   | $                  | (0.10      | )                   | $          | 0.22               |       | $                   | (0.06      | ) | $ | (0.36 | ) |

#### ** **

#### **Note 18 –Subsequent Events**

#### ** **

In July 2003,GoVideo entered into a financing agreement last amended and restated in May2004.  The maximum line of credit availablewas $40,000,000 (reduced to $30,000,000 on July 15, 2004) limited by aborrowing base determined by specific inventory and receivable balances, andprovides for cash loans, letters of credit and acceptances.  The agreement, as amended, matures July 21,2007.  Interest is charged at prime plus1/2 percent subject to a minimum of not less than $15,000 per calendarmonth.  GoVideo pays a monthly fee onthe unused balance of the line of credit of 0.25 percent per year.  Borrowings under GoVideo’s line of creditare collateralized by all of GoVideo’s assets and up to $5,000,000 of thecredit facility is guaranteed by Lotus. Under the current credit facility, GoVideo is required to comply withcertain financial covenants and conditions including minimum levels of netincome.  During April and June,2004 GoVideo did not comply with the financial covenants by not earning therequired minimum net income.  GoVideoreceived a waiver letter from the lender for the April 2004noncompliance.    However, the lenderwill not waive the June 2004 noncompliance.  As a result, interest charged could increase from prime plus 1/2percent to prime plus three percent. GoVideo is currently attempting to negotiate amendments to the creditagreement to reduce the thresholds required by the financial covenants.

 

Subsequentto June 30, 2003, the Company advanced $7,462,000 to Go Video to fund GoVideo’s inventory purchases and fund operating expenses.  GoVideo paid back $1,200,000 of the advanceon June 30, 2004.  The remainingadvances, which accrue interest at annual rates of 3% to 5%, were due atvarious dates through January 2004. The advances have not been repaid, and Go Video and the Company arecurrently negotiating extensions for the due dates.

 

Inconnection with the President and co-founder’s resignation from Correlant inJuly 2003 (See Note 1), the Company entered into an Employment SeparationAgreement/Consulting Agreement with the former President.  Under the terms of the agreement, Correlantagreed to pay to the former President $20,000 and repurchase 327,000 Correlantshares held by the former President for $0.07 per share for a total of$23,000.  To date, the former Presidentremains in possession of his Correlant stock. In addition, the Company agreed to pay the former President $23,000 permonth for one year to provide advice and input related to certain Correlantbusiness matters.

 

Inconnection with the VP of Engineering and co-founder’s resignation fromCorrelant in July 2003 (See Note 1), the Company entered into anEmployment Separation Agreement/Consulting Agreement with the former VP ofEngineering.  Under the terms of theagreement, Correlant agreed to pay the former VP of Engineering $2,000 andrepurchase 272,000 Correlant shares held by the former VP of Engineering for$0.07 per share for a total of $19,000. To date, the former VP of Engineering remains in possession of hisCorrelant stock.  In addition, theCompany

 

F-33

----

 

agreedto pay the former VP of Engineering $20,000 per month for one year to provideadvice and input related to certain Correlant business matters.

 

InAugust 2003, the Company entered into a new facility lease and moved itsexecutive offices.  The lease, whichcommenced on August 1, 2003, is on a month-to month basis and provides formonthly rental of $4,000 per month.

 

InSeptember 2003, the Company entered into an agreement with TCL InformationTechnology Industrial (Group) Ltd, an affiliate of TCL Industries whereby theCompany sold its 50% interest in TCL Digital for an aggregate amount of$5,604,000.  $1,842,000 was applied torepay the sum payable under the promissory note dated August 18, 2003issued by the Company in favor of TCL International Holdings Limited (“TCLHoldings”), TCL Industries parent company. The balance of $3,762,000 was paid to the Company.  The gain on the sale was $1,053,000.

 

FromSeptember 2003 through June 2004, the Company repurchased 6,936,000shares of its common stock at $0.30 per share for a total cost of$2,081,000.   The Board of Directorsplans to continue to review potential repurchases of its common stock and willcontinue to approve the repurchase transactions on a case by case basis.

 

OnMarch 7, 2004, the Company’s board of directors adopted resolutionsproposing and approving a change of the Company’s name from “Lotus Pacific,Inc.” to “Opta Corporation.”  OnJune 29, 2004, the Company filed a Preliminary Information Statement,Schedule 14C, with the Securities and Exchange Commission (“SEC”) toinform all stockholders of the approval of an amendment to the Company’sCertificate of Incorporation providing for the name change.  A majority of the Company’s stockholdersconsented in writing to the name change. The name change will become effective upon filing the DefinitiveInformation statement, Schedule 14C, with the SEC.

 

In March 2004,GoVideo executed two-year employment agreements with its top executives for anaggregate base salary of $779,000 per year, plus a severance package to includenine to ten months of base salary for terminations without cause.

 

OnApril 1, 2004, Lotus filed an action against TurboComm, in New JerseyFederal Court, asserting two causes of action for breach of contract, and over$900,000 unpaid interest. On May 27, 2004, Lotus filed a Request to EnterDefault against TurboComm.  OnJune 29, 2004, a Default was entered against TurboComm. Lotus is in theprocess of reaching a settlement with TurboComm.

 

OnApril 14, 2004, Correlant filed a lawsuit against TurboComm in theDistrict Court of Taiwan seeking to collect TurboComm’s outstanding debt ofapproximately $2,300,000. Correlant sold products to TurboComm and paid certainlicense fees on TurboComm’s behalf. Correlant invoiced TurboComm for all products and license fees, yetTurboComm refuses to pay.  OnJuly 30, 2004, Correlant reached a settlement agreement withTurboComm.  Under the agreement,Correlant agreed to with withdraw its lawsuit against TurboComm in exchange forthe transfer of 700,000 Series A and 300,000 Series C shares of Correlantpreferred stock owned by TurboComm. Both parties mutually agreed to release anddischarge any and all claims that each may have against the other party.

 

OnJuly 7, 2004, the Company’s Board of Directors approved the commencementof a new wholly-owned subsidiary, Go Video DigiTech (Huizhou) Co., Ltd.(“DigiTech”), which will be located in Guangdong, China.  DigiTech will market GoVideo’s MP3players.  The Company plans to investapproximately $  500,000 inthe new subsidiary.  TCL MultimediaElectronics R&D Center (“TCL Multimedia”), an affiliate company of TCL, iscurrently expending some resources during the start up phase of GoVideo China.

 

OnJuly 7, 2004, the Company’s Board of Directors approved the closure ofBeijing Lotus.  All assets of BeijingLotus will be transferred to DigiTech.

 

Aspart of the wind down and cessation of Correlant’s historical operations,Correlant’s Board of Directors approved the termination of the CorrelantDeferral Plan effective August 31, 2004.

 

F-34

----

 

BetweenNovember 2003 and June 2004, GoVideo obtained credit terms fromvarious suppliers totaling approximately $16,000,000 through corporateguarantee letters from TCL Industries Holdings Limited (a significantshareholder of the Company) and TCL Holdings, both of which are relatedparties.  In addition, GoVideo is ableto obtain more advantageous terms from certain vendors in China by purchasingproducts from those vendors through TCL.

 

F-35

----