**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ý****        ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the Fiscal Year Ended June 30, 2005**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition periodfrom           to           **

 

**Commission File Number: 000-24999**

 

## **OPTA CORPORATION**

(Exactname of registrant as specified in its charter)

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

 

### **1350 Bayshore Highway,Suite 600, Burlingame, CA 94010**

(Addressof principal executive offices, Zip code)

 

Registrant’stelephone number, including area code: **650-579-3610**

 

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 mark if the  registrant is a well-known seasoned issuer, as defined in Rule 405 of the  Securities Act. |
|---------------------------------------------------------------------------------------------------------------------------|
| Yes     o       No    ý                             |

 
| Indicate by check mark if the  registrant is not required to file reports pursuant to Section 13 or Section  15(d) of the Act. |
|--------------------------------------------------------------------------------------------------------------------------------|
| Yes     o       No    ý                                  |

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

 

Indicate by check mark if disclosure ofdelinquent filer pursuant to Item 405 of Registrant S-K is not containedherein, and will not be contained to the best of Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý |
|---------------------------|---------------------|------------------------------|

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Act). Yes    o     No    ý

 

The aggregate market value of the registrant’svoting and non-voting Common Stock held by non-affiliates of the registrant wasapproximately $1,490,283 (computed using the adjusted closing sales price of $0.061per share of Common Stock on January 31, 2006 as reported by the Pink Sheets). Sharesof Common Stock held by each officer and director and each person who owns 5%or more of the outstanding Common Stock have been excluded in that such personsmay be deemed affiliates. The determination of affiliate status is notnecessarily a conclusive determination for other purposes.

 

The number of shares of CommonStock outstanding as of January 31, 2006 was 50,037,538.

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

 

##### None.

 

 

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##### **PARTI**

#####  

**Item 1. Business**

 

***ExplanatoryNote - Delays in Reporting***

 

This Annual Report on Form 10-Kfor Opta Corporation (formerly Lotus Pacific, Inc.) (the “Company” or “Opta”)for fiscal year ended June 30, 2005 is being filed after the required duedate as a result of Opta currently taking steps (“Going Private Transaction”)to complete a corporate reorganization that will enable Opta to become anon-reporting company with the Securities and Exchange Commission (the “Commission”).The Going Private Transaction will enable us to terminate our PeriodicReporting Obligations so that we may continue future operations as a privatecompany, relieving us of the costs, administrative burdens and competitivedisadvantages associated with operating as a public company. Following theadoption of Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), the amount ofmanagement time and Company resources required to comply with such requirementshave become overly burdensome for a company of our size. On June 17, 2005 andAugust 2, 2005, our Board of Directors adopted resolutions proposing and approving theGoing Private Transaction. On July 18, 2005 and August 2, 2005, stockholderswho collectively own approximately 60.2% of our outstanding capital stock,consented in writing to the Going Private Transaction; the vote of more than50% of our outstanding stock was required. The Going Private Transaction wasapproved twice by both the Board of Directors and the stockholders as a resultof entering into several material transactions subsequent to the firstapproval.

 

On July 8, 2005 we filed apreliminary Schedule 14C and a Schedule 13E-3 describing the planned GoingPrivate Transaction. Both documents were amended to incorporate significantcompany events and filed August 3, 2005. The Staff of the Commission reviewedour Schedules 14C and 13E-3 and responded with inquires and requests foradditional information. We answered all of the Staff’s inquires and requestsfor additional information in a letter dated October 3, 2005 and amended ourSchedule 14C and Schedule 13E-3 on October 3, 2005. We subsequently received afurther letter from the Staff dated October 18, 2005. We have not yet filed anamendment to the 14C and 13E, in response to the Staff’s comments because, asnoted above and below, we have been delayed in completing our auditedfinancials statements for the year ended June 30, 2005 and the interim periodsended September 30, 2005 and December 31, 2005, which would be required to beincluded in such amendments. Because we have not cleared comments from the Staffwith respect to our Schedule 14C and Schedule 13E-3, we have not yet filed our definitive Schedule14C for the Going Private Transaction and consequently have notfiled our Form 15 – Certification and Notice of Termination of Registration. Asa result, we are required to continue our periodic reporting under theSecurities Exchange Act of 1934. We are working diligently toward completingour Going Private Transaction and we are in the process of responding to the Staff’scomments with respect to such Schedules. We originally intended to complete ourGoing Private Transaction prior to the deadline for filing its Form 10-K forthe period ended June 30, 2005, but our efforts were delayed due to a series oftransactions effected by us in the past few months to address the continuinglosses at Opta Systems, LLC d/b/a GoVideo (“Opta Systems” or “GoVideo”), ourmain operating subsidiary and the dissolution of Correlant Communications, Inc.(“Correlant”), our non-operating subsidiary. Additionally, as previously reportedwe dismissed our former accountant and engaged a new principal accountant onSeptember 27, 2005 as part of a continuing effort to save costs. As a result,we were unable to complete this Form 10-K by the required due date.

 

***ExplanatoryNote – Updated Information Subsequent to Fiscal 2005***

 

Because this report relates tofiscal 2005, except as otherwise noted herein, this report speaks as of June 30,2005. The Company has not updated the disclosures in this report to speak as ofa later 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 stockholdermatters;

•      Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations;

•      Item 8. Financial Statements and Supplementary Data Note 1 – Businessand Background and Note 20 – Subsequent Events.

•      Item 12. Security Ownership of Certain Beneficial Owners andManagement;

•      Item 13. Certain Relationships and Related Transactions;

•      Item 14. Principal Accounting Fees and Services; and

•      Item 15. Exhibits

 

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Accordingly, the disclosure inthis report does not contain complete and updated information regarding theCompany and its operations as of the date of filing this report. All suchinformation contained in this report therefore is subject to updating andsupplementing to be provided by the Company in its reports to be filed with theCommission for periods subsequent to fiscal 2005.

 

###### ***Company Overview***

######  

The Company incorporated inDelaware on June 25, 1985. Opta is a holding company that conductsbusiness through its subsidiaries. During the reporting period, the Companydeveloped, managed, and operated emerging consumer electronics andcommunications companies, and focused on developing next generation consumerelectronics and communication products. The Company provides its subsidiarieswith capital and strategic and infrastructure services. As discussed below,subsequent to fiscal 2005, the Company entered into several materialtransactions, which dramatically changed the Company’s operations. Allreferences to “Opta Corporation,” “Opta,” “Company,” “we,” “our” or “us” meanOpta Corporation and its subsidiaries.

 

###### ***Business Developments Subsequent to Fiscal 2005***

######  

As discussed above, we arecurrently in the process of a corporate reorganization that will enable us tobecome a non-reporting company. The purpose of the Going Private Transaction isto enable us to terminate our Periodic Reporting Obligations and enable us tocontinue future operations as a private company, thereby relieving us of thecosts, administrative burdens and competitive disadvantages associated withoperating as a public company. We intend to accomplish this purpose by reducingthe number of holders of record to fewer than 300 by cashing out certainstockholders as described in our preliminary Schedule 14C filed on October 3,2005.

 

Because the results of a GoingPrivate Transaction are more predictable and automatic as compared to otheralternatives of ways to complete the process of going private, our Board ofDirectors believes that the Going Private Transaction is the most expeditiousand economical way of reducing the number of holders of record to fewer than300 thereby positioning us to effect the termination of our Periodic ReportingObligations. The Going Private Transaction will become effective once we becomecurrent in all our required filings, clear all comments with the Staff of the Commission, file ourdefinitive Schedule 14C and Schedule 13E-3, consummate the Going PrivateTransaction and file a Form 15– Certification and Notice of Terminationof Registration.

 

As of June 30, 2005, Opta hadtwo significant subsidiaries:  Correlant andGoVideo. Both subsidiaries entered significant transactions subsequent tofiscal 2005.

 

*CorrelantCommunications*

 

As reported in our Form 8-K asfiled on July 21, 2005, on July 18, 2005, the Board of Directors of Correlantapproved the dissolution of Correlant, pending approval by the Correlant shareholders.At a Special Meeting of Shareholders held August 5, 2005, Correlantshareholders approved the dissolution of Correlant. At the time of thedissolution, Opta held 10,000 shares of Series D Preferred Stock of Correlantand approximately 13,900,000 shares of common stock of Correlant. To date, Opta has received liquidationproceeds of $10,000,000 for its Series D preferred stock and $1,276,000 for itscommon stock.

 

*GoVideo*

 

As reported in our Form 8-K asfiled on July 29, 2005, on July 26, 2005, we entered into a series oftransactions involving and relating to GoVideo. Each of such transactions wasconditioned upon each other and the consummation of such transactions wasdeemed to occur simultaneously.

 

As previously reported, on July26, 2005 pursuant to a Participation Agreement (the “Participation Agreement”)between us and Wells Fargo Business Credit, a division of Wells Fargo Bank, NA(“Wells”), we acquired an 80% participation interest in the credit facility ofour wholly-owned subsidiary, GoVideo, under the Credit and Security Agreementdated as of July 21, 2003, as amended to date (the “Wells Credit Agreement”)between GoVideo and Wells. On October 13, 2005, we amended the ParticipationAgreement to provide for revolving advances in an amount up to $2,000,000 overthe borrowing base (such revolving advances over the borrowing base to bereferred to as “Overline Advances”) and as a result, our participationpercentage was 80% with respect to the revolving advances that were notOverline Advances and 100% with respect to Overline Advances. The maximumamount of the line of credit remained at $4,000,000. Concurrently with thepurchase of the participation and our collateral deposit of $800,000 in cashcollateral to secure our obligations and guaranty of the Wells

 

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Credit Agreement, Wellsreleased its lien on the intellectual property assets of GoVideo under theWells Credit Agreement.

 

Pursuant to a forbearanceagreement dated July 22, 2005, most recently amended by Wells January 20, 2006,between GoVideo and Wells (the “Forbearance Agreement”), Wells agreed toforbear from exercising its rights and remedies with respect to existingdefaults under the Wells Credit Agreement from the date of the agreementthrough January 27, 2006 and modify certain terms of the Credit Agreement,including reducing the maximum line of credit to $4,000,000 and waiving thetermination fee. Wells also agreed that defaults by GoVideo under financialcovenants in the Wells Credit Agreement and with respect to material adversechanges will not constitute new defaults under that agreement. As a condition to the forbearance byWells, GoVideo agreed to pay to Wells a fee of $300,000 by adding the fee tothe loan’s principal balance in two installments, $150,000 on September 2, 2005and $150,000 on January 4, 2006. Opta agreed to enter into the ParticipationAgreement and to deposit $800,000 in cash collateral to secure Opta’s guarantyas described above.

 

On January 27, 2006, pursuant to a Loan Sale Agreement dated January20, 2006 between Opta and Wells, the Participation Agreement was terminated andOpta purchased the entire right, title and interest of Wells under, and Optabecame the Lender under, the Wells Credit Agreement. The purchase price was$2,148,000, which consisted of the following: $2,113,000 principal, $23,000interest and unused line of credit fees, and $12,000 legal and audit feesincurred by Wells. The full amount of Opta’s participation interest wascredited against such purchase price. On February 1, 2006, Opta, as suchLender, and GoVideo further amended the Forbearance Agreement to extend theForbearance Period to April 30, 2006, and to terminate the guaranty and thesubordination agreement previously delivered by Opta to Wells under the CreditAgreement.

 

Pursuant to a purchase and saleagreement dated July 26, 2005 (the “TCLMM Agreement”) among GoVideo, TCLMultimedia Technology Holdings Limited, a Cayman Islands company with shareslisted on the Stock Exchange of Hong Kong Limited (“TCLMM”), TCL Industries,Asia Focus Industrial Limited (“Asia Focus”) and Opta, TCLMM agreed to assumethe debt obligations owed by GoVideo to TCL Industries and Asia Focus underthree promissory notes, with obligations totaling approximately $11,000,000 atJuly 26, 2005 (“Existing Obligations”). The Existing Obligations werepreviously guaranteed by Opta, and secured by Opta’s pledge of 100% of theCommon Stock and Series D Preferred Stock of Correlant, held by Opta. Pursuantto the TCLMM Agreement, TCL Industries and Asia Focus released Opta’sobligations as guarantor under the Existing Obligations and released Opta’spledge of the Correlant shares.

 

In consideration for TCLMM’sassumption of the Existing Obligations, GoVideo (i) assigned to TCLMM all ofGoVideo’s right, title and interest in and to certain significant intellectualproperty assets of GoVideo (the “GoVideo IP”) and (ii) issued a promissory notein favor of TCLMM (the “TCLMM Note”) for an initial principal amount of $1,000,000,representing the preliminary difference between the value of the GoVideo IP, asdetermined by a third-party appraiser, and the Existing Obligations assumed byTCLMM. A subsequentindependent appraisal of the GoVideo IP was completed, which reduced the finalvaluation of the GoVideo IP by $700,000. As a result, the TCLMM Noteautomatically increased to $1,700,000.

 

The TCLMM Note principal and interest, at amonthly rate of 0.257%, was originally due and payable on January 26, 2006. Pursuantto the TCLMM Agreement, GoVideo had granted to TCLMM a subordinated lien on allof GoVideo’s assets, as security for the TCLMM Note, junior to the lien underthe Wells Credit Agreement. In addition, Opta had agreed to guaranty GoVideo’sobligations under the TCLMM Note pursuant to a Guaranty dated July 26, 2005. GoVideopaid the principal and interest on the TCLMM Note in full on February 14, 2006.

 

Under the TCLMM Agreement,TCLMM granted to GoVideo a 90-day, non-exclusive, worldwide license to use theGoVideo IP on a royalty-free basis. On August 30, 2005, GoVideo and TCLMM enteredinto a non-exclusive license agreement through October 24, 2008, with an automatic renewal for subsequent twoyear terms unless terminated by either party by ninety days written notice ofintention not to renew. Under the terms of the agreement, GoVideo agreed to pay TCLMM a royaltybased on the cost of goods sold in connection with the distribution, sale,advertising and promotion of certain consumer electronics products under theGoVideo tradename.

 

TCLMM and TCL Industries are affiliates of TCLIndustries Holdings (HK) Ltd (“TCL”), the majority stockholder of the Company.

 

*GoVideo’s New Business Model*

 

Currently, we are concentratingour efforts on the Going Private Transaction and finalizing and implementinga new business model for our subsidiary GoVideo in an attempt to return toprofitability and generate a positive cashflow. Prior to the July 2005 restructuring transactions, GoVideo conductedits business through an Original Equipment Manufacturer (“OEM”) model andcarried monthly inventories between $10,000,000 and $18,000,000 during the 12months prior to the July 2005 restructuring transactions. Its businessoperations were financed through related party loans and a line of credit fromWells

 

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Fargo, which incurred highinterest expense. Under the new business model, we currently plan that GoVideo will not carryinventories and will act as a brand licensing provider by bridgingmanufacturers and retailers. We believe this will enable GoVideo to reduce theoverhead and risks related to carrying large inventories. GoVideo’s managementis currently working with GoVideo’s suppliers to finalize its future businessmodel and operations. As this is a new business model, we cannot guarantee itssuccess nor its successfulimplementation or transition. Additionally, we cannot guaranteethat once the new business model is implemented that GoVideo will return toprofitability or generate a positive cashflow. Management currently believes that if the newbusiness model cannot be successfully implemented, GoVideo will ceaseoperations. If GoVideo is shut down and has any assets subsequent to theshutdown, the assets will be combined with the proceeds from the liquidation ofCorrelant. If such events wereto occur, we anticipate we would use the combined assets toidentify market opportunities that will create and accelerate the growth andsuccess of Opta complementary with the Company’s business and long-termstrategies while leveraging our significant experience in the consumerelectronics market.

 

***SignificantBusiness Developments and Subsidiary Activity During the Reporting Period***

 

Previous to initiating theGoing Private Transaction and the aforementioned restructuring transactions andchange in GoVideo’s business model subsequent to fiscal 2005, our strategy wasto increase revenue, move toward profitability and generate cashflow fromoperations as a result of focusing on the consumer electronics market. Toachieve these goals, we pursued the following strategies during the reportingperiod:

 

•      Introduction of new innovative products to the market; and

•      Increase the GoVideo brand recognition in both the U.S. markets andabroad.

 

Readersof this report are cautioned that the following discusses strategies andactivities during the reporting period and, except for the changes in thebusiness model discussed above and elsewhere in this report, is not updatedinformation regarding the Company and its operations as of the date of filingthis report.

 

***Introduction of new innovative products to the market***

 

During fiscal 2005, GoVideobegan distributing the MP3 Rave MP branded product. During fiscal 2004, GoVideointroduced its digital video disc (“DVD”) Recorder + VCR.

 

***Increase the GoVideo brand recognition in both the U.S. markets andabroad***

 

Opta approved the formation ofa new wholly-owned subsidiary in China, to market GoVideo’s MP3 players underthe GoVideo brand name

 

During the reporting period,Opta had two significant subsidiaries, presented in order of significanceduring fiscal 2005:  GoVideo and Correlant.The following discussion is not necessarily indicative of current events. Instead,it describes operations during the period covered by this report.

 

*GoVideo*

 

GoVideo is a product line thatwe purchased in April 2003 from SONICblue Incorporated, a Delaware corporation(NASDAQ: SBLU), and Sensory Science Corporation, a Delaware corporation andwholly-owned subsidiary of SONICblue.

 

*GoVideoBusiness Strategy*. GoVideo’s strategy was to develop, market, and distribute innovative,high performance consumer electronic products that incorporate advancedtechnology, ease of use, and superior industrial design. GoVideo’s strategy wasbased on the belief that there is a segment of the consumer electronics marketthat desires high-performance products that offer value to the consumer andprofit opportunities to dealers. Because many of GoVideo’s competitors werefocused on higher volume, lower priced product lines where product and servicedifferentiation was difficult to sustain, we focused on technology, engineeringand industry know-how, product distribution network and reputation for bringinginnovative products to the electronics marketplace.

 

Historically, the GoVideoproduct line has been known for innovation and was the first company to bringthe dual deck VCR and DVD/VCR combination to market as well as the firstnetworked DVD player. The consumer electronics industry has been marked by anincrease in what were traditionally contract manufacturers creating their ownbrand name and competing in the marketplace.

 

*GoVideoProducts.*GoVideoaccounted for substantially all of the Company’s consolidated net revenuesduring fiscal 2005

 

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and 2004 and 48% during fiscal2003. The GoVideo product line, originally established in 1984, designed andmanufactured product lines in the consumer electronics industry, including aRave MP branded line of MP3 players (“MP3”), DVD players, portable DVDs,DVD-Video Cassette Recorder Combos (“DVR”), Dual-Deck VCRs, DVD Recorders, DVDRecorder + VCR, and liquid crystal display (“LCD”) TVs.

 

The principal consumerelectronic products offered by GoVideo during fiscal 2005, 2004 and 2003 werethe DVR, the DVD Recorder + VCR and MP3s.

 

*DVR*. GoVideo offered several models of theDVR that vary from one another by features and configurations. This product hasthe ability to:

 

•      Play DVD discs and VHS tapes;

•      One touch copy transfer DVD to VHS tapes;

•      Progressive Scan, which delivers the highest quality DVD-Video on adigital TV; and

•      Schedule recordings in advance.

 

The following table shows netrevenues attributable to GoVideo’s DVR (*in thousands*):

 

| ** **                                                            | ** ** | **Net  Revenue** | ** ** | **Percentage of  Consolidated Net  Revenue** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
| Year Ended June 30, 2005                                              |       | $                | 45,789     |                                                   | 35         | % |
| Year Ended June 30, 2004                                              |       | 71,601           |       | 57                                                     | %          |
| April 18, 2003, the purchase  date of GoVideo, through  June 30, 2003 |       | 7,471            |       | 38                                                     | %          |
|                                                                       |            |                  |            |                                                        |            |  |

 

DVD Recorder + VCR. The DVDRecorder + VCR was introduced during the second quarter of fiscal 2004. GoVideooffers several models of the DVD Recorder + VCR that vary from one another byfeatures and configurations. This product has the following features:

 

•      Records on DVD-R or rewritable DVD-RW discs or VHS in one easy to useunit;

•      One touch copy transfer DVD to VHS tapes or VHS tapes to DVD;

•      All Sources, All Outputs – Plays VHS or DVD through RF, Composite,S-Video, or Component out with one connection convenience;

•      AutoPlayTM – Skips ads and menus and goes to right to the start of theDVD movie;

•      Versatile Entertainment – Plays VHS Tape, DVDs, DVD-R/RW, DVD+R/RW,Music CDs, Kodak Picture CDs, MP3 audio and JPEG image files on CD-R/RW;

•      Progressive Scan, which delivers the highest quality DVD-Video on adigital TV; and

•      Schedule recordings in advance.

 

The following table shows net revenuesattributable to GoVideo’s DVD Recorder + VCR (*in thousands*):

 

| ** **                                                            | ** ** | **Net  Revenue** | ** ** | **Percentage of  Consolidated Net  Revenue** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|
| Year Ended June 30, 2005                                              |       | $                | 33,188     |                                                   | 26         | % |
| Year Ended June 30, 2004                                              |       | 23,164           |       | 18                                                     | %          |
| April 18, 2003, the purchase  date of GoVideo, through  June 30, 2003 |       | —           |       | —                                                 | %          |
|                                                                       |            |                  |            |                                                        |            |  |

 

*MP3s.*During the first quarter of fiscal 2005,GoVideo introduced its line of MP3s. GoVideo offers two main models, which havethe following features:

 

•      Playmusic from most online MP3 and Windows Media Audio (“WMA”) services;

•      Hi-speedUniversal Serial Bus (“USB”) 2.0 for ultra-fast music transfers;

•      Quickand easy - drag and drop music to and from PC;

 

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•      MemoryExpansion slot for additional storage;

•      Plays16+ Hours on one AAA Battery;

•      128/256MBbuilt-in memory (up to 4/8 hours of music); and

•      FMtuner with 20 Presets.

 

Net revenue attributable to theMP3 product was $28,103,000, or 22% of consolidated net revenue, during fiscal2005.

 

*GoVideoRevenue to Significant Countries.*During fiscal 2005, 2004 and 2003, allGoVideo’s revenues were generated in the U.S.

 

*GoVideoCustomers*.A relatively small number of customers account for a significant percentage of consolidatednet revenues. The percentage of consolidated net revenues derived fromsignificant customers is detailed as follows:

 

| ** **                                                           | ** ** | **Costco  Wholesale  Corporation** | ** ** | **QVC** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|---------|------------|
| Year Ended June 30, 2005                                             |       | 42                                 | %          | 5       | %          |
| Year Ended June 30, 2004                                             |       | 41                                 | %          | 14      | %          |
| April 18, 2003, the purchase  date of GoVideo, Through June 30, 2003 |       | 31                                 | %          | —  | %          |

 

*GoVideoSeasonality.*During the reporting period, general economic conditions had an impacton GoVideo’s business and financial results. And as a result of competing inthe consumer electronic industry, GoVideo’s quarterly results reflect distinctseasonality in the sale of products. Revenues typically were highest from September throughDecember. However, GoVideo was only a “spot supplier” to some of its customers,i.e. GoVideo sells to certain customers only when these customers go out to bidfor specific products. GoVideo didn’t supply a constant stream of product tothese customers. Revenues with these customers differed from the traditionalseasonality in the consumer electronics industry depending on variouscircumstances including product availability and pricing.

 

*GoVideo Product Development and Manufacturing.*Product development activities consistedof hardware, firmware, and software design and engineering as well asco-development and engineering of products with manufacturers and technologypartners. Research was focused on the development of lower-cost consumerelectronics and evaluation of potential new products, acquisitions, or jointventures.

 

The following table showsGoVideo-sponsored research and development expenses (*in thousands*):

 

| **Year ended June 30,** | ** ** | **Dollars** | ** ** | **Percentage of  GoVideo’s Net  Revenues** | ** ** |
|----------------------------------------|------------|-------------|------------|------------------------------------------------------|------------|
| 2005                                   |       | $           | 2,113      |                                                 | 2          | % |
| 2004                                   |       | 1,089       |       | 1                                                    | %          |
| 2003                                   |       | 607         |       | 7                                                    | %          |
|                                        |            |             |            |                                                      |            |  |

 

#### **Independentcompanies manufactured most of GoVideo’s products. At any one time, GoVideo hadmultiple contract manufacturers. These manufacturers were constantly evaluatedin order to minimize the risks associated with outsourcing the manufacturingprocess. These manufacturers are located in Korea, Taiwan and China.**

#### ** **

*GoVideoSales and Marketing*. GoVideo’s marketing strategy during the reporting period was to sellproducts with the support of independent sales representatives, who alsorepresented many other brand name consumer electronic products, specific tocertain geographic territories throughout the U.S. GoVideo sold its productlines directly to retailers nationwide including numerous national and regionalchains, catalog accounts, specialty stores, warehouse clubs and home shoppingchannels.

 

*GoVideoBacklog and Inventory.*GoVideo purchased completed units from contract manufacturers. As such,GoVideo never carried a raw materials inventory. GoVideo’s practice was tomaintain sufficient finished goods inventory to fill orders promptly and notcarry a backlog of orders. Accordingly, backlog information was not meaningfulto an understanding of its business and was not indicative of actual shipmentsmade to customers in any period. GoVideo managed and maintained inventory in away that allowed it to meet all expected product demand while maintainingflexibility to reallocate manufacturing capacity to improve efficiency andrespond to changes in supply and demand. GoVideo’s practice was to

 

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purchase inventory based oncustomer orders or forecasts to mitigate the inherent dangers of pricedecreases in the volatile consumer electronics market.

 

*GoVideo Intellectual Property.*GoVideo developed and owned, throughJuly 26, 2005, the proprietary operating system software used by most of itsproducts including its Dual-Deck technology. Intellectual property rights thatapply to various products include patents, trademarks and the GoVideo tradename. To distinguish GoVideo products from competitors’ products, GoVideoobtained certain trademarks and tradenames for products. These trademarks andtradenames include GoVideo, AmeriChrome, California Audio Labs, Rave MP,Cinevision, Cal Audio and California Audio. As previously discussed, GoVideoassigned the GoVideo IP to TCLMM pursuant to an agreement dated July 26, 2005. OnAugust 30, 2005, GoVideo entered a non-exclusive agreement with TCLMM tolicense the GoVideo IP, for a royalty based on the cost of goods sold throughOctober 24, 2008 with anautomatic renewal for subsequent two year terms unless terminated by eitherparty by ninety days written notice of intention not to renew.

 

*GoVideo Competition and Market Analysis.*The market for consumer electronics isextremely competitive and is characterized by rapid technological change. Inthe DVR category, GoVideo’s main competitors included: Sony Corporation, Toshiba,Samsung, Sylvania, Zenith, Panasonic, and JVC. During fiscal 2005, GoVideo’sDVR was in the top four companies in terms of units sold, with an estimated 11%of the market.

 

#### **Inthe DVD Recorder + VCR category, GoVideo’s main competitors included Panasonic,Sony Corporation, LG Electronics, Hitatchi, Sharp, Sansui, JVC, Broksonic,Samsung, and Zenith. GoVideo has maintained a strong market position since itsintroduction of this product. In the past, GoVideo has at times held the numberone market share position. However, due to product introductions by strongJapanese brands, GoVideo has not been able to maintain the number one marketshare position for any meaningful length of time. During fiscal 2005, GoVideo’sDVD Recorder + VCR was in the top three companies in terms of units sold, withan estimated 15% of the market.**

#### ** **

In the MP3 category, GoVideo’smain competitors included:  AppleComputer, Inc., iRiver, Sandisk Corporation, Creative Technology, Ltd. and Rio.During fiscal 2005, GoVideo’s MP3 player was in the top five companies in termsof units sold, with an estimated five percent of the market.

 

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

#### ** **

•      Price;

•      Flexibility to move with market demands;

•      Quality;

•      Brand recognition;

•      Product features;

•      Product support including consumer customer service and timely deliveryper forecast; and

•      Product innovation including the patented Dual Deck technology.

 

Because GoVideo never hadmanufacturing capabilities, GoVideo had the competitive advantage of being ableto respond to market demands extremely quickly. This strategy was disadvantageousbecause GoVideo had less leverage when negotiating the purchase price withcontract manufacturers. Another negative aspect of not having manufacturingcapabilities was that GoVideo’s customers had the ability to go straight to themanufacturers and purchase the product.

 

*CorrelantCommunications*

 

In March 1999, the Companyacquired 95% of the issued and outstanding common shares of Correlant (formerlyTurboNet Communications, Inc.) representing an 81% ownership interest inCorrelant. Based in San Diego, California, Correlant designed, developed andmarketed telecommunications products to cable operators, network serviceproviders, and communications network users in the U.S. and Asian countries.

 

Correlant was incorporated inCalifornia on February 13, 1996 under the name TurboNet Communications,Inc. and reincorporated in Delaware on October 4, 2000 as CorrelantCommunications, Inc.

 

Prior to February 2002,Correlant sold Data-Over-Cable System Interface Specification (“DOCSIS”)certified cable modems and in certain instances, the MAC bundled with Correlant’scable modem software (“MAC+software”), both key components of the completedcable modem. Correlant developed and owned the proprietary software used in thecable modem. Effective February 2002, Correlant changed its business modelwhereby it primarily sold the MAC+software and only sold the

 

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completed cable modem inspecific circumstances. Instead of focusing on selling the completed cablemodem, Correlant concentrated efforts toward selling only the MAC+software. Thenew business model was a result of Correlant’s attempt to increase gross profitpercentage, streamline business operations and reduce operating expenses.However, this business model ultimately proved unsuccessful, as gross marginscontinued to decrease as a result of increased competition in the cable modemmarket and more broadly, the high-speed Internet market. In addition, many ofCorrelant’s major customers chose to either design and manufacture their ownDOCSIS cable modems or to utilize competitors’ platforms which wereincompatible with Correlant’s products.

 

During this period, Correlantfaced competition from other technologies that enabled high-speed Internetaccess services 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.

 

In February 2003, Opta, asmajority stockholder of Correlant, appointed four new members to Correlant’sBoard of Directors, effectively taking control of the Board. Prior to this,Opta had only one representative on Correlant’s Board of Directors and did notcontrol Correlant’s Board or its operations. Immediately thereafter, the Boardof Directors created a new Executive Committee of the Board, comprised of twomembers who are Opta management, to act on behalf of the Board of Directors andoversee the Correlant’s management and operations.

 

As previously reported,effective July 31, 2003, Correlant’s President, Chief Executive Officerand co-founder of Correlant resigned as a director of Correlant. From that dateforward he no longer served as President and CEO of Correlant. As part of the separation, Optaentered an agreement in February 2004 to repurchase all shares of Optacommon stock owned by Correlant’s former President. As of June 30, 2004,Correlant’s former President no longer owns any Opta stock. Inconnection with the resignation, Correlant entered into an EmploymentSeparation Agreement with the former President. From July 31, 2003 until December 23,2003, Correlant worked to find a permanent CEO and retained outside consultantsto advise and assist during the transition period. Such consultants werecharged with evaluating Correlant’s business operations, its products anddemand for its products, and future business prospects.

 

Upon recommendation of itsconsultants, Correlant began a substantial reduction in its workforce andoperations to reduce operating expenses, reducing the number of Correlantemployees from 34 as of August 1, 2003 to 18 employees as of December 23,2003 and two part-time employees, who are also Opta management, as of June 30,2005.

 

As previously reported, as aresult of declining margins and demand for its products, Correlant’s Board ofDirectors approved the wind down and cessation of Correlant’s historicaloperations in the cable modem and cable modem termination system (“CMTS”)business effective December 23, 2003. As part of the wind down, Correlantlicensed part of its technology. As part of the previously discussedliquidation, the remaining technology was sold in August, 2005. The wind downof Correlant’s operations was substantially completed by March 31, 2004. Theliquidation was substantially completed by August 31, 2005.

 

*CorrelantProducts*.Correlant’s products were divided into two categories:

 

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

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

 

Cable Modems. Correlant’s cablemodems received both the *DOCSIS 1.0* and *1.1* certifications. The cable modems connect to the end user’scomputer via a standard Ethernet or USB connector, and to the cable network viaa standard TV coaxial cable connector.

 

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

 

| **Year Ended June 30,** | ** ** | **Net  Revenue** | ** ** | **Percentage of  Consolidated Total  Net Revenue** | ** ** |
|----------------------------------------|------------|------------------|------------|-------------------------------------------------------------------|------------|
| 2005                                   |       | $                | —     |                                                              | —     | % |
| 2004                                   |       | —           |       | —                                                            | %          |
| 2003                                   |       | 133              |       | 1                                                                 | %          |
|                                        |            |                  |            |                                                                   |            |  |

 

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MAC+Software. As part of theaforementioned change in business model, Correlant began selling a keycomponent of the completed cable modem, MAC+software, rather than the completedcable modem effective February, 2002. The following table shows revenueattributable to MAC+Software (*in thousands*):

 

| **Year Ended  June 30,** | ** ** | **Net  Revenue** | ** ** | **Percentage of  Consolidated Total  Net Revenue** | ** ** |
|------------------------------------|------------|------------------|------------|-------------------------------------------------------------------|------------|
| 2005                               |       | $                | —     |                                                              | —     | % |
| 2004                               |       | 39               |       | —                                                            | %          |
| 2003                               |       | 8,161            |       | 42                                                                | %          |
|                                    |            |                  |            |                                                                   |            |  |

 

*InfrastructureEquipment.*Duringfiscal 2002, Correlant completed initial development of a CMTS to complementits cable modems. Its CMTS was designed to enable cable operators to provide acomplete solution for two-way data transfer between the Internet and theend-user, utilizing its cable modem at one end and its head-end equipment atthe other. CMTS sales were less than 1% of consolidated total net revenueduring fiscal 2005, 2004 and 2003.

 

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

 

| ** **       | ** ** | **Year Ended June 30,** | ** ** |
|------------------|------------|----------------------------------------|------------|
| ** **       | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Japan            |       | $                                      | —     |   | $ | 215 |   | $ | 54 |   |
| Taiwan           |       | —                                 |       | 163 |   | 9,446 |   |
| United States    |       | —                                 |       | 116 |   | 201 |   |
| Europe and other |       | —                                 |       | 128 |   | 476 |   |
|             |       | $                                      | —     |   | $ | 622 |   | $ | 10,177 |   |

 

Segment disclosures andgeographical information for fiscal 2005, 2004 and 2003 are presented in “Item8. Financial Statements and Supplementary Data Note 18 – Segment and GeographicInformation.”

 

*CorrelantResearch and Development.*The following table shows Correlant-sponsored research and developmentexpenses (*in thousands*):

 

| **Year ended June 30,** | ** ** | **Dollars** | ** ** | **Percentage of  Correlant’s  Total Revenues** | ** ** |
|----------------------------------------|------------|-------------|------------|---------------------------------------------------------------|------------|
| 2005                                   |       | $           | —     |                                                          | —     | % |
| 2004                                   |       | 1,547       |       | 249                                                           | %          |
| 2003                                   |       | 7,340       |       | 72                                                            | %          |
|                                        |            |             |            |                                                               |            |  |

 

*CorrelantCustomers.*Correlantsold its data-over-cable products to vendors who then sold the equipment undertheir brand name to cable operators. A relatively small number of customersaccounted for a significant percentage of Correlant’s revenues. The percentageof Correlant’s revenues derived from significant customers is detailed asfollows:

 

| ** **                                                             | ** ** | **Year Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Synclayer                                                              |       | —                                 | %          | 35 | % | 1 | % |
| TurboComm Technologies, Inc.  (“TurboComm”), a related party |       | —                                 | %          | 26 | % | 93 | % |

 

On April 14, 2004,Correlant filed a lawsuit against TurboComm in the District Court of Taiwanseeking to collect TurboComm’s outstanding debt of approximately $2,300,000 asa result of TurboComm’s unwillingness to pay. On July 30, 2004, Correlantreached a settlement agreement with TurboComm. Under the agreement, Correlant dismissedits lawsuit against TurboComm in exchange for the transfer of 700,000 Series Aand 300,000 Series C shares of Correlant preferred stock owned by TurboComm.Both parties mutually agreed to release and discharge any and all claims thateach may have against the other party.

 

*Correlant Manufacturing and Distribution.*Correlant had limited in-housemanufacturing capability at its facility in San Diego, California. Thisfacility was used for design, assembly and testing of prototypes, pilotproduction of new modem

 

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designs, sample testing of products received from other manufacturers,developing the manufacturing process and documentation for new products inpreparation for outsourcing.

 

Correlant had an establishedrelationship and manufacturing contract with TurboComm, a company located inTaiwan that manufactured the high-speed data-over-cable technology products. Fromthe early stages of design and development, Correlant worked closely withTurboComm’s engineers to ensure optimal and cost effective manufacturing.Correlant’s manufacturing agreement with TurboComm provided TurboComm wouldsupply all of Correlant’s forecasted orders for cable modems at prices to beagreed to by Correlant and TurboComm on a quarterly basis. While manufacturingCorrelant’s products, TurboComm was obligated to repair or replace anydefective cable modems and CMTS units. Although the term of the originalcontract went through May 2003, both Correlant and TurboComm mutually agreed tocontinue the relationship until Correlant shut down its historical operationsin the cable modem business.

 

Correlant sold itsdata-over-cable products to vendors who sold equipment under their brand nameto cable operators. This market had, and still has, a limited number ofexisting and potential customers. Correlant already had establishedrelationships with several existing vendors. As a result, Correlant requiredonly a limited sales and marketing infrastructure.

 

*CorrelantBacklog.*Correlant’sgeneral practice was to contract with TurboComm and fill orders within delivery datesrequired by customers, with some adjustments based on Correlant’s forecast.During the years covered by this report, substantially all Correlant’s productswere produced in accordance with specifications and production schedulesdetermined by Correlant based on orders placed by its primary customers. Theamount of unfilled orders at any particular time could be affected by a numberof factors including, but not limited to, the availability of cable modemcomponents, and the manufacturing and assembly capacity of Correlant’s thirdparty manufacturer. Accordingly, Correlant’s backlog information is notmeaningful to an understanding of its business and may not be indicative ofactual shipments made to customers in any period.

 

*CorrelantWorking Capital and Raw Materials.*As result of Correlant producingproducts in accordance with customer orders and its third party manufacturerprocuring a large portion of cable modem components, Correlant was not requiredto carry finished goods inventory. Occasionally, when Correlant did carry a rawmaterials inventory, the amount was not material. Accordingly, inventoryrequirements, and the impact of inventory requirements on working capital, arenot meaningful to an understanding of Correlant’s business.

 

*CorrelantIntellectual Property.*Although Correlant developed and owns the proprietary software used inits cable modem products, Correlant never held any patents or copyrights on itstechnology. Due to the rapid change in technology and the high cost associatedwith obtaining and defending a patent, Correlant management never applied for apatent. Instead, Correlant entered into confidentiality and inventionassignment agreements with employees, and entered into non-disclosureagreements with key suppliers, distributors and customers to limit access toand disclosure of proprietary information. However, these contractualarrangements may not prove sufficient to prevent misappropriation of Correlant’stechnology or deter independent third-party development of similartechnologies. In addition, the laws of some foreign countries may not protectCorrelant’s intellectual property rights to the same extent as do the laws ofthe United States.

 

*Correlant Competition*. Correlant’s primary competitorsincluded ADC, Arris, Cisco, Com21, Motorola and Terayon. Other potentialcompetitors included, among others, Alcatel, Best Data, Dassault, Ericcson,Future Networks, NEC, NetGear, Nortel, Pace, Phasecom, Samsung,Scientific-Atlanta, Riverstone, Sony, Thomson Consumer Electronics and ZoomTelephonics.

 

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

#### ** **

•      The other technologies described above;

•      The ability to receive the DOCSIS certification;

•      Price;

•      Quality;

•      Ensuring product availability through effective planning andprocurement of key components; and

•      Product support.

 

***OtherBusiness Developments and Subsidiary Activity During the Reporting Period***

 

In March 1999, the Companyacquired 77% of the issued and outstanding common shares of Arescom. Based inFremont, California, Arescom designed, manufactured and marketed a broad rangeof high quality remote access products, such as routers and remote managingsoftware, and other inter-networking equipment for Internet Service Providers (“ISP”),

 

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resellers, and systemintegrators in the North America market. In December 2001, the Companysold approximately 92% of its investment in Arescom, representing 65% of theoutstanding securities of Arescom to an unrelated third party.

 

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,representing approximately 70% of the outstanding shares of Arescom, for$10,000,000 in cash. The Company determined that Arescom would not generateconsistent cash flow from operations in the foreseeable future, and decided tosell its interests for cash to pursue other business opportunities. The Companyretained approximately 6% of the outstanding common shares and 11,048 shares ofsubordinated preferred stock of Arescom. On September 10, 2003, Opta divested its remaining6% ownership in Arescom by settling all legal claims against Arescom.

 

On April 22, 1999, theCompany organized Lotus World, Inc. (“Lotus World”) to offer Auction Live, anonline auction service, to international clients. 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 ISP companies. Due to the negativeresponse in general to e-commerce, the operations of Lotus World were suspendedby prior management in 2001. On March 12, 2002, the Company and LotusWorld entered into an Asset Purchase and Assignment and Assumption Agreementwith Avtech Technology, whereby the Company assigned its rights to certaincontracts and related intangibles to Avtech in exchange for Avtech’s assumptionof all of the Lotus World’s obligations under the contracts assigned. Subsequentto the completion of the transaction, the Company dissolved Lotus World.

 

On November 13, 2000, theCompany established a wholly-owned subsidiary, Acumen Technology, Inc. (“Acumen”),incorporated in Delaware and in December 2000, the Company transferred allof the capital 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, Acumen was merged into Opta. As a result ofthe merger, the Company assumed all the rights and obligations of Acumen andacquired the assets of Acumen that included, without limitation, shares ofstock of Correlant and Arescom. Acumen had no operations other than serving asa holding company for the shares of stock of Correlant and Arescom.

 

In June 2001, Acumenformed Lotus Pacific Communications Technology (Beijing) Co., Ltd. (“BeijingLotus”), a wholly-owned subsidiary, to support business activity in Beijing. AsBeijing Lotus had no material operations since its inception, the Company’sBoard of Directors approved the closure of Beijing Lotus on July 7, 2004. Allassets of Beijing Lotus were transferred to another Opta wholly ownedsubsidiary, Go Video DigiTech (Huizhou) Co., Ltd. (“DigiTech”), duringSeptember, 2004. See discussion related to Digitech below.

 

During January 2003, theCompany 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 the time, the investment was part of theCompany’s business strategy to seek businesses to maximize the Company’s growthpotential based on its assets.

 

Shortly after the Company beganrunning the joint venture, TCL Digital, the Company determined the jointventure’s business model did not fit with the Company’s long-term businessstrategy, and diverted management resources from the operations of othersubsidiaries. During September 2003, the Company entered into an agreementwith TCL Information Technology Industrial (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 December 2003. TCL Information is an affiliate ofTCL, the majority stockholder of the Company.

 

On July 7, 2004, theCompany’s Board of Directors approved the commencement of a new wholly-ownedsubsidiary, DigiTech, located in Guangdong, China. DigiTech markets GoVideo’sMP3 players under the GoVideo brand name. The Company invested approximately$500,000 in the new subsidiary. TCL Multimedia Electronics R&D Center (“TCLMultimedia”), an affiliate company of TCL, expended some resources during thestart up phase of GoVideo DigiTech.

 

***Employees***

 

As of June 30, 2005, Optahad six full time employees in sales, general and administration. Correlant hadtwo part-time employees, who are also Opta management, in sales, general andadministration. GoVideo had 64 full-time employees,

 

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including 29 in productmanagement and 35 in sales, general and administration. Subsequent to year end,as part of a cost reduction effort, 28 employees were terminated from GoVideo. Additionally,several employees quit as a result of the continued losses and down-sizing. Asof January 31, 2006 Opta had six full time employees in sales, general andadministration and Correlant had no employees. As of January 31, 2006, GoVideohad six full-time employees, including three in product management and three insales, general and administration.

 

No employees arerepresented by any collective bargaining organization, and the Company hasnever experienced a work stoppage.

 

***Available Information***

 

All SEC reports andamendments to reports filed pursuant to Sections 13(a) and 15(d) of theSecurities Exchange Act of 1934, as amended, are available free of charge onour Investor Relations web site at www.optaco.com/sec as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the SEC. Information on our web site and other information that can be accessedthrough our web site are not part of this report.

 

You may read and copymaterials that we file with the SEC at the SEC’s Public Reference Room at 100 FStreet, NE, Washington, D.C. 20549. Information on the operation of the PublicReference Room is available by calling the SEC at 1-800-SEC-0330. The SECmaintains an Internet site that contains reports, proxy statements and otherinformation we file. The address of the SEC website is http://www.sec.gov.

 

**Item 1A. RiskFactors**

 

**Forward-LookingStatements and Certain Risks**

 

*Thestatements contained in this report that are not purely historical are “forward-lookingstatements” within the meaning of Section 21E of the Securities ExchangeAct. These statements regard our expectations, hopes, beliefs, commitments,intentions, and strategies regarding the future. They may be identified by theuse of words or phrases, such as “believe,” “expect,” “anticipate,” “should,” “plan,”“estimate,” and “potential,” among others. Forward-looking statements include,but are not limited to, statements contained in “Business” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”regarding our financial performance, revenue and expense levels in the future,and the sufficiency of our existing assets to fund future operations andcapital spending needs. Actual results could differ materially from theanticipated results or other expectations expressed in these forward-lookingstatements or for the reasons discussed below. The fact that some of the riskfactors may be the same or similar to past reports we have filed with theSecurities and Exchange Commission means only that the risks are present inmultiple periods. We believe that many of the risks detailed here are part ofdoing business in the industry in which we operate and compete and will likelybe present in all periods reported. The fact that certain risks are endemic tothe industry does not lessen their significance. The forward-looking statementscontained in this report are made as of the date of this report, and we assumeno obligation to update them or to update the reasons why actual results coulddiffer from those projected in these forward-looking statements. Among others,risks and uncertainties that may affect our business, financial condition,performance, development, and results of operations include the following:*

 

**BusinessStrategy and Operation Risks**

 

*We intendto implement a new business model for GoVideo that is dramatically differentfrom the former OEM model.*Under the new business model, GoVideo will act as a brand licensingprovider by bridging manufacturers and retailers. GoVideo’s historical businessmodel was an OEM business model that required significant amounts of workingcapital. Currently, GoVideo is in the process of working with suppliers tofinalize the new business model. There is no assurance that GoVideo will besuccessful in changing the emphasis of its business model. Management currently anticipatesthat if the new business model cannot be successfullyimplemented, GoVideo will cease operations.

 

*GoVideo mayneed additional capital resources*. We believe GoVideo’s cash and othersources of liquidity are sufficient to fund its down-sized operations for theforeseeable future. See “**Part II Item 7****Liquidity and Capital Resources.” **However, GoVideo may need additional capital to operate if:

 

•      Market conditions change;

•      Business plans or assumptions change; or

•      Material increases in working capital become necessary.

 

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*The Companyfaces tough competition.*Our main operating subsidiary, GoVideo, plays a unique niche in thehighly competitive consumer electronics industry. GoVideo competes against manywell established companies including many OEMs who have substantially greaterfinancial and other resources than the Company. Additionally, the consumerelectronics industry is empirically facing a trend of declining gross marginresulted from emerging global market and competition. Although GoVideo wasprofitable in fiscal 2003, it was not profitable during fiscal 2004 or 2005. Wehave taken steps to reorganize GoVideo. But the steps taken may not besufficient for GoVideo to compete in the consumer electronics industry. Conversely,we may have cut too many resources, which could negatively impact GoVideo’sability to compete. If GoVideo is unable to achieve and sustain profitabilityin the future GoVideo’s business operations may fail forcing us to furtherscale down operations or even cease operations.

 

*GoVideo’scustomers have the ability to go straight to the contract manufacturer.*GoVideo has no manufacturingcapabilities. All products are purchased from contract manufacturers. Becauseof this, there is nothing stopping GoVideo’s customers from purchasing productsdirect from these contract manufacturers.

 

*We may notbe able to produce sufficient quantities of our products as we obtaincomponents from, and depend on, a limited number of key suppliers.*All our TV and DVD player productscontain one or more components that are available from a single supply sourceand other components that are available from limited sources. We depend onthese sources to meet our production requirements. We do not have any long termsupply contracts. Although we do not presently anticipate a disruption in thissource of supply, if it is necessary for us to obtain these key components froman alternative supplier, it could take several months before receiving adequatesupplies, and during this time we would be unable to satisfy our customers’demands. In such event, prolonged delays could result in the cancellation oforders and the loss of customers*.*

 

*GoVideopurchases products from countries in Asia, including China, South Korea andTaiwan, where there are risks associated with the potential change in social,political and regulatory 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 aresult of trade disputes, the U.S. has occasionally imposed tariffs, regulatoryprocedures and importation bans on certain products. Trade sanctions orregulatory procedures involving a country in which we conduct a substantial amountof business could have a material adverse effect on our operations.

 

*GoVideo isresponsible for product warranties and defects*. Although GoVideo outsources allproduct manufacturing, itprovides limited labor and parts warranties on certain of its products for amaximum of one year. Therefore, GoVideo is highly dependent upon the quality ofits suppliers. If products have defects, this could hurt our reputation as wellas cause customer collection problems.

 

*Our newproducts may not be 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.

 

*Theintroduction or expected introduction of new products or technologies maydepress sales of existing products and technologies*. As GoVideo maintains asubstantial investment in product inventory, the introduction of new productsmay force us to charge less for our existing inventory and cause such existinginventory to become obsolete. Such declining prices and inventory obsolescencecould have a material adverse effect on our business and financial results.

 

*Ourexecutive officers and key personnel are critical to our business and the lossof their services could disrupt our operations and our customer relationships.*Our success depends to a significantdegree upon the continuing contributions 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 key personnelcould significantly harm our results of operations and business.

 

**FinancialReporting**

 

*We and our independent auditors haveidentified a number of significant deficiencies related to our internal controlover financial reporting that collectively represent a material weakness, whichcould continue to impact our ability to report our results of operations andfinancial condition accurately and in a timely manner.* The Company has had significantfinancial reporting issues to address since the restatement of its June 30,2001, 2000 and 1999 financial statements. While we are implementing steps toensure the effectiveness of our internal control over financial reporting,failure to restore the effectiveness of our internal control over financialreporting could continue to negatively impact our ability to report our

 

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financial condition and resultsof operations accurately and could have a material adverse effect on ourbusiness, results of operations, financial condition and liquidity.

 

*If the Company is unable to take thenecessary corrective action to strengthen its disclosure controls, its abilityto report its financial results on a timely and accurate basis may be adverselyaffected*.Based upon the evaluation of our control weaknesses as discussed above, weconcluded that our disclosure controls and procedures need to be strengthenedand are not sufficiently effective. We have taken various steps to maintain theaccuracy of our financial disclosures, and based on these measures and othersignificant work, management believes there are no material inaccuracies oromissions of material fact in our financial statements and other reports filedwith the SEC. However, material weaknesses in our internal controls overfinancial reporting could further adversely impact our current inability toreport timely financial information. If the current inability to report timelyis exacerbated by weak disclosure controls, this could result in furtheraccounting restatements or other accounting related problems and we could facegreater scrutiny from the SEC.

 

*Wemay not complete our Going Private Transaction in a timely manner, which willcause us to incur additional costs and mitigate the benefits of going private.*We are pursuing the Going PrivateTransaction to relieve us of the costs, administrative burdens and competitivedisadvantages associated with operating as a public company. Until the GoingPrivate Transaction becomes effective, we must continue to incur costsassociated with being a public company.

 

*Therestatement and reaudit of our financial statements and the potential forreview of our financial disclosure could materially impact our business andresults of operations.*Following the replacement of prior management, the new management beganreviewing various transactions undertaken by old management prior toJune 29, 2001. During its preliminary investigation, new managementidentified certain material transactions undertaken by prior management thatimpact reported financial and operating results with respect to itsconsolidated financial statements for the fiscal years ended June 30,2001, 2000 and 1999. Due to the preliminary results, the Company dismissed thethen existing independent accountants, hired new independent accountants andreaudited all periods under investigation. The Company completed therestatement of previously reported financial statement in its Form 10-K forfiscal 2002 filed April 16, 2004.

 

As a result of the restatement and reaudit of our financial statementsfor fiscal 2001, 2000 and 1999 and the resulting delay in filing SEC reports,the SEC or other governmental authorities may choose to review our SEC filings.If we are required to respond to the SEC or other governmental authorities orotherwise take actions in response to, arising out of, or relating to therestatement and reaudit of our financial statements, such actions may requiresignificant attention and resources of management and, regardless of theoutcome, could materially impact our business and results of operations. If webecome subject to such heightened scrutiny, this could adversely affectinvestor confidence, our ability to access the capital markets and cause thetrading price for our securities to decline. In addition, we cannot assure youthat we will not have to further restate earnings or further revise our reportsfor prior periods as a result of any SEC review. Any such restatement couldfurther impact investor confidence, our ability to access the capital marketsand the trading price of our securities.

 

*Additional delays inreporting.*Sincethe restatement and reaudit of our financial statements discussed above, wehave been unable to remain current with respect to all SEC required filings. Thiscompounds the potential problems associated with the original reaudit of ourfinancial statements for the fiscal years ended June 30, 2001, 2000 and 1999and the resulting delay in filing our Form 10-K for fiscal 2002, 2003, 2004 and2005.

 

**StockMarket Risks**

 

*Our stockprice may not come back.*The Company’s stock was removed from OTC Bulletin Board as a result ofthe Company’s failure to timely submit the Form 10-K for fiscal 2002. AlthoughOpta filed its Form 10-K for fiscal 2002 on April 16, 2004, Opta is noteligible to trade on the OTC Bulletin Board until Opta becomes current in allits required filings or files a Form 10 and clears all comments with the SEC. Thecurrent trading of the Company’s stock is sporadic and minimal and there is noestablished public trading market for our common stock. In addition, the stockmarket has experienced extreme price and volume fluctuations that have affectedthe market price of many technology companies, in particular, and that haveoften been unrelated to the operating performance of these companies. Thesefactors, as well as general economic and political conditions, may materiallyadversely affect the market price of our common stock in the future.Additionally, volatility or a lack of positive performance in our stock price mayadversely affect our ability to retain key employees.

 

Because of these and otherfactors affecting our operating results, past financial performance should notbe considered an indicator of future performance, and investors should not usehistorical trends to anticipate results or trends in future periods.

 

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**Item 2. Properties**

 

At June 30, 2005,Opta’s executive offices were located 1350 Bayshore Highway, Suite 740,Burlingame, California, a 3,196 square foot office under a lease that expiredOctober 31, 2005. During fiscal 2005, Correlant moved its operations to Opta’soffices. On October 29, 2005, Opta and Correlant moved office suites from 740to 600 under a new lease, for 1,210 square feet of office space that expiresOctober 31, 2006. The new address is 1350 Bayshore Highway, Suite 600,Burlingame, California.

 

DigiTech leases a 5,705square foot building in Huizhou, China of which 646 square feet is used forwarehousing and 5,059 square feet is used for administrative operations.

 

As of June 30, 2005, GoVideoleased two facilities in Scottsdale, Arizona. One facility, used forwarehousing, was approximately 13,100 square feet. The other facility, used foradministration, warehousing and distribution, was approximately 33,000 squarefeet. Both leases expired January 31, 2006. As of February 1, 2006, GoVideo operatesunder a month-to-month lease in a 2,400 square foot office used foradministrative operations. GoVideo’s new business model does not require anywarehousing or distribution facilities.

 

**Item 3. LegalProceedings**

 

From time to time we may beinvolved in various disputes and litigation matters arising in the normal courseof business.

 

On August 14, 2005, DaewooElectronics America, Inc. (“Daewoo”) filed a lawsuit in the Superior Court ofCalifornia, County of San Mateo, Case No. CIV 448845, entitled DaewooElectronics America, Inc., Plaintiff v. Opta Corporation and Does 1 through 25,Defendants. The Complaint in the suit alleges that Opta Corporation executed awritten guaranty dated December 4, 2003 in favor of Daewoo in which OptaCorporation unconditionally guaranteed the payment of all obligations ofGoVideo to Daewoo, in a principal amount not to exceed $5,000,000. Daewooalleges that it sold GoVideo goods of an agreed purchase price in excess of$10,000,000, for which GoVideo has not paid. Daewoo alleges Opta Corporationowes Daewoo $5,000,000 in principal amount, plus interest, attorneys’ fees andcosts under the guaranty. In a separate lawsuit filed in the Superior Court ofCalifornia, County of San Mateo, on September 14, 2005, Case No. CIV 449577,entitled Daewoo Electronics America, Inc., Plaintiff v. Opta Systems, LLC, dbaGoVideo and Does 1 through 25, Defendants, Daewoo sued GoVideo for the allegedpurchase price of the goods in the amount of $10,700,000, in principal amount,plus interest, attorneys’ fees and costs. Opta Corporation denies that it hasany liability under the alleged guaranty. GoVideo denies that it has anyliability to Daewoo. A motion to quash the service of Daewoo’s Summons andComplaint on Opta Corporation for lack of jurisdiction was taken off calendarfollowing Daewoo’s re-service on Opta Corporation of the summons and complaint.A similar motion on GoVideo’s behalf was granted by the Court, finding thatGoVideo is not subject to the jurisdiction of California courts. OptaCorporation’s demurrer challenging the legal sufficiency of Daewoo’s originalComplaint was taken off calendar after Daewoo filed a First Amended Complainton or about December 8, 2005. Opta Corporation filed a demurrer to the FirstAmended Complaint which is presently set for hearing on March 23, 2006. OptaCorporation also filed motions to dismiss the First Amended Compliant based onthe filing of the GoVideo New Jersey Action described below, or, alternatively,to stay all action on the First Amended Complaint pending the outcome of theGoVideo New Jersey Action. A hearing on the motions to dismiss or stay is alsoset for March 23, 2006. The Court has set July 24, 2006 for jury trial of theSan Mateo County action. Opta Corporation intends to defend Daewoo’s suit andto pursue any and all remedies to which it may be entitled.

 

On November 14, 2005, GoVideofiled an action in the United States District Court for the District of NewJersey, entitled Opta Systems, LLC d/b/a/ GoVideo v. Daewoo ElectronicsAmerica, Inc. et al., Civil Action No. 05-5387 (JAP) (the “GoVideo New JerseyAction”), in which GoVideo brought claims against Daewoo Electronics America,Inc. and Daewoo Electronics Corp. (together, “Daewoo”) for breach of contract,breach of duty of good faith and fair dealing, breach of express and impliedwarranties, negligence, fraud, tortious interference, unjust enrichment, andalter ego liability, arising out of a series of purchase order contracts andrelated agreements. In the GoVideo New Jersey Action, GoVideo seekscompensatory damages from Daewoo in an amount not less than $19,400,000, pluspunitive damages and certain other sums, and other relief. On December 13,2005, Daewoo obtained an automatic clerk’s extension of Daewoo’s time to filean Answer or otherwise respond to the Complaint, which extended such time toDecember 27, 2005. Subsequently, by consent order dated December 29, 2005, Optaconsented to further extend such time to January 27, 2006. On January 26, 2006,Daewoo filed an Answer to Complaint, Separate Defenses, Counterclaims, and JuryDemand, and on January 27, 2006, Daewoo filed an Amended Answer to Complaint,Separate Defenses, Counterclaims, and Jury Demand, denying any and allliability alleged in the Complaint, and alleging counterclaims against GoVideobased on causes of action for account stated, breach of contract, unjustenrichment, and fraud. By the counterclaims, Daewoo seeks damages in the totalamount of $30,200,000, plus punitive damages and certain other sums. GoVideowill timely file an Answer and Affirmative Defenses

 

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to the Counterclaims denyingany and all liability.

 

We are involved in various other legal proceedings. Our managementbelieves that any liability to us that may arise as a result of theseproceedings will not have a material adverse effect on our consolidated financial position,results of operations or cash flows. However, litigation is subject to inherentuncertainties. Were an unfavorable ruling to occur, there exists thepossibility of a material adverse impact on our results of operations of theperiod in which the ruling occurs. Our estimate of the potential impact on ourfinancial position or overall results of operations for new legal proceedingscould change in the future.

 

**Item 4. Submissionof Matters to a Vote of Security Holders**

 

As permitted under Section 228of the Delaware General Corporation Law, we solicited the written consent ofcertain of our stockholders to elect our Corporation Directors. By writtenconsent, stockholders holding 30,106,671 shares of common stock, or 60.2% ofthe outstanding shares of common stock as of May 16, 2005, the date of thewritten consent, approved each of Opta Corporation’s Directors. See “**Item 10. Directors and Executive Officers of the Registrant.”**

 

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**PART II**

** **

**Item 5. Marketfor Registrant’s common equity, related stockholder matters and IssuerPurchases of Equity Securities.**

 

Opta’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 for failure tocomply with NASD Rule 6530, as a result of the Company’s inability totimely file its Form 10-K for fiscal 2002. Although we became current withour filings during fiscal 2005, we did not complete the necessary steps to berelisted due to the contemplation of our previously discussed “Going PrivateTransaction.”  From November 5, 2002through October 12, 2004, the Company’s shares of common stock were quotedon the National Quotation Bureau’s “Pink Sheets,” under the symbol “LPFC.”  Effective October 13, 2004, inconnection with the name change from “Lotus Pacific, Inc.” to “OptaCorporation,” the Company’s shares of common stock are quoted under the symbol “OPTP.”  Trading in the Company’s common stock hasbeen minimal with limited or sporadic quotations and there is no establishedpublic trading market for the Company’s common stock. The high and low commonstock prices per share were as follows:

 

| ** **   | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------|------------|----------|------------|---------|------------|
|         |       |     |       |    |       |
| Fiscal 2006: |       |     |       |    |       |
|         |       |     |       |    |       |
| 1st Quarter  |       | $        | 0.86       |    | $          | 0.01 |   |
| 2nd Quarter  |       | 0.14     |       | 0.01    |       |
|         |       |     |       |    |       |
| Fiscal 2005: |       |     |       |    |       |
|         |       |     |       |    |       |
| 1st Quarter  |       | $        | 0.15       |    | $          | 0.08 |   |
| 2nd Quarter  |       | 0.10     |       | 0.03    |       |
| 3rd Quarter  |       | 1.03     |       | 0.001   |       |
| 4th Quarter  |       | 0.14     |       | 0.0001  |       |
|         |       |     |       |    |       |
| Fiscal 2004: |       |     |       |    |       |
|         |       |     |       |    |       |
| 1st Quarter  |       | $        | 0.09       |    | $          | 0.01 |   |
| 2nd Quarter  |       | 0.09     |       | 0.02    |       |
| 3rd Quarter  |       | 0.05     |       | 0.01    |       |
| 4th Quarter  |       | 0.10     |       | 0.01    |       |
|         |       |     |       |    |       |
| Fiscal 2003: |       |     |       |    |       |
|         |       |     |       |    |       |
| 1st Quarter  |       | $        | 0.13       |    | $          | 0.03 |   |
| 2nd Quarter  |       | 0.10     |       | 0.01    |       |
| 3rd Quarter  |       | 0.10     |       | 0.05    |       |
| 4th Quarter  |       | 0.10     |       | 0.05    |       |

 

These OTC market quotationsreflect inter-dealer prices, without retail mark-up, mark down or commissionand may not necessarily represent actual transactions.

 

As of January 31, 2006,there were 50,037,538 shares of Common Stock issued and outstanding, held byapproximately 800 holders of record as indicated on the records of the Company’stransfer agent.

 

To date, the Company has notdeclared or paid any cash dividends on its common stock. The Companyanticipates that it will retain all available funds for use in operation andexpansion of its business, and no cash dividends are expected to be paid on thecommon stock in the foreseeable future.

 

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**Equity Compensation Plan Information**

 

Information regarding Opta’sequity compensation plans is set forth in “Item 12. Security Ownership ofCertain Beneficial Owners and Management.” As of the date of this report, there are no outstanding options orwarrants to purchase securities of the Company.

 

**RecentSales of Unregistered Securities**

 

There were no sales ofunregistered securities by the Company during fiscal 2005, 2004 or 2003.

 

**Issuer Purchases of Equity Securities**

 
| **Date of Purchase**  | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced  Plans or Programs** | ** ** | **Approximate Dollar  Value of  Shares that May Yet  Be  Purchased under the  Plans or Programs** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 through April 30,  2005 |       | None                                         |       | —                                   |       | None                                                                                                                        |       | None                                                                                                                                           |       |
| May 1 through May 31, 2005      |       | None                                         |       | —                                   |       | None                                                                                                                        |       | None                                                                                                                                           |       |
| June 1 through June 30, 2005    |       | None                                         |       | —                                   |       | None                                                                                                                        |       | None                                                                                                                                           |       |

 

As previously discussed, we arecurrently taking steps to complete a corporate reorganization that will enable usto become a non-reporting company with the Commission. As part of thisreorganization, we anticipate purchasing approximately 1,930,000 shares ofcommon stock at a proposed price of $0.13 per share. Opta filed a Schedule 14Cand Schedule 13E-3 on July 8, 2005 and Amendments No. 1 to Schedule 14C andSchedule 13E-3 on August 3, 2005 and Amendments No. 2 on October 3, 2005. OurBoard of Directors has reserved the right to abandon the Going PrivateTransaction at any time prior to the effective time.

 

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**Item 6. SelectedConsolidated Financial Data**

 

The following selectedconsolidated financial data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” theConsolidated Financial Statements of the Company and related notes includedelsewhere in this Annual Report on Form 10-K.

 
| ** **                                                            | ** ** | **As of or for the Fiscal Year Ended June 30,** | ** **  |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|-------------|
| **(in thousands, except per share amounts)** | ** ** | **2005**                                                                                     | ** **  | **2004** | ** ** | **2003 (1)** | ** ** | **2002 (2)** | ** ** | **2001** | ** ** |
|                                                                  |       |                                                                                         |        |   |   |   |   |   |   |   |   |
| **Results  of Operations**                                            |       |                                                                                         |        |   |   |   |   |   |   |   |   |
| Net revenues                                                          | ** ** | **$**                                                                                        | **129,119** |   | $ | 125,324 |   | $ | 19,454 |   | $ | 55,880 |   | $ | 263,192 |   |
| Loss from continuing  operations                                      | ** ** | **$**                                                                                        | **(18,861** | ) | $ | (7,722 | ) | $ | (6,366 | ) | $ | (36,529 | ) | $ | (7,433 | ) |
| Net income (loss) per common  share – basic and diluted:         |       |                                                                                         |        |   |   |   |   |   |   |   |   |
| Loss from continuing  operations                                      | ** ** | **$**                                                                                        | **(0.38**   | ) | $ | (0.14 | ) | $ | (0.10 | ) | $ | (0.57 | ) | $ | (0.12 | ) |
| Total gain (loss) from  discontinued operations                       | ** ** | **$**                                                                                        | **—**  |   | $ | — |   | $ | — |   | $ | 0.27 |   | $ | (0.45 | ) |
| Net income (loss)                                                     | ** ** | **$**                                                                                        | **(0.38**   | ) | $ | (0.14 | ) | $ | (0.10 | ) | $ | (0.30 | ) | $ | (0.57 | ) |
| Cash dividends per share                                              | ** ** | **$**                                                                                        | **—**  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| **Financial  Position**                                               |       |                                                                                         |        |   |   |   |   |   |   |   |   |
| Total assets from continuing  operations                              | ** ** | **$**                                                                                        | **44,879**  |   | $ | 71,120 |   | $ | 52,987 |   | $ | 53,342 |   | $ | 117,214 |   |
| Long-term obligations, less  current portion                          | ** ** | **$**                                                                                        | **—**  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Total stockholders’ equity                                       | ** ** | **$**                                                                                        | **1,430**   |   | $ | 20,349 |   | $ | 30,565 |   | $ | 36,560 |   | $ | 54,328 |   |

 

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(1) The results of operationsfor fiscal 2003 included GoVideo’s activity since the April 18, 2003purchase 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.

 

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**Item 7.****   ****Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

The following discussion of the financial condition and results ofoperations should be read in conjunction with the Consolidated FinancialStatements and Notes thereto included elsewhere in this report.

 

We begin Management’sDiscussion and Analysis of Financial Condition and Results of Operations (“MD&A”)with a discussion of why we were unable to timely file our Form 10-K for theyear ended June 30, 2005. This is followed by a discussion of transactionsconsummated since June 30, 2005 that have had, and will continue to have, asignificant impact on our consolidated financial position, results of operations andcash flows and how these transactions will impact our “Business Outlook” for fiscal2006. We then provide a more detailed analysis of our financial condition andresults of operations for 2005 compared to 2004, 2004 compared to 2003 and 2003compared to 2002. This detailed analysis is provided solely for readers to understand the historical results of ouroperations during the time periods covered. However, due to the strategicchange in direction of Opta and the significant transactions we enteredsubsequent to June 30, 2005 as discussed in “Item 1. Business,” and throughoutthe MD&A section, these results are not indicative of future results.

 

Next we analyze the changes inour cash flows, and discuss our financial commitments in thesection entitled “Liquidity and Capital Resources.”  We conclude MD&A with (I) a discussion ofthe Critical Accounting Estimates we believe are important to understanding theassumptions and judgments incorporated in our reported financial results; and(II) Recently Issued Accounting Standards and the impact they had or will haveon our results of consolidated financial position, results of operations and cash flows.

 

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 andSupplementary Data.

 

The various sections of thisMD&A contain a number of forward-looking statements, all of which are basedon our current expectations and could be affected by the uncertainties and riskfactors described throughout this filing.

 

**Delays inReporting and Filing of Going Private Documents**

 

This Annual Report on Form 10-Kfor Opta Corporation (formerly Lotus Pacific, Inc.) (the “Company” or “Opta”)for fiscal year ended June 30, 2005 is being filed after the required duedate as a result of Opta currently taking steps (“Going Private Transaction”)to complete a corporate reorganization that will enable Opta to become anon-reporting company with the Securities and Exchange Commission (the “Commission”).The Going Private Transaction will enable us to terminate our PeriodicReporting Obligations so that we may continue future operations as a privatecompany, relieving us of the costs, administrative burdens and competitivedisadvantages associated with operating as a public company. Following theadoption of Sarbanes-Oxley, the amount of management time and Company resourcesrequired to comply with such requirements have become overly burdensome for acompany of our size. On June 17, 2005 and August 2, 2005, ourBoard of Directors adopted resolutionsproposing and approving the Going Private Transaction. On July 18, 2005 andAugust 2, 2005, stockholders who collectively own approximately 60.2% of ouroutstanding capital stock, consented in writing to the Going PrivateTransaction; the vote of more than 50% of our outstanding stock was required. TheGoing Private Transaction was approved twice by both the Board of Directors andthe stockholders as a result of entering into several material transactionssubsequent to the first approval.

 

On July 8, 2005 we filed apreliminary Schedule 14C and a Schedule 13E-3 describing the planned GoingPrivate Transaction. Both documents were amended to incorporate significantcompany events and filed August 3, 2005. The Staff of the Commission reviewedour Schedules 14C and 13E-3 and responded with inquires and requests foradditional information. We answered all of the Staff’s inquires and requestsfor additional information in a letter dated October 3, 2005 and amended ourSchedule 14C and Schedule 13E-3 on October 3, 2005. We subsequently received afurther letter from the Staff dated October 18, 2005. We have not yet filed anamendment to the 14C and 13E, in response to the Staff’s comments because, asnoted above and below, we have been delayed in completing our auditedfinancials statements for the year ended June 30, 2005 and the interim periodsended September 30, 2005 and December 31, 2005, which would be required to beincluded in such amendments. Because we have not cleared comments from the Staffwith respect to our Schedule 14C and Schedule 13E-3, we have not yet filed our definitive Schedule14C for the Going Private Transaction and consequently have notfiled our Form 15 – Certification and Notice of Termination of Registration. Asa result, we are required to continue our periodic reporting under theSecurities Exchange Act of 1934. We are working diligently toward completingour Going Private Transaction and we are in the process of responding to the Staff’scomments with respect to such Schedules. We

 

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originally intended to completeour Going Private Transaction prior to the deadline for filing its Form 10-Kfor the period ended June 30, 2005, but our efforts were delayed due to a seriesof transactions effected by us in the past few months to address the continuinglosses at Opta Systems, LLC d/b/a GoVideo (“Opta Systems” or “GoVideo”), ourmain operating subsidiary and the dissolution of Correlant Communications, Inc.(“Correlant”), our non-operating subsidiary. Additionally, as previouslyreported, we recently dismissed our former accountant and engaged a newprincipal accountant on September 27, 2005 as part of a continuing effort tosave costs. As a result, we were unable to complete this Form 10-K by therequired due date.

 

###### **Business Developments Subsequent to Fiscal 2005**

######  

We are a holding company, witha focus on consumer electronics and communications, and we conduct businessthrough our subsidiaries. We consummated several transactions subsequent toJune 30, 2005 that impacted both our subsidiaries, Correlant and GoVideo, asdescribed below.

 

*Correlant.*As reported in our Form 8-K as filed onJuly 21, 2005, on July 18, 2005, the Board of Directors of Correlant approvedthe dissolution of Correlant, pending approval by the Correlant shareholders. Ata Special Meeting of Shareholders held August 5, 2005, Correlant shareholdersapproved the dissolution of Correlant. At the time of the dissolution, Optaheld 10,000 shares of Series D Preferred Stock of Correlant and approximately13,900,000 shares of common stock of Correlant. To date, Opta has received liquidation proceeds of $10,000,000 for itsSeries D preferred stock and $1,276,000 for its common stock.

 

*GoVideo*. As reported in our Form 8-K as filedon July 29, 2005, on July 26, 2005, Opta entered into a series of transactionsto address the continued lossesand liquidity issues with GoVideo. Each of such transactions was conditioned upon each other and theconsummation of such transactions was deemed to occur simultaneously.

 

On July 26, 2005 pursuant to aParticipation Agreement (the “Participation Agreement”) between us and WellsFargo Business Credit, a division of Wells Fargo Bank, NA (“Wells”), weacquired an 80% participation interest in the credit facility of ourwholly-owned subsidiary, GoVideo, under the Credit and Security Agreement datedas of July 21, 2003, as amended to date (the “Wells Credit Agreement”) betweenGoVideo and Wells. On October 13, 2005, we amended the Participation Agreementto provide for revolving advances in an amount up to $2,000,000 over theborrowing base (such revolving advances over the borrowing base to be referredto as “Overline Advances”) and as a result, our participation percentage was80% with respect to the revolving advances that were not Overline Advances and100% with respect to Overline Advances. The maximum amount of the line ofcredit remained at $4,000,000. Concurrently with the purchase of theparticipation and our collateral deposit of $800,000 in cash collateral tosecure our obligations and guaranty of the Wells Credit Agreement, Wellsreleased its lien on the intellectual property assets of GoVideo under theWells Credit Agreement.

 

Pursuant to a forbearanceagreement dated July 22, 2005, most recently amended by Wells January 20, 2006,between GoVideo and Wells (the “Forbearance Agreement”), Wells agreed toforbear from exercising its rights and remedies with respect to existingdefaults under the Wells Credit Agreement from the date of the agreementthrough January 27, 2006 and modify certain terms of the Credit Agreement,including reducing the maximum line of credit to $4,000,000 and waiving thetermination fee. Wells also agreed that defaults by GoVideo under financialcovenants in the Wells Credit Agreement and with respect to material adversechanges will not constitute new defaults under that agreement. As a condition to the forbearance byWells, GoVideo agreed to pay to Wells a fee of $300,000 by adding the fee tothe loan’s principal balance in two installments, $150,000 on September 2, 2005and $150,000 on January 4, 2006. Opta agreed to enter into the ParticipationAgreement and to deposit $800,000 in cash collateral to secure Opta’s guarantyas described above.

 

On January 27, 2006, pursuant to a Loan Sale Agreement dated January20, 2006 between Opta and Wells, the Participation Agreement was terminated andOpta purchased the entire right, title and interest of Wells under, and Optabecame the Lender under, the Wells Credit Agreement. The purchase price was$2,148,000, which consisted of the following: $2,113,000 principal, $23,000interest and unused line of credit fees, and $12,000 legal and audit feesincurred by Wells. The full amount of Opta’s participation interest was creditedagainst such purchase price. On February 1, 2006, Opta, as such Lender, andGoVideo further amended the Forbearance Agreement to extend the ForbearancePeriod to April 30, 2006, and to terminate the guaranty and the subordinationagreement previously delivered by Opta to Wells under the Credit Agreement.

 

Pursuant to a purchase and saleagreement dated July 26, 2005 (the “TCLMM Agreement”) among GoVideo, TCLMultimedia Technology Holdings Limited, a Cayman Islands company with shareslisted on the Stock Exchange of Hong Kong Limited (“TCLMM”), TCL Industries,Asia Focus Industrial Limited (“Asia Focus”) and Opta, TCLMM agreed to assumethe debt obligations owed by GoVideo to TCL Industries and Asia Focus underthree promissory notes, with obligations totaling approximately $11,000,000 atJuly 26, 2005 (“Existing Obligations”). The Existing Obligations were

 

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previously guaranteed by Opta,and secured by Opta’s pledge of 100% of the Common Stock and Series D PreferredStock of Correlant, held by Opta. Pursuant to the TCLMM Agreement, TCLIndustries and Asia Focus released Opta’s obligations as guarantor under theExisting Obligations and released Opta’s pledge of the Correlant shares.

 

In consideration for TCLMM’sassumption of the Existing Obligations, GoVideo (i) assigned to TCLMM all ofGoVideo’s right, title and interest in and to certain significant intellectualproperty assets of GoVideo (the “GoVideo IP”) and (ii) issued a promissory notein favor of TCLMM (the “TCLMM Note”) for an initial principal amount of$1,000,000, representing the preliminary difference between the value of theGoVideo IP, as determined by a third-party appraiser, and the ExistingObligations assumed by TCLMM. A subsequent independent appraisal of the GoVideo IP was completed,which reduced the final valuation of the GoVideo IP by $700,000. As a result,the TCLMM Note automatically increased to $1,700,000.

 

The TCLMM Note principal and interest, at amonthly rate of 0.257%, was originally due and payable on January 26, 2006. Pursuantto the TCLMM Agreement, GoVideo granted to TCLMM a subordinated lien on all ofGoVideo’s assets, as security for the TCLMM Note, junior to the lien under theWells Credit Agreement. In addition, Opta agreed to guaranty GoVideo’sobligations under the TCLMM Note pursuant to a Guaranty dated July 26, 2005. GoVideopaid the principal and interest on the TCLMM Note in full on February 14, 2006.

 

Under the TCLMM Agreement,TCLMM granted to GoVideo a 90-day, non-exclusive, worldwide license to use theGoVideo IP on a royalty-free basis. On August 30, 2005, GoVideo and TCLMMnegotiated an extension to the license agreement through October 24, 2008, with an automatic renewal for subsequent twoyear terms unless terminated by either party by ninety days written notice ofintention not to renew. Under the terms of the agreement, GoVideo agreed to pay TCLMM a royaltybased on the cost of goods sold in connection with the distribution, sale,advertising and promotion of certain consumer electronics products under theGoVideo tradename.

 

The above transactions impactour consolidated liquidity as follows:

 

•      Decreasedcash, cash equivalents and short term securities by approximately $6,400,000,which was paid to Correlant’s noncontrolling shareholders as a result ofliquidating Correlant;

•      Decreaseddebt, including both principal and accrued interest, of approximately $9,300,000as a result of assigning the GoVideo IP to TCLMM in exchange for assumingGoVideo’s debt; and

•      Decreasedcash by $300,000 as a result of paying a forbearance waiver fee to Wells.

 

Webelieve the above transactions will impact our future consolidated results ofoperations as follows:

 

•      IncreaseGoVideo’s cost of goods sold due to the license fee owed to TCLMM;

•      Decreaseinterest income as a result of liquidating Correlant; and

•      Decreaseinterest expense due to the extinguishment of GoVideo’s debt to third parties.

 

In addition to restructuringGoVideo’s debt, GoVideo’s business model is changing. Prior to the July 2005restructuring transactions, GoVideo conducted its business through an OEM modeland carried monthly inventories between $10,000,000 and $18,000,000 during the 12months prior to the July 2005 restructuring transactions. Its businessoperations were financed through related party loans and a line of credit fromWells Fargo, which incurred high interest expense. Under the new businessmodel, GoVideo will not carry inventories and will act as a brand licensingprovider by bridging manufacturers and retailers. We believe this will enableGoVideo to reduce the overhead and risks related to carrying large inventories.GoVideo’s management is actively working with GoVideo’s suppliers to finalizeits future business model and operations. The goal of the new business model isto return GoVideo to profitability and generate a positive cashflow. If the newbusiness model is successfully implemented, we will continue to evaluateGoVideo’s business operations and financial performance. As this is a newbusiness model, we cannot guarantee its success. Additionally, we cannotguarantee that once the new business model is implemented that GoVideo will returnto profitability or generate positive cashflow. Management currently believesthat if the new business model cannot be successfully implemented, GoVideo willcease operations. If GoVideo is shutdown and has any assets subsequent to theshutdown, the assets will be combined with the proceeds from the liquidation ofCorrelant and used to identify market opportunities as discussed above.

 

Looking forward to the secondhalf of fiscal 2006 and beyond, in addition to the continued evaluation ofGoVideo, we will concentrate our efforts on the Going Private Transaction and terminate our Periodic Reporting Obligations,relieving us of the costs, administrative burdens and competitive disadvantagesassociated with operating as a public company. Additionally, using the cashfrom the liquidation of Correlant, we will concentrate on identifying market opportunities thatwill create and accelerate the growth and success of Opta complementary withthe Company’s business and long-term strategies while leveraging oursignificant experience in the consumer electronics market.

 

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***Acquisitionsand Dispositions***

 

We have engaged in multipleacquisitions and dispositions. The details of these transactions are describedin detail in “Item 8. Financial Statements and Supplementary Data Note 4 – Acquisitions andDispositions – Majority Owned Subsidiaries and Note 5 – Acquisitions andDispositions – Equity Method Investees.” However, unless specifically addressed in MD&A, these acquisitionsand dispositions were not material to our results of operations and theunderstanding of our business. As such, the details have been omitted fromMD&A. The following is a discussion of our acquisitions and dispositions inorder of significance to our current business.

 

*GoVideo*

 

In April 2003, wepurchased substantially all assets and assumption of certain liabilities of aproduct line known as “GoVideo.”  TheGoVideo product line, established in 1984, designs and manufactures productlines in the consumer electronics industry, including Rave MP branded product (“MP3”),digital video disc (“DVD”) players, portable DVDs, DVD-Video Cassette Recorder(“VCR”) Combos, Dual-Deck VCRs, DVD Recorders, DVD Recorder + VCRs, and liquidcrystal display (“LCD”) TVs. During the period covered by this report, GoVideo’sstrategy was to develop, market, and distribute innovative, high performanceconsumer electronic products that incorporate advanced technology, ease of use,and superior industrial design. Additionally, GoVideo’s marketing strategy wasto sell products with the support of independent sales representatives specificto certain geographic territories throughout the U.S. and who also representmany other brand name consumer electronic products. GoVideo sold its productlines directly to retailers nationwide including numerous national and regionalchains, catalog accounts, specialty stores, warehouse clubs and home shoppingchannels.

 

Our business strategy with respect to GoVideo is currently beingevaluated as previously discussed. While our objective and full effort is onguiding GoVideo toward profitability, we cannot provide assurance that GoVideowill be able to generate a profit in any given future period. If GoVideo cannotachieve and sustain future profitability, GoVideo may have to further scaledown operations or even cease operations.

 

*CorrelantCommunications, Inc*

 

In March 1999, we entered intoa share 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. Subsequently, there have been severaltransactions, which reduced our ownership interest in Correlant toapproximately 66%.

 

During the period covered bythis report, Correlant generated revenue by selling the Media Access Controller(“MAC”) bundled with its proprietary cable modem software (“MAC+software”),which were both key components of the Data-Over-Cable System InterfaceSpecification (“DOCSIS”) certified cable modem. In certain instances, Correlantsold the completed cable modem.

 

As a result of declining marginsand demand for its products, Correlant’s Board of Directors approved the winddown and cessation of Correlant’s historical operations in the cable modembusiness effective December 23, 2003. Correlant was dissolved subsequent toJune 30, 2005.

 

*TCL Digital Technologies, Ltd.*

 

In January 2003, the Company entered into an agreement to form ajoint venture with Beijing Youbang Online Electronics Technology Co., Ltd. (“Youbang”),TCL Computer Technology Co., Ltd. (“TCL Computer”), an affiliate of TCL Industriesand all the equity holders of Youbang, pursuant to which the Company acquired a50% interest in a new joint venture to own substantially all of Youbang’soperations. Pursuant to the agreement, all of Youbang’s assets, other than realestate, were transferred to a newly formed Beijing, China joint venture namedTCL Digital Technologies, Ltd. (“TCL Digital”), 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. 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 to repay the sum payable under thepromissory note dated August 18, 2003 issued by the Company in favor ofTCL International Holdings Limited (“TCL Holdings”), TCL Industries’ parentcompany. The balance of $3,762,000 was paid to the Company resulting in a gainof $1,053,000 included with Gain on sale of

 

24

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investments in the Company’s statement of operations during fiscal2004.

 

## **Results of Operations**

## ** **

**Comparisonof Fiscal 2005 to Fiscal 2004**

 

The following table summarizescertain aspects of our results of operations for fiscal 2005 compared to fiscal2004 (*in thousands):*

* *
| ** **                         | ** ** | **June 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------------|------------|-------------------|------------|------------|------------|-------------------|------------|
| ** **                         | ** ** | **2005**          | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                               |       |              |       |       |       |              |       |   |   |
| Revenues                           |       | $                 | 129,119    |       | $          | 125,324           |       | $ | 3,795 |   | 3 | % |
|                               |       |              |       |       |       |              |       |   |   |
| Gross profit (loss)                |       | (2,550            | )          | 10,125     |       | (12,675           | )          | (125 | )% |
| As a percentage of revenues        |       | (2                | )%         | 8          | %          |              |       |   |   |
|                               |       |              |       |       |       |              |       |   |   |
| General and administrative         |       | 5,516             |       | 8,414      |       | (2,898            | )          | (34 | )% |
| Sales and marketing                |       | 6,727             |       | 4,604      |       | 2,123             |       | 46 | % |
| Research and development           |       | 2,113             |       | 2,637      |       | (524              | )          | (20 | )% |
| Restructuring charges              |       | (78               | )          | 1,845      |       | (1,923            | )          | (104 | )% |
| Impairment of assets               |       | 538               |       | 1,831      |       | (1,293            | )          | (71 | )% |
|                               |       |              |       |       |       |              |       |   |   |
| Total other income (expense),  net |       | (1,623            | )          | (78        | )          | 1,545             |       | 1,981 | % |
|                               |       |              |       |       |       |              |       |   |   |
| Benefit for income taxes           |       | 714               |       | 498        |       | 216               |       | 43 | % |
|                                    |            |                   |            |            |            |                   |            |  |  |  |  |  |

 

## ***Revenues***

## ** **

The increase in overallrevenues for fiscal 2005 as compared to fiscal 2004 was primarily attributableto GoVideo’s increased product offerings most notably the DVDRecorder + VCR, which was introduced during the second quarter of fiscal 2004and the MP3, which was introduced during the first quarter of fiscal 2005. Revenuesattributable to the new DVD Recorder + VCR totaled $33,188,000 during fiscal2005 as compared to $23,164,000 during fiscal 2004. Revenues attributable tothe MP3 totaled $28,103,000 during fiscal 2005 as compared to no revenue duringfiscal 2004.

 

The increase in overallrevenues for fiscal 2005 as compared to fiscal 2004 discussed above wassomewhat offset by the following:

 

•      The decrease in other existing product sales,including the DVD recorder. Net revenues attributable to the DVDrecorder decreased $25,812,000 to $45,789,000 during fiscal 2005 from$71,601,000 during fiscal 2004.

•      The continualpricing pressures that are traditional in the consumer electronics market;

•      The inability to negotiate a competitive product purchase price fromcontract manufacturers; and

•      Customers going straight to contract manufacturers to purchase products.

 

Nearly100% of our revenues were generated from domestic sales during fiscal 2005 and2004. We expect this trend to continue as long as GoVideo sales are our mainsource of revenues.

 

*GrossProfit including Cost of Revenues*

 

Thedecrease in gross profit dollars and gross profit percentage for fiscal 2005 ascompared to fiscal 2004 was due to the following:

 

•      The liquidation of GoVideo’s significantlyoverstocked and overpriced inventory of DVD recorders, DVD Recorders + VCRs andMP3 players. At certain times during fiscal 2005, GoVideo had committedoutstanding orders as the prices of these products began to drop substantially. Although GoVideowas able to cancel and/or renegotiate some outstanding orders, it was notsufficient to mitigate the substantial price drop. As a result, GoVideo had toliquidate a substantial amount of inventory at negative gross profit. 

 

•      $1,869,000 netincrease to the inventory valuation during fiscal 2005; and

 

25

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•                  The continualdownward price pressure experienced by the overall consumer electronics market.

 

Weanticipate continued pressure on the selling prices of GoVideo’s differentconsumer electronics products until GoVideo’s business model is changed from anOEM to a brand licensing provider as previously discussed.

 

*Operating Expenses*

 

General and administrative (“G&A”).G&A expense consists primarily of personnel costs for our administrativeand support staff, allowance for doubtful accounts, and legal and accountingfees. The decrease in G&A expense for fiscal 2005 as compared to fiscal2004 was primarily a result of:

 

•                  The shut down of Correlant’s historical operations which contributed$642,000 to G&A during fiscal 2005 as compared to $3,848,000 during fiscal2004.

 

•                  The one time recovery of bad debt associated with settling a legaldispute, during fiscal 2005, with one of Correlant’s customers. The recoverytotaled $1,946,000.

 

Sales and marketing (“S&M”).S&M expense consists primarily of personnel costs for our sales staff,advertising and product promotional expenses. The increase in S&M expensefor fiscal 2005 as compared to fiscal 2004 was primarily due to the followingfactors:

 

•                  Increased sales and marketing efforts expended to launch the new MP3;

 

•                  Increased sales and marketing dollars offered to customers as anincentive to purchase GoVideo brand products as opposed to competitors’products that already exist in the market; and

 

•                  Increased headcount, prior to GoVideo’s downsizing, to support GoVideo’sgrowing business needs.

 

Research anddevelopment (R&D). R&D expenses consist primarily of personnel costs ofemployees engaged in research, design and development activities and, to alesser extent, design prototype material expenditures and equipment andsupplies required to develop new products and enhance existing products. The decrease in R&D expenses duringfiscal 2005 as compared to fiscal 2004 was directly related to the shut down ofCorrelant’s historical operations. Correlant incurred no R&D expensesduring fiscal 2005 as compared to $1,547,000 during fiscal 2004. This decreasewas somewhat offset by the increased R&D expense attributable to GoVideo’sincreased expenses to support GoVideo’s expanded product offerings.

 

We believeoverall operating expenditures may decrease as GoVideo has taken steps toreorganize certain aspects of its business. GoVideo has undertaken costreduction efforts, including reducing staff, realigning the roles andresponsibilities of management and reducing other operating expenses in anattempt to return to profitability and become cash flow positive. Additionally,we believe that going private will reduce our annual G&A expenses significantly, and also will allowthe Company to avoid significant G&A expenses because the Company will notbe required to comply with the internal control over financial reportingrequirements of Section 404 of the Sarbanes-Oxley Act.

 

Restructuring Charges. Duringthe second quarter of fiscal 2004, the Company’s board of directors approvedthe wind down and cessation of Correlant’s historical operations in the cablemodem industry. In connection with the shut down, Correlant recorded arestructuring charge of $1,845,000 during fiscal 2004. On November 4,2004 Correlant entered into a lease termination agreement for its San Diegofacility. In fiscal 2005, as a result of the lease termination, we reversed$78,000 of previously accrued facilities closing expense.

 

26

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The following table summarizesthe activity in the Company’s reserves associated with its shut down ofhistorical operations (*in thousands*):

 
| ** **                         | ** ** | **Separation   costs for   terminated   employees   and   contractors** | ** ** | **Facilities closing** | ** ** | **Other**  | ** ** | **Total  restructuring   charges** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|------------------------------------|------------|
| Balance at June 30, 2003      |       | $                                                                       | —     |                   | $          | —     |       | $                                  | —     |   | $ | — |   |
| Fiscal 2004  restructuring charges |       | 890                                                                     |       | 583                    |       | 372        |       | 1,845                              |       |
| Cash  payments                     |       | (628                                                                    | )          | (49                    | )          | (372       | )          | (1,049                             | )          |
| Balance at June 30, 2004      |       | 262                                                                     |       | 534                    |       | —     |       | 796                                |       |
| **Cash  payments**                 | ** ** | **(262**                                                                | **)**      | **(456**               | **)**      | **—** | ** ** | **(718**                           | **)**      |
| **Reversal  of over accrual**      | ** ** | **—**                                                              | ** ** | **(78**                | **)**      | **—** | ** ** | **(78**                            | **)**      |
| **Balance at June 30, 2005**  | ** ** | **$**                                                                   | **—** | ** **             | **$**      | **—** | ** ** | **$**                              | **—** | ** ** | **$** | **—** | ** ** |

 

Impairment of assets. Duringfiscal 2005, the Company recorded a charge of $538,000 relating to theimpairment of GoVideo’s property and equipment resulting from the down-sizingof operations subsequent to fiscal 2005. The impairment of assets during fiscal 2004 was mainly attributable tothe $1,795,000 write off of GoVideo’s goodwill. As part of our annualreview of financial results, we noted indicators that the carrying value ofGoVideo’s goodwill may not be recoverable. Based on the annual testingperformed, we wrote off the entire balance of GoVideo’s goodwill.

 

*Other Income (Expense)*

 

Other income (expense) consistsof interest income, interest expense, foreign exchange gain (loss) and othernon-operating items. Other income (expense) during fiscal 2005 was mainlyattributable to interest expense related to GoVideo’s debt. GoVideo’s interestexpense increased during fiscal 2005 as compared to fiscal 2004 as a result ofGoVideo’s increased average debt principal. Additionally, interest expense wasincurred at a higher default interest rate attributable to GoVideo’snon-compliance with certain debt covenants. During fiscal 2005, the interestexpense was somewhat offset by settling a legal dispute with acustomer of Correlant, Turbocomm Technologies, Inc. (“TurboComm”), as discussed above,resulting in a one time gain of $774,000and Opta also settling a dispute with TurboComm, a stockholder of Opta, whichresulted in a one time gain of $88,000. Interest income remained fairlyconstant during all periods presented as a result of the slightly decreasedcash and cash equivalents and short term investment balances offset by theslight increase in fixed income interest rates. For 2004 details, see “**Comparison of Fiscal 2004 to Fiscal 2003**.”

 

*Benefit for Income Tax*

 

Our fiscal 2005 benefit for income taxes was primarilyreflective of two income tax refunds received subsequent to June 30, 2005.The first refund was a result of the Internal Revenue Service (“IRS”) auditing ourtax years ended June 30, 2001, 2000, and 1999. The audit was resolved bythe Joint Committee on Taxation (“JCT”) and they approved our refund of federalincome tax of approximately $1,486,000. This refund was reduced by interestowed by us to the IRS (restricted interest), which resulted in a net refund of $473,000.The second refund was a result of amending our New Jersey State tax return toapply net operating losses generated in tax years ended June 30, 2002 and2001, to taxable income reported in the tax year June 30, 2000. As aresult, we received $1,134,000 from the State of New Jersey.

 

27

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**Comparisonof Fiscal 2004 to Fiscal 2003**

 

The following table summarizescertain aspects of our results of operations for fiscal 2004 compared to fiscal2003 (*in thousands):*

 
| ** **                         | ** ** | **June 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------------|------------|-------------------|------------|------------|------------|-------------------|------------|
| ** **                         | ** ** | **2004**          | ** ** | **2003**   | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
|                               |       |              |       |       |       |              |       |   |   |
| Revenues                           |       | $                 | 125,324    |       | $          | 19,454            |       | $ | 105,870 |   | 544 | % |
|                               |       |              |       |       |       |              |       |   |   |
| Gross profit                       |       | 10,125            |       | 4,022      |       | 6,103             |       | 152 | % |
| As a percentage of revenues        |       | 8                 | %          | 21         | %          |              |       |   |   |
|                               |       |              |       |       |       |              |       |   |   |
| General and administrative         |       | 8,199             |       | 7,838      |       | 361               |       | 5 | % |
| Sales and marketing                |       | 4,604             |       | 652        |       | 3,952             |       | 606 | % |
| Restructuring charges              |       | 1,845             |       | —     |       | 1,845             |       | NA |   |
| Depreciation and amortization      |       | 215               |       | 486        |       | (271              | )          | (56 | )% |
| Research and development           |       | 2,637             |       | 7,513      |       | (4,876            | )          | (65 | )% |
| Impairment of assets               |       | 1,831             |       | 498        |       | 1,333             |       | 268 | % |
|                               |       |              |       |       |       |              |       |   |   |
| Total other income (expense),  net |       | (78               | )          | 4,117      |       | (4,195            | )          | (102 | )% |
|                                    |            |                   |            |            |            |                   |            |  |  |  |  |  |

 

*Revenues*

 

The significant increase in overall revenues for fiscal 2004 ascompared to fiscal 2003 was primarily attributable to the following factors:

 

•                  Fiscal 2004 included GoVideo’s revenuefor the entire year as compared to fiscal 2003, which only included GoVideo’srevenues from April 18, 2003 through June 30, 2003.

 

•                  GoVideo’s revenues increased in fiscal2004 as compared to 2003 as a result of GoVideo coming out of bankruptcy, withliquidated assets and liabilities, and moving toward a company with growingoperations.

 

•                  GoVideo introduced a new product, theDVD Recorder + VCR, during the second quarter of fiscal 2004. Revenuesattributable to the new DVD Recorder + VCR totaled $23,164,000 during fiscal2004.

 

The positive impact of GoVideo was somewhat offset by the cessation ofCorrelant’s historical operations in the cable modem industry in December 2003.Correlant contributed revenues of $622,000 during fiscal 2004 as compared to$10,178,000 during fiscal 2003.

 

Revenues generated byinternational sales as a percentage of total revenues decreased to less than 1%in fiscal 2004 from 51% in fiscal 2003 as a result of the purchase of GoVideo. GoVideo’srevenues during fiscal 2004 as well as from April 18, 2003, the date ofpurchase through June 30, 2003 were all generated from sales to domesticcustomers.

 

*GrossProfit*

 

The increase in gross profitdollars for fiscal 2004 compared to fiscal 2003 was a direct result ofincreased revenues attributed to GoVideo as discussed above.

 

Although the gross profitdollars increased, the overall gross profit percentage dramatically decreasedas a result of the following:

 

•                  The products offerings by GoVideo duringfiscal 2003 were extremely limited compared to fiscal 2004 as GoVideo wascoming out of bankruptcy during fiscal 2003.

 

•                  GoVideo introduced several new productsduring fiscal 2004. With the introduction of these new products, GoVideo’spricing was aggressive as an attempt to gain market share.

 

•                  The change in revenue mix betweenGoVideo and Correlant products sold. Historically, consumer electronics bear alower gross margin than cable modem related products.

 

28

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•                  $272,000 increase in the reserve forGoVideo’s obsolete and lower of cost or market reserve for inventory to $510,000in fiscal 2004 from $238,000 in fiscal 2003. The fiscal 2004 reserve wasdirectly attributable to some of the newer products GoVideo brought to marketin 2004.

 

*OperatingExpenses*

 

General and administrative. G&Aexpense consists primarily of personnel costs for our administrative andsupport staff, allowance for doubtful accounts, and legal and accounting fees. Theincrease in G&A expense for fiscal 2004 as compared to fiscal 2003 wasprimarily a result of including GoVideo for the entire year in fiscal 2004 ascompared to fiscal 2003, which only included GoVideo from April 18, 2003through June 30, 2003.

 

The increase in G&A wassomewhat offset by the following:

 

•                  $1,498,000 decrease in allowance fordoubtful accounts to $481,000 in fiscal 2004 from $1,979,000 in fiscal 2003.The fiscal 2004 allowance related to GoVideo’s slow paying customers. For 2003 details, see “**Comparison of Fiscal 2003 to Fiscal 2002.**”

 

•                  The shut down of Correlant’s historicaloperations.

 

Sales and marketing. S&Mexpense consists primarily of personnel costs for our sales staff, advertisingand product promotional expenses. The increase in S&M expense for fiscal2004 as compared to fiscal 2003 was primarily due to the following factors:

 

•                  Fiscal 2004 included GoVideo for the entireyear as compared to fiscal 2003, which only included GoVideo from April 18,2003 through June 30, 2003;

 

•                  GoVideo’s business model has a higheroperational cost structure to promote and support the various product offeringsthan Correlant’s OEM business model; and

 

•                  The introduction and marketing ofseveral new GoVideo products during fiscal 2004 as discussed above.

 

Restructuring Charges. Duringthe second quarter of fiscal 2004, the Company’s board of directors approvedthe wind down and cessation of Correlant’s historical operations in the cablemodem and CMTS business. In connection with the shut down, the Company recordeda restructuring charge of $1,845,000 during fiscal 2004.

 

Depreciation and amortization (“D&A”).D&A expense consists of depreciation of property and goodwill amortizationrelated to the purchase of Correlant. The decrease in D&A expense was dueto the shut down of Correlant’s historical operations. Depreciation expenseattributable to Correlant decreased $418,000 during fiscal 2004 as compared tofiscal 2003 as a result of Correlant’s assets being impaired and written off asof June 30, 2003. The decrease in D&A was somewhat offset by theinclusion of GoVideo for the entire year as compared to fiscal 2003, which onlyincluded GoVideo from April 18, 2003 through June 30, 2003.

 

Research and development. R&Dexpense consists primarily of personnel costs, including amortization ofdeferred stock compensation of employees engaged in research, design anddevelopment activities and, to a lesser extent, design prototype materialexpenditures and expensed equipment and supplies required to develop newproducts and enhance existing products. The majority of R&D expenses duringfiscal 2004 and 2003 were attributable to Correlant. Therefore, the decrease inR&D expense for fiscal 2004 as compared to fiscal 2003 was directly relatedto the shut down of Correlant’s historical operations. The decrease wassomewhat offset by the inclusion of GoVideo for the entire year in fiscal 2004as compared to fiscal 2003, which only included GoVideo from April 18,2003 through June 30, 2003.

 

Impairment of assets. Theimpairment of assets during fiscal 2004 was mainly attributable to the$1,795,000 write off of GoVideo’s goodwill. As part of our annual reviewof financial results, we noted indicators that the carrying value of GoVideo’sgoodwill may not be recoverable. Based on the annual testing performed, wewrote off the entire balance of GoVideo’s goodwill. For 2003 details, see “**Comparison of Fiscal 2003 to Fiscal 2002**.”

 

*Total otherincome (expense)*

 

Total other income (expense)consists of interest income, interest expense, gain on sale of investments andother non-operating items. The main activities included in other income(expense) during fiscal 2004 were:

 

•                  $1,053,000 one time gain as a result ofselling our joint venture TCL Digital; and

 

29

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•                  $1,166,000 interest expense related toGoVideo’s increased debt.

 

For 2003 details, see “**Comparison of Fiscal 2003 to Fiscal 2002**.”

 

**Comparisonof Fiscal 2003 to Fiscal 2002**

 

The following table summarizescertain aspects of our results of operations for fiscal 2003 compared to fiscal2002 (*in thousands):*

 
| ** **                            | ** ** | **June 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------|------------|-------------------|------------|------------|------------|-------------------|------------|
| ** **                            | ** ** | **2003**          | ** ** | **2002**   | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
|                                  |       |              |       |       |       |              |       |   |   |
| Revenues                              |       | $                 | 19,454     |       | $          | 55,880            |       | $ | (36,426 | ) | (65 | )% |
|                                  |       |              |       |       |       |              |       |   |   |
| Gross profit                          |       | 4,022             |       | 5,939      |       | (1,917            | )          | (32 | )% |
| As a percentage of revenues           |       | 21                | %          | 11         | %          |              |       |   |   |
|                                  |       |              |       |       |       |              |       |   |   |
| Selling, general and administrative   |       | 8,490             |       | 6,019      |       | 2,471             |       | 41 | % |
| Depreciation and amortization         |       | 486               |       | 12,048     |       | (11,562           | )          | (96 | )% |
| Research and development              |       | 7,513             |       | 9,392      |       | (1,879            | )          | (20 | )% |
| Impairment of assets                  |       | 498               |       | 20,071     |       | (19,573           | )          | (98 | )% |
|                                  |       |              |       |       |       |              |       |   |   |
| Total other income (expense),  net    |       | 4,117             |       | 638        |       | 3,479             |       | 545 | % |
|                                  |       |              |       |       |       |              |       |   |   |
| Provision (benefit) for  income taxes |       | (109              | )          | (3,181     | )          | (3,072            | )          | (97 | )% |
|                                       |            |                   |            |            |            |                   |            |  |  |  |  |  |

 

*Revenues*

 

Revenues for fiscal 2003 ascompared to fiscal 2002 were positively impacted by the purchase of oursubsidiary, GoVideo, on April 18, 2003. Although fiscal 2003 only includedGoVideo’s revenues from April 18, 2003 through June 30, 2003, GoVideoaccounted for 48% of our consolidated revenues. The majority of GoVideo’srevenues during fiscal 2003 were generated from sales of DVD Recorders, DVDplayers, portable DVDs, DVD-VCR Combos and to a lesser extent, sales from theDual-Deck VCRs and LCD TVs. We expect GoVideo revenue as a relative percentageof revenue to grow as current management continues to rebuild the Company’sbusiness based on GoVideo and concentrate future business in the relatedindustries of consumer electronics and telecommunications.

 

The positive impact of GoVideo was more than offset by the significanteconomic slowdown in the cable modem industry, both domestic and international.Correlantcontinued to experience a slowdown in customer orders during fiscal 2003. Additionally,the average sales price of cable modems continued to decline, which in turnplaced price pressure on the cable modem components. Ultimately, thissignificant slowdown and continued pricing pressure resulted in the cessationof Correlant’s historical operations in the cable modem industry in December 2003.The significant decrease in overall revenues for fiscal 2003 as compared tofiscal 2002 was primarily attributable to the following factors:

 

•                  Unit sales of DOCSIS cable modems soldby Correlant decreased approximately 99%;

 

•                  The average selling price of DOCSIScable modems decreased approximately 37%;

 

•                  Unit sales of MAC+Software sold byCorrelant decreased approximately 34%; and

 

•                  Average sales price of MAC+Softwaredecreased approximately 54%.

 

Revenues generated byinternational sales as a percentage of total revenues decreased to 51% infiscal 2003 from 91% in fiscal 2002 as a result of the purchase of GoVideo. GoVideo’srevenues from the date of purchase through June 30, 2003 were allgenerated from sales to domestic customers. We expect international sales as arelative percentage of total revenues to decrease as GoVideo’s revenues as apercentage of total revenues continue to increase.

 

*GrossProfit*

 

The decrease in gross profitdollars for fiscal 2003 compared to fiscal 2002 was a direct result of reducedrevenue from declining MAC+Software unit sales and severe price competition. Thisdecrease was somewhat offset by the increase in 

 

30

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gross profit dollars attributedto GoVideo.

 

Although the gross profitdollars decreased, the overall gross profit percentage dramatically increasedas a result of the purchase of GoVideo and a higher portion of overall revenuesgenerated from the sale of Correlant’s MAC+software. GoVideo’s products and theMAC+Software both had higher gross profit percentages in fiscal 2003 than cablemodems during fiscal 2002.

 

*OperatingExpenses*

 

Selling, general andadministrative (“SG&A”). SG&A expense consists primarily of personnelcosts, including amortization of deferred stock compensation for ouradministrative and support personnel, allowance for doubtful accounts, andlegal and accounting fees. The increase in SG&A expense for fiscal 2003 ascompared to fiscal 2002 was primarily due to the following factors:

 

•                  $1,935,000 increase in allowance for doubtful accounts to $1,979,000 infiscal 2003 from $44,000 in fiscal 2002. $1,949,000 of the fiscal 2003allowance related to Correlant’s main customer TurboComm. On April 14,2004, Correlant filed a lawsuit against TurboComm in the District Court ofTaiwan seeking to collect TurboComm’s outstanding debt as a result of TurboComm’sunwillingness to pay. On July 30, 2004, Correlant reached a settlementagreement with TurboComm. Under the agreement, Correlant dismissed its lawsuitagainst TurboComm in exchange for the transfer of 700,000 Series A and300,000 Series C shares of Correlant preferred stock owned by TurboComm.Both parties mutually agreed to release and discharge any and all claims thateach may have against the other party. The remaining $30,000 allowance fordoubtful accounts in fiscal 2003 related to GoVideo’s slow paying customers. Fiscal2002 allowance related to Correlant’s smaller customers not being able to paydue to the significant economic slowdown in the downturn in the cable modemindustry.

 

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

 

•                  $400,000 increased legal and accountingfees resulting from the previously discussed takeover of Opta by TCL and thesubsequent replacement of prior Opta management, and the subsequent reaudit andrestatement of previously reported financial results; and

 

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

 

The above increases were partially offset by a decrease of $253,000 inamortization of deferred stock compensation as a result of accounting for stockoptions under the accelerated provisions allowed by Financial Accounting StandardsBoard (“FASB”) Interpretation (“FIN”) 44, *Accounting for CertainTransactions Involving Stock Compensation – An Interpretation of APB Opinion No. 25*.

 

Depreciation and amortization (“D&A”).D&A expense consists of depreciation of property and equipment and goodwillamortization related to the purchase of Correlant. The decrease in D&Aexpense was due to no goodwill amortization during fiscal 2003 as compared togoodwill amortization of $11,453,000 during fiscal 2002. Goodwill was deemedimpaired at June 30, 2002 and fully written off. The remaining decreasewas a result of the non-renewal of research and development softwaremaintenance due to the shutdown of Correlant’s historical operations.

 

Research and development (“R&D”).R&D expense consists primarily of personnel costs, including amortizationof deferred stock compensation of employees engaged in research, design anddevelopment activities and, to a lesser extent, design prototype materialexpenditures and expensed equipment and supplies required to develop newproducts and enhance existing products. The decrease in R&D expense forfiscal 2003 as compared to fiscal 2002 was primarily attributable to thefollowing factors:

 

•                  $811,000 decrease in amortization ofdeferred 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.

 

The above decrease was somewhat offset by the purchase of GoVideo,which added $607,000 to R&D expense.

 

Impairment of assets. The majority of the impairment of assets duringfiscal 2003 related to the cessation of Correlant’s historical operations. Assuch, $477,000 of Correlant’s fixed assets were deemed impaired and written off.Impairment of assets during fiscal 2002 related to the goodwill associated withthe 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 wasfully written off.

 

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*Total otherincome (expense)*

 

Total other income (expense)consists of interest income, interest expense foreign exchange gain (loss) andother non-operating items. We experienced net other income during fiscal 2003due to a $3,500,000 dispute settlement with prior auditors. Additionally, wereceived 3,000,896 shares of our common stock as part of the settlementwith USS Online, Travelway International Ltd. and Huaya Lu Tung. See “Item 3.Legal Proceedings.” The shares are accounted for as treasury stock and valuedat the adjusted closing sales price of $0.05 per share as reported by theNational Quotation Bureau’s “Pink Sheets” on the date the shares were acquiredwhich totaled $150,000. The remaining other income during fiscal 2003 was aresult of interest income earned on our cash account and investments, slightlyoffset by our interest expense. We experienced net other income during fiscal2002 primarily due to interest income earned on our cash and investments, whichwas offset slightly by our foreign exchange loss from our Taiwan branch andinterest expense.

 

*Provision(benefit) for income taxes*

 

Werecord an asset or liability for tax assessments based on our estimate of thepotential assessments. Among other reasons, new laws and new interpretations oflaws and rulings may affect the liability for potential tax assessments bytax authorities. Due to the subjectivity and complex nature of the underlyingissues, actual payments or refunds or assessments may differ from ourestimates. To the extent our estimates differ from actual payments or refundsor assessments, income tax expense is adjusted. In June 2003, we werenotified by the Internal Revenue Service (“IRS”) that it would be reviewing ourtax returns for the years ended June 30, 2001, 2000 and 1999. Subsequently,we filed amended returns for the years ended June 30, 2001, 2000 and 1999.The amendments relate to the restatement of our financial statements as well asthe deconsolidation of consolidated tax returns and subsequent filing ofseparate returns by us and each of our subsidiaries. Because we filed taxreturns separate from our subsidiaries, we could no longer offset income fromits sale of stock in subsidiaries against operating losses within itssubsidiaries. However, because we experienced losses in subsequent years theselosses were available to carryback against these gains.

 

**Liquidityand Capital Resources**

 

The following table summarizesour liquidity position and cash flows as of and for the year ended June 30,2005 (*in thousands*):

 
| Cash and cash equivalents              |   | $      | 2,844  |   |
|----------------------------------------|--------|--------|--------|--------|
| Short-term investments                 |   | 16,128 |   |
| Working Capital                        |   | 5,074  |   |
| Cash provided by operating  activities |   | 7,668  |   |
| Cash provided by investing  activities |   | 1,094  |   |
| Cash used by financing  activities     |   | (8,955 | )      |

 

As of June 30, 2005, ourprincipal source of liquidity included cash and cash equivalents and short-terminvestments of $18,972,000. Cash provided by operating activitieswas attributable to GoVideo’s decreased inventory and accounts receivable as aresult of scaling back GoVideo’s operations. Additionally, cash provided byoperating activities was positively impacted as a result of GoVideo’s accountspayable and accrued expenses, which increased as a result of managing GoVideo’sline of credit and payments to vendors. Cash provided by operating activitieswas somewhat offset by cash used to fund our consolidated net loss. Significant operating cash outlaysduring fiscal 2005 included payment of separation costs for terminated employees and contractors and facilityclosing costs totaling $782,000associated with the 2004 Correlant restructuring. We expect future cash provided(used) by operating activities to fluctuate, primarily as a result offluctuations in our operating results, the timing of product shipments,accounts receivable collections, inventory management and the timing of vendorpayments.

 

During fiscal 2005, our principal investing activities included the net sales of short- term investments and the netpurchase of property and equipment.

 

Financing activities during fiscal 2005 consisted almost entirely ofour subsidiary GoVideo receiving advances, and making payments on its availableline of credit. The net decrease to GoVideo’s line of credit was a result ofpaying down the principal as GoVideo received payments from customers. Theremaining financing activities were due to our subsidiary, DigiTech, borrowing$725,000 from TCL to expand operations in China. The loan originally matured June 30, 2005. However,the loan has been automatically extended for two six-month periods and may beautomatically extended for additional six month terms if DigiTech and TCL mutuallyagree to renew the loan.

 

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*Cash andWorking Capital Requirements*

 

At June 30, 2005, our mainoperating subsidiary, GoVideo, had three significant debt agreements, all ofwhich were materially impacted by transactions entered into subsequent to June 30,2005, as previously discussed.

 

The first agreement was theCredit Agreement with Wells Fargo Business Credit, which was originally enteredinto July 2003, subsequently amended several times, and ultimatelyscheduled to mature July 21, 2007. At June 30, 2005, GoVideo owedWells $6,172,000. On January 27,2006, pursuant to a Loan Sale Agreement dated January 20, 2006 betweenOpta and Wells, Opta purchased the entire right, title and interest of Wellsunder, and Opta became the Lender under, the Wells Credit Agreement. The purchase price was $2,148,000, whichconsisted of the following: $2,113,000 principal, $23,000 interest and unusedline of credit fees, and $12,000 legal and audit fees incurred by Wells. On February 1, 2006, Opta, as such Lender, and GoVideo furtheramended the Forbearance Agreement relating to the Wells Credit Agreement toextend the Forbearance Period to April 30, 2006, and to terminate theguaranty and the subordination agreement previously delivered by Opta to Wellsunder the Credit Agreement. See “**BusinessDevelopments Subsequent to Fiscal 2005.**”

 

The second and third agreementsthat were materially impacted by transactions entered into subsequent to June 30,2005, as previously discussed, were with TCL Industries and Asia Focus,entities affiliated with TCL. The advances had been used to fund inventorypurchases and operating expenses. These advances, which were subordinate toGoVideo’s line of credit, were originally due at various dates during 2004. GoVideowas unable to pay the loans and extended the maturity dates of both loans multipletimes. Both loans were collateralized by 100% of the Common and Preferred Series Dstock of Correlant Communications owned by Opta. The principal owed to TCLIndustries at June 30, 2005 was $1,500,000. The principal owed to AsiaFocus at June 30, 2005 was $4,700,000. Both loans were paid subsequent to June 30,2005.

 

Additionally, Opta had onesignificant debt agreement that was materially impacted subsequent to June 30,2005, as previously discussed. During fiscal 2004, Opta entered into afinancing agreement with TCL Industries. Opta ultimately loaned the funds toGoVideo to fund inventory purchases and operating expenses. Opta extended thematurity date of the loan multiple times. The loan was collateralized by 100%of Opta’s Common and Preferred Series D stock of Correlant Communications.The principal owed to TCL at June 30, 2005 was $4,500,000. See “**Item 13. Certain Relationships and Related Transactions.” **The loan to TCL Industries waspaid subsequent to June 30, 2005.

 

During fiscal 2005, one of our major challenges was managing liquidity.Liquidity has been an issue since we began growing our subsidiary, GoVideo, outof bankruptcy. As a result of the increasing concerns with liquidity, weentered significant transactions, as previously discussed, that decreasedconsolidated debt and increased consolidated working capital. See “**Business Developments Subsequent to Fiscal 2005**.”  While management’s goal is to guidethe Company toward profitability and positive cashflow, there can be noassurance that the Company’s future revenues or its cost control actions willenable it to return to profitability or generate a positive cashflow. Takinginto consideration the significanttransactions consummated subsequent to June 30, 2005, and considering current cash reserves and otherexisting sources of liquidity, we believe the consolidated Company hassufficient sources of financing to continue operations through at least thenext twelve months. However,if our capital requirements exceed liquidity available from operations, wecannot assure you that additional sources of financing would be available to uson commercially favorable terms, if at all.

 

*ContractualObligation*

 

The following table summarizesour contractual obligations at June 30, 2005, and the effect suchobligations are expected to have on our liquidity and cash flows in futureperiods (*in thousands*):

 
| ** **                          | ** ** | **Payments  Due by Period** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | ** **                  | ** ** | **Less  Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More    Than** | ** ** |
| ** **                          | ** ** | **Total**                   | ** ** | **1  Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **5  Years** | ** ** |
|                                |       |                        |       |   |   |   |   |   |   |   |   |
| Operating lease obligations         |       | $                           | 319        |   | $ | 304 |   | $ | 15 |   | $ | — |   | $ | — |   |
| Capital lease obligations           |       | —                      |       | — |   | — |   | — |   | — |   |
| Inventory purchase  obligations     |       | 2,864                       |       | 2,864 |   | — |   | — |   | — |   |
| Total contractual cash  obligations |       | $                           | 3,183      |   | $ | 3,168 |   | $ | 15 |   | $ | — |   | $ | — |   |

 

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During October 2005, Opta extended its office lease through October 2006.Future minimum lease payments, not included in the above table, related to thelease extension total approximately $30,000.

 

Substantially all our operatinglease obligations are building leases. The above inventorypurchase obligations are entered as part of the normal course of businessby our subsidiary, GoVideo, and are generally subject to renegotiation andcancellation at any time. TheCompany believes that its existing cash balances and funds expected to begenerated from future operations will be sufficient to satisfy thesecontractual obligations and that the ultimate payments associated with thesecommitments will not have a material adverse impact on the Company’s liquidityposition.

 

*Off-BalanceSheet Arrangements*

 

At June 30, 2005, we didnot have any relationship with unconsolidated entities or financialpartnerships, which other companies have established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.Therefore, we are not materially exposed to any financing, liquidity, market orcredit risk that could arise if we had engaged in such relationships.

 

***Trends***

 

Our Company’s operations havesignificantly changed during the period covered by this filing. We transitionedour operations from the development, manufacture and distribution of productsused for broadband Internet access, including data-over-cable equipment andnetworking devices to the development, marketing, and distribution ofinnovative, high performance consumer electronic products. Subsequent to thereporting period, GoVideo began changing its business model froman OEM model to a brand licensing provider by bridging manufacturers andretailers. As a result, there are no meaningful current or historical trends inproduction, sales or inventory, product backlog, product costs, selling pricesor levels of operating expenses.

 

As of January 31, 2006, to the best of our knowledge, no knowntrends or demands, commitments, events or uncertainties existed, which are likelyto have a material effect on our liquidity.

 

***CriticalAccounting Policies***

 

The discussion and analysis ofour financial condition and results of operations are based on the consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the U.S. The preparation of these financialstatements requires estimates and assumptions that affect the reported amountsand disclosures.

 

We believe the following, amongothers, to be critical accounting policies. That is, they are both important tothe portrayal of our financial condition and results of operations, and theyrequire critical management judgments and estimates about matters that areinherently uncertain. Although we believe our judgments and estimates areappropriate and correct, actual future results may differ from ourestimates.

 

•                  *Revenue recognition.*We recognize revenue upon passage oftitle of our product in accordance with the Securities and Exchange Commission(“SEC”) Staff Accounting Bulletin 101*, Revenue Recognition inFinancial Statements* (“SAB 101”), as amended by SAB 101A and 101B. Atthe time revenue is recognized, GoVideo records an allowance for estimatedsales returns based on estimates derived from historical trends. Sales returnsare recorded with net revenues. GoVideo also establishes an allowance forestimated payment term discounts expected to be taken by customers based onanalysis of historical trends. Payment term discounts granted are recorded inother expense.

 

•                  *Warranty Reserves*. GoVideo provides limited labor andparts warranties on certain of its products for a maximum of one year. GoVideorecords a warranty reserve based upon historical experience and an estimate oftotal exposure associated with products sold to consumers through retailoutlets. Correlant did not provide a product warranty. The warranty liabilityfor defective cable modems was the responsibility of the third-partymanufacturer*.*

 

•                  *Bad debt reserves*. We conduct business and extend creditbased on an evaluation of our customers’ financial condition generally withoutrequiring collateral. Exposure to losses on trade receivables is expected tovary by customer due to the financial condition of each customer. We monitorexposure to credit losses and maintain allowances for anticipated lossesconsidered necessary under the circumstances. Delinquent notes and tradeaccounts 

 

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receivableare charged against the allowance for doubtful accounts once uncollectibilityhas been determined. The allowance is determined through an analysis of theaging of accounts receivable and assessments of risk based on historical trendsand an evaluation of the impact of current and projected economic conditions. Weevaluate the past-due status of our notes and related parties and tradereceivables based on contractual terms of sale. If the financial condition ofour customers were to deteriorate, this could result in an impairment ofability to make payments, and additional allowances may be required.

 

•                  *Related party transactions.*We have significant related partytransactions and agreements; many of which are complex. We believe suchtransactions have been accounted for at fair value. We utilized our bestestimate of the value of these transactions and agreements. Had alternativeassumptions been used, the values obtained may have been different.

 

•                  *Inventories.* GoVideo’s inventory consists of mostlyfinished goods, some of which are in transit from its contract manufacturer. Correlant’sinventory consisted primarily of integrated circuits and other components to beused in the manufacture of cable modems. Inventories are stated at the lower ofcost or market with cost being determined on a first-in, first-out basis. Wewrite down our inventory for estimated obsolescence or unmarketable inventoryequal to the difference between the cost of the inventory and the estimatedmarket value based upon assumptions about future demand and market conditions. Dueto the aforementioned change in Correlant’s business model and the timing ofCorrelant’s product life cycle, the inventory was fully reserved at June 30,2003. It remained fully reserved until the shutdown of Correlant’s historicaloperations in the cable modem and cable modem-related market.

 

•                  *Investments.*Our investments consist primarily ofdebt securities. Investments are stated at fair value based on quoted marketprices obtained from an independent banker. Investments are classified asavailable-for-sale based on management’s intended use. As of June 30, 2005the cost of our investments approximated fair value. Currently we do not haveany equity investments in publicly traded companies. During the period coveredby this Annual Report, we held noncontrolling interests in private companieswith no active market, which required fair values to be estimated. We record 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 of businesses, which resulted insignificant goodwill and other identifiable intangible 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 an impairment review include, but are notlimited to, the following: (1) significant negative industry or economictrends; (2) current, historical or projected losses that indicatecontinuing losses; and (3) a significant decline in our marketcapitalization relative to net book value. When we determine there is anindicator the carrying value of the goodwill or other identifiable intangibleassets may not be recoverable, we measure impairment based on estimates offuture cash flow. These estimates include assumptions about future conditionswithin the Company as well as the entire industry.

 

•                  *Impairment of other long-livedassets.*Otherlong-lived assets, such as property and equipment, are amortized or depreciatedover their estimated useful lives. These assets are reviewed for impairmentwhenever events or circumstances provide evidence that suggest that thecarrying amount of the asset may not be recoverable, with impairment beingbased upon an evaluation of the identifiable undiscounted cash flows. If theasset has been impaired, the resulting charge reflects the excess of the asset’scarrying cost over its fair value.

 

***RecentlyIssued Accounting Standards***

 

In May 2003, the FASB issued SFAS 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*(“SFAS 150”). SFAS 150 represents the first phase of the FASB’sproject to clarify the accounting treatment of certain instruments that possesscharacteristics of both liabilities and equity. SFAS 150 generally requiresthat freestanding financial instruments that obligate the issuer to redeem theholders’ shares, or are indexed to such an obligation, and are settled in cash orsettled with shares meeting certain conditions be treated as liabilities. Theprovisions of SFAS 150 are effective immediately for instruments entered intoor modified after May 31, 2003 and to all other instruments that exist asof the beginning of the first interim financial reporting period beginningafter June 15, 2003, with the exception of mandatorily redeemableinstruments of non-public companies, which become subject to SFAS 150 forfiscal periods beginning after December 15, 2003. We adopted SFAS 150during fiscal 2005. 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, 2005.

 

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In November 2004, the FASB issued SFAS 151, *InventoryCosts*(SFAS 151), which revised ARB 43, relating to inventory costs.This revision is to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs and wasted material (spoilage). ThisStatement requires that these items be recognized as a current period chargeregardless of whether they meet the criterion specified in ARB 43. In addition,this Statement requires the allocation of fixed production overheads to thecosts of conversion be based on normal capacity of the production facilities.SFAS 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. We do not believe the adoption of SFAS 151will have a material impact on our financial statements.

 

In December 2004, the FASB issued SFAS 123R, *Share-BasedPayment* (“SFAS 123R”), which is a revision of SFAS 123 andsupersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25and the intrinsic value method of accounting, and requires companies torecognize the cost of employee services received in exchange for awards ofequity instruments, based on the grant date fair value of those awards, in thefinancial statements. The effective date of SFAS 123R is the first reportingperiod beginning after June 15, 2005. SFAS 123R permits companies to adoptits requirements using either a “modified prospective” method, or a “modifiedretrospective” method. Under the “modified prospective” method, compensationcost is recognized in the financial statements beginning with the effectivedate, based on the requirements of SFAS 123R for all share-based paymentsgranted after that date, and based on the requirements of SFAS 123 for allunvested awards granted prior to the effective date of SFAS 123R. Under the “modifiedretrospective” method, the requirements are the same as under the “modifiedprospective” method, but also permits entities to restate financial statementsof previous periods based on proforma disclosures made in accordance with SFAS123. We expect to adopt this new standard on June 1, 2006, usingthe modified prospective method. We do not believe the adoption of SFAS123R will have a material impact on our financial statements.

 

On December 16, 2004,the FASB issued Statement 153, *Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions*(“SFAS153”). SFAS 153 addresses the measurement of exchanges of nonmonetaryassets and redefines the scope of transactions that should be measured based onthe fair value of the assets exchanged. We expect to adopt this new standardduring fiscal 2006. We do not believe adoption of SFAS 153 will have a materialeffect on our consolidated financial position, results of operations or cashflows.

 

On June 7, 2005, the FASBissued Statement 154, *Accounting Changes andError Corrections*(“SFAS154”), a replacement of APB Opinion 20, *AccountingChanges*, and Statement 3, *ReportingAccounting Changes in Interim Financial Statements*. SFAS 154 changesthe requirements for the accounting for and reporting of a change in accountingprinciple. Previously, most voluntary changes in accounting principles wererequired recognition via a cumulative effect adjustment within net income ofthe period of the change. SFAS 154 requires retrospective application to priorperiods’ financial statements, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change. SFAS 154 iseffective for accounting changes made in fiscal years beginning after December 15,2005; however, the Statement does not change the transition provisions of anyexisting accounting pronouncements. We do not believe adoption of SFAS 154 willhave a material effect on our consolidated financial position, results ofoperations or cash flows.

 

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**Item 7A. Quantitativeand Qualitative Disclosures about Market Risk**

 

*InterestRisk*. Ourexposure to market risk for changes in interest rates relates primarily to ourinvestment portfolio. We do not use derivative financial instruments in ourinvestment portfolio. We place our investments with high credit quality issuersand, by policy, limit the amount of credit exposure to any one issuer. We areaverse to principal loss and ensure the safety and preservation of investedfunds by limiting default risk, market risk, 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 or guarantor.Our portfolio includes only corporate debt and government securities. The fairvalue of our investment portfolio fluctuates based on changes in marketconditions and interest rates; however, given the short term maturities, wehave not experienced significant market or interest rate risk.

 

The amortized cost, expected maturitydates and estimated fair value of our investment portfolio as of June 30,2005 and 2004, respectively, were as follows:

 
| ** **                      | ** ** | ** **    | ** ** | ** **                  | ** ** | **Fair**   | ** ** |
|---------------------------------|------------|---------------|------------|-----------------------------|------------|------------|------------|
| ** **                      | ** ** | **Amortized** | ** ** | **Expected Maturity Dates** | ** ** | **Market** | ** ** |
| ** **                      | ** ** | **Cost**      | ** ** | **2006**                    | ** ** | **2007**   | ** ** | **2008** | ** ** | **Value** | ** ** |
| **June 30, 2005**          |       |          |       |                        |       |       |       |   |   |   |   |
| Government Securities           |       | $             | 10,692     |                        | $          | 7,692      |       | $ | 3,000 |   | $ | — |   | $ | 10,567 |   |
| Weighted  average interest rate |       | 2.26          | %          | 2.26                        | %          | 2.26       | %          | — |   |   |   |
| Corporate Bonds                 |       | $             | 5,607      |                        | $          | 5,607      |       | $ | — |   | $ | — |   | $ | 5,561 |   |
| Weighted  average interest rate |       | 4.18          | %          | 4.18                        | %          | **—** | ** ** | **—** | ** ** | ** ** | ** ** |

 
| ** **                      | ** ** | ** **    | ** ** | ** **                  | ** ** | **Fair**   | ** ** |
|---------------------------------|------------|---------------|------------|-----------------------------|------------|------------|------------|
| ** **                      | ** ** | **Amortized** | ** ** | **Expected Maturity Dates** | ** ** | **Market** | ** ** |
| ** **                      | ** ** | **Cost**      | ** ** | **2006**                    | ** ** | **2007**   | ** ** | **2008** | ** ** | **Value** | ** ** |
|                            |       |          |       |                        |       |       |       |   |   |   |   |
| **June 30, 2004**          |       |          |       |                        |       |       |       |   |   |   |   |
| Government Securities           |       | $             | 11,042     |                        | $          | 1,000      |       | $ | 7,042 |   | $ | 3,000 |   | $ | 10,910 |   |
| Weighted  average interest rate |       | 2.18          | %          | 1.46                        | %          | 2.17       | %          | 2.44 | % |   |   |
| Corporate Bonds                 |       | $             | 6,774      |                        | $          | 1,527      |       | $ | 5,247 |   | — |   | $ | 6,733 |   |
| Weighted  average interest rate |       | 4.20          | %          | 4.06                        | %          | 4.24       | %          | — |   |   |   |
|                                 |            |               |            |                             |            |            |            |  |  |  |  |  |  |  |  |  |

 

We sold our entire investmentportfolio subsequent to June 30, 2005 as part of liquidatingCorrelant.

 

*ForeignCurrency Risk*. The majority of our transactions are denominated in the U.S. dollar. Therefore,we do not have any hedging or similar foreign currency contracts. To date, wehave not experienced any material foreign currency exchange rate gains orlosses associated with foreign currency transactions and do not expect anysignificant changes in foreign currency exposure in the near future.

 

**Item 8. FinancialStatements**

 

The information required byItem 8 is included on page F-1.

 

**Item 9. Changes in andDisagreements With Accountants on Accounting and Financial Disclosure**

 

On September 21, 2005, upon recommendationof the Company’s Audit Committee and approval of the Board of Directors, theCompany dismissed Hein & Associates LLP (“Hein”) as its independentauditors. Effective September 27, 2005 Opta Corporation (“Opta”) engagedClancy and Co., P.L.L.C. (“Clancy”) as independent principal accountant toaudit Opta’s audited financial statements for the year ending June 30,2005. During each of the Company’s two most recent fiscal years, there were: (i) nodisagreements with Hein on any matter of accounting principles or practices,financial statement disclosure, or auditing scope and procedure which, if notresolved to the satisfaction of Hein, would have caused Hein to make referenceto the matter in their report; and (ii) no reportable events as defined inItem 304(a) (1) (v) of Regulation S-K. For more detailsregarding our change in accountants, see our Form 8-K filed on September 29,2005.

 

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There were no disagreementswith accountants on accounting and financial disclosure during fiscal 2005.

 

**Item 9A. Controlsand Procedures**

 

Inconnection with the audit of our financial statements for the year ended June 30,2005, Clancy and Co., P.L.L.C. (“Clancy”), our independent auditors, informedthe Board of Directors on February 20, 2006 of several “significantdeficiencies” that collectively constituted a “material weakness” in ourinternal control over financial reporting under standards established by thePublic Company Accounting Oversight Board.

 

A*significant deficiency* is a controldeficiency, or combination of control deficiencies, that adversely affects theCompany’s ability to initiate, authorize, record, process or report externalfinancial data reliably in accordance with generally accepted accounting principlessuch that there is more than a remote likelihood that a misstatement of theCompany’s annual or interim financial statements that is more thaninconsequential will not be prevented or detected. A *materialweakness* is a significant deficiency, or combination ofsignificant deficiencies, that results in more than a remote likelihood that amaterial misstatement or the annual or interim financial statements will notebe prevented or detected.

 

Thefollowing conditions, all of which were communicated to the Audit Committee byOpta’s previous auditors (Hein) and for which no apparent improvement was made,were identified:

 

•                  The current organization of the accountingdepartment does not provide Opta with the adequate skills to accurately accountfor and disclose significant transactions or disclosures.

 

•                  Certain key managers in the accountingdepartment do not appear to have the knowledge and experience required fortheir responsibilities.

 

•                  Substantive matters are not being addressedappropriately by the Board and Audit Committee resulting in inadequateoversight from the Board and Audit Committee.

 

•                  The process that Opta is currently using tomonitor the ongoing quality of internal controls performance, identifydeficiencies and trigger timely corrective action is not working effectively.

 

•                  There is no adequate means of accuratelycapturing and recording certain significant and complex business transactions.

 

Accordingly,the Company’s internal controls over financial reporting are still noteffective:

 

Basedupon the Company’s evaluation, which considered the above findings of Clancy,the Company’s management, including the Chief Executive Officer, ChiefFinancial Officer and the Chief Operating Officer concluded that, as of June 30,2005, the Company’s internal controls over financial reporting were noteffective.

 

***Evaluationof disclosure controls and procedures***

 

The Company’s managementevaluated, with the participation of the Chief Executive Officer and theInterim Chief Financial Officer, the effectiveness of the Company’s disclosurecontrols and procedures as of the end of the period covered by this AnnualReport on Form 10-K. Based on this evaluation, the Company’s principalexecutive officer and principal financial officer have concluded that, as ofsuch date, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act) need to be strengthened and are notsufficiently effective. We have taken various steps to maintain the accuracy ofour financial disclosures, and based on these measures and other significantwork, management believes there are no material inaccuracies or omissions ofmaterial fact in our financial statements and other reports filed with the SEC.However, material weaknesses in our internal controls over financial reportingcould further adversely impact our current inability to report timely financialinformation. Our efforts to strengthen our disclosure controls and procedureshave been delayed due to the Going Private Transaction described above in “**Item 1. Business**.” The Going Private Transaction will enable us to terminate our PeriodicReporting Obligations so that we may continue future operations as aprivate company, relieving us of the costs, administrative burdens andcompetitive disadvantages associated with operating as a public company.

 

***Changes in Internal Control***

 

In connection with the audit of our financial statements for the yearended June 30, 2004, Hein & Associates LLP (“Hein”), ourindependent auditors at that time, informed the Board of Directors of a “reportablecondition” that constituted a “material 

 

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weakness” in our internal control over financial reporting under standardsestablished by the American Institute of Certified Public Accountants, orAICPA. A material weakness was defined for the applicable periods as areportable condition in which the design or operation of one or more of theinternal control components does not reduce to a relatively low level the riskthat misstatements caused by error or fraud in amounts that would be materialin relation to the financial statements being audited may occur and not bedetected within a timely period by employees in the normal course of performingtheir assigned functions. A reportable condition was defined for the applicableperiods as a matter that relates to significant deficiencies in the design oroperation of internal controls that could adversely affect an organization’sability to record, process, summarize and report financial data consistent withthe assertions of management in the financial statements. While we areimplementing steps to ensure the effectiveness of our internal control overfinancial reporting, there were no changes in our internal control over financial reporting thatoccurred during our most recently completed fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting. Notwithstanding the foregoing, a control system, nomatter how well designed and operated, can provide only reasonable, notabsolute, assurance that it will detect or uncover failures within the Companyto disclose material information otherwise required to be set forth in theCompany’s periodic reports. TheGoing Private Transaction described above will enable us to terminate ourperiodic reporting obligations so that we may continue future operationsas a private company, relieving us of the costs, administrative burdens andcompetitive disadvantages associated with operating as a public company. As aresult of the Going Private Transaction, we have experienced delays in ourefforts to ensure the effectiveness of our internal controls over financial reporting.See “**Item 1. Business.**”

 

**Item 9B. OtherMatters**

 

None.

 

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**PART III**

 

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

 

As permitted under Section 228of the Delaware General Corporation Law, by written consent dated May 16,2005, stockholders of the Company representing more than a majority of theissued and outstanding shares of common stock elected the current OptaCorporation Directors.

 

*(A) OptaCorporation Directors*

 

Our Board of Directors iscurrently divided into three classes with staggered terms. Our Class IDirector, Zuoquan Lin, will stand for reelection at the 2008 Annual Meeting ofstockholders, or until his successor is duly elected and qualified or until hisdeath, resignation or removal. Our Class II Director, Vincent Yong Yan,will stand for reelection at the 2006 Annual Meeting of stockholders, or untilhis successor is duly elected and qualified or until his death, resignation orremoval. Our Class III Directors, Dongsheng Li and James Jian Liu, willstand for reelection at the 2007 Annual Meeting of stockholders, or until theirsuccessors are duly elected and qualified or until their death, resignation orremoval. The following table sets forth certain information with respect to thedirectors of the Company as of June 30, 2005:

 
| **Name**          | ** ** | **Age** | ** ** | **Office**                                                  | ** ** |
|-------------------|------------|---------|------------|-------------------------------------------------------------|------------|
| LI, Dongsheng     |       | 48      |       | Chairman of the Board and Class III  Director          |       |
| YAN, Vincent Yong |       | 42      |       | President, Chief Executive  Officer, Class II Director |       |
| LIU, James Jian   |       | 49      |       | Class III Director                                     |       |
| LIN, Zuoquan      |       | 42      |       | Class I Director                                       |       |

 

Mr. Dongsheng Li waselected as a Class III Director of the Company on June 29, 2001. Mr. Lialso has served as Chairman of the board of directors of the Company’ssubsidiary, Correlant, since February 2003. Mr. Li has been Chairmanof the board of directors and President of TCL Corporation (formerly TCLHoldings Co., Ltd.), a People’s Republic of China company (and TCL’sparent company), since 1996. Mr. Li is also the Chairman of the board ofdirectors of TCL International Holdings, Ltd. Mr. Li has 20 years ofexperience in the telecommunication equipment and consumer electronicsindustry. Mr. Li holds a Bachelor degree in Engineering from South ChinaUniversity of Technology.

 

Mr. Vincent Yong Yan waselected as a Class II Director of the Company on June 29, 2001. Mr. Yanhas been the President, CEO and Secretary of the Company since June 29,2001. Mr. Yan was the CFO of the Company from June 29, 2001 until November 2002.Mr. Yan also has served as a Vice President, director and member of theExecutive Committee of the board of directors of Correlant since February 2003.Mr. Yan has been Executive Director and Chief Financial Officer of TCLInternational Holdings, Ltd., a publicly traded consumer electronics andinformation technology company since 1999. Mr. Yan was appointed CFO ofTTE Corp., a joint venture between TCL and Thomsom S.A. in 2004. Additionally,he was elected chairman of the board of TTE Corp in 2004 and Chairman of theBoard of TCL-Alcatel in December, 2004. Prior to joining TCL, Mr. Yanserved as PRC Country Manager of Tulip Computers (Asia) Ltd., a subsidiary of aEuropean computer manufacturer. Mr. Yan has over ten years of experiencein the computer and consumer goods industries. Mr. Yan holds an MBA fromStanford University and a Masters degree in Computer Science from PekingUniversity.

 

Mr. James Jian Liu wasappointed as a Class III Director of the Company on August 6, 2001. Mr. Liualso has served as a director of Correlant since February 2003. Mr. Liuserved as President of JBL International Inc., an apparel agent in NewYork, New York, from January 1996 to the present. He earned his BA degreefrom Nanjing University, China.

 

Professor Zuoquan Lin wasappointed as a Class I Director on March 25, 2002. Professor Lin alsohas served as a director of Correlant since February 2003. He is currentlythe Dean of the Department of Information Science, a position he has held since1998, and is the Director of the Networking Research and Development Center atPeking University, China, having held the position since 1999. His main areasof research include computer software, artificial intelligence, network economyand management information system. Professor Lin also is currently an independentconsultant in enterprise strategy and information technology.

 

There were no changes inprocedures for nominating Opta directors during the fiscal year ended June 30,2005.

 

The Company will provide a copyof our Board Nomination Procedures to any person, free of charge, upon writtenrequest sent to our principal executive office.

 

40

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*(B) OptaCorporation Executive Officers*

 
| **Name**            | ** ** | **Age** | ** ** | **Office**                                                  | ** ** |
|---------------------|------------|---------|------------|-------------------------------------------------------------|------------|
| YAN, Vincent Yong   |       | 42      |       | President, Chief Executive  Officer, Class II Director |       |
| WANG, Sean Shaojian |       | 41      |       | Chief Operating Officer,  Interim Chief Financial Officer   |       |

 

See discussion related to Mr. Yanabove.

 

Sean Shaojian Wang wasappointed as the Company’s Chief Operating Officer in June 2004. EffectiveApril 5, 2005, Mr. Wang began serving as the interim chief financialofficer of Opta until Opta has completed a search for a new chief financialofficer. Mr. Wang served as the Chief Financial Officer, from 2002 to2004, of PacificNet, Inc., a company in Minneapolis, Minnesota whoseshares are traded on NASDAQ(Symbol: PACT). PacificNet, Inc., through its subsidiaries,invests, operates and provides value-added telecom services (“VAS”) andproducts solutions in China. From 1993 to 2002, Mr. Wang served as amanaging director of Thian Bing Investments PTE, Ltd. in Singapore, aninvestment company in oil seeds planting, edible oil processing, packingmaterials and the other related industries. Mr. Wang graduated fromHamline University in St. Paul, Minnesota with a Bachelor of Science in 1986and from the University of Minnesota with a Masters of Business Administrationin 1989.

 

None of the members of theBoard of Directors or executive officers of the Company are related to oneanother.

 

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

 

Section 16(a) of theSecurities Exchange Act of 1934 requires our directors and executive officers,as well as persons who own more than 10% of a registered class of ourequity securities, to file with the Securities and Exchange Commission initialreports of ownership and reports of changes in beneficial ownership. Directors,executive officers, and greater than 10% shareholders are required bySecurities and Exchange Commission regulation to furnish us with copies of all Section 16(a) formsthey file. Based solely upon a review of the copies of such forms furnished tous, or written representations that no Forms 5 were required, we believe thatduring the fiscal year ended June 30, 2005, our directors and officerscomplied with all Section 16(a) filing requirements.

 

(D) *Code ofEthics*

 

The Company has adopted a codeof ethics that applies to all employees, executive officers and all members ofour finance department, including the principal accounting officer. Our code ofethics, which was originally adopted on March 26, 2004, is included as Exhibit 14.1filed herewith.

 

(E)  *AuditCommittee*

 

The Company has a separatelydesignated standing Audit Committee of the Company’s Board of Directorsestablished in accordance with Section 3(a)(58)(A) of the SecuritiesExchange Act of 1934, as amended. James Jian Liu and Zuoquan Lin are themembers of our Audit Committee. The Audit Committee represents the Board ofDirectors in discharging its responsibility relating to the accounting,reporting and financial practices of the Company and its subsidiaries and shallhave general responsibility for surveillance of the systems of internalcontrols, which management and the Board of Directors have established, theperformance and selection of independent auditors, and our audit and financialreporting processes. Opta has no “audit committee financial expert” asdefined in Item 401(h) of Regulation S-K due to the aforementioned Going PrivateTransaction.

 

41

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**AuditCommittee Report**

 

The Audit Committee,operating under its written charter, has (1) reviewed and discussed theaudited financial statements of the Company as of and for the year ended June 30,2005, with management of the Company; (2) discussed with the Company’sindependent accountants the matters required to be discussed by Statement onAuditing Standards (“SAS”) No. 61, *Communications with AuditCommittees*, and SAS No. 90, *Audit CommitteeCommunications*; (3) received and reviewed the writtendisclosures and the letter from its independent accountants required byIndependence Standards Board Standard No. 1, *IndependenceDiscussions with Audit Committees*; and (4) discussed with itsindependent registered public accounting firm, the independent registeredpublic accounting firm’s independence. Based on its review and discussionslisted above, the Audit Committee recommended to the Board of Directors thatthe audited financial statements be included in the Company’s Annual Report on Form 10-Kfor the year ended June 30, 2005, for filing with the Securities andExchange Commission.

 

This report is submitted bythe Audit Committee.

 
| * * | */s/* *LIU, Jian*    | * * |
|----------|---------------------------|----------|
|     | LIU, Jian                 |     |
|     |                      |     |
| * * | */s/* *LIN, Zuoquan* | * * |
|     | LIN, Zuoquan              |     |

 

**Item 11. ExecutiveCompensation**

 

The following table shows forthe fiscal years ended June 30, 2005, 2004 and 2003, compensation awardedor paid to, or earned by each of the Named Executive Officers at June 30,2005:

 

**Summary Compensation 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)                |       | 2005                     |       | $                          | 180,000    |       | $          | 30,000 |   | — |   | — |   | — |   | — |   | — |   |
| President, Chief                 |       | 2004                     |       | 180,000                    |       | 150,000    |       | — |   | — |   | — |   | — |   | $ | 39,000 |   |
| Executive Officer,               |       | 2003                     |       | 120,000                    |       | —     |       | — |   | — |   | — |   | — |   | 39,000 |   |
| CFO (3)                          |       |                     |       |                       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Sean Wang                        |       | 2005                     |       | $                          | 160,000    |       | $          | 20,000 |   | — |   | — |   | — |   | — |   | $ | 28,000  |   |
| COO, Interim CFO                 |       | 2004                     | (2)        | 160,000                    |       | —     |       | — |   | — |   | — |   | — |   | — |   |
|                             |       | 2003                     |       | N/A                        |       | —     |       | — |   | — |   | — |   | — |   | — |   |

 

----

(1) Mr. Yan has an employment contract with the Company signed on June 29,2001. The contract was automatically extended for a year on June 30, 2005.

 

(2) Reflects Mr. Wang’s annual salary at the time he was appointedChief Operating Officer in June 2004.

 

(3) Mr. Yan was Opta’s CFO from June 2001 until November 2002.

 

**StockOptions**

 

No current executive officer ordirector of the Company holds any stock options. No stock option grants weremade during fiscal 2005. No stock appreciation rights were granted duringfiscal 2005.

 

**OptionExercises and Holdings**

 

No current executive officer ordirector of the Company holds any option, and no options were exercised duringfiscal 2005.

 

**DirectorCompensation**

 

During fiscal 2005,non-employee directors of the Company were each offered $20,000 per year toserve on Opta’s Board of Directors, plus actual out-of-pocket expenses forattendance at each board meeting. During fiscal 2005, no board member acceptedthe $20,000 payment. Although non-employee directors were eligible to receivean option to purchase 5,000 shares of the Company’s common stock for eachfiscal year that they serve as Directors, no Director received such optionsduring fiscal 2005.

 

42

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Directors who are alsoemployees of the Company do not receive cash payments or stock options fortheir service on the Board of the Directors.

 

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

 

None of the other employeesbesides Mr. Yan has any employment or severance agreement with the Companyand their employment may be terminated at any time at the discretion ofthe Board of Directors.

 

On June 29, 2001, theCompany entered into a one-year employment agreement with Mr. Yan for thepositions of President, Chief Executive Officer, Chief Financial Officer from June 2001to November 2002, and Secretary of the Company. This agreement may beextended for successive one-year periods by the Company and Mr. Yan. Forhis services, Mr. Yan was originally paid an annual salary of $120,000,increased to $180,000 in fiscal 2004, and an annual bonus to be determined inthe discretion of the Company’s Compensation Committee of the Board ofDirectors. A copy of the employment contract with Vincent Yan was attached inthe Company’s Form 10-K filed on October 12, 2001. During fiscal2005, Mr. Yan’s employment agreement was extended for one year without anychanges.

 

**CompensationCommittee Interlocks and Insider Participation**

 

The CompensationCommittee, established by the Board of Directors in March 2004, reviewsand approves the compensation for executive officers of the Company on anannual basis. Members of the Compensation Committee, James Jian Liu and ZuoquanLin, are independent directors and are not employees of the Company. Neither of them currently are,nor ever been, officers or employees of Opta or any of its subsidiaries.

 

Before the Compensation Committee was created, compensation forexecutive officers was determined by three members of the Board of Directors,Jian Liu, Zuoquan Lin and Li Dongsheng, Chairman of the Board.

 

**Compensation Committee Reporton Executive Compensation**

 

The following is the report of the compensation committee of the boardof directors, describing the compensation policies and rationale applicable tothe Company’s executive officers with respect to the compensation paid to suchexecutive officers for the fiscal year ended June 30, 2005.

 

*Purpose of the Compensation Committee*. The committee is responsible for determining compensation levels forthe Company’s executive officers for each fiscal year based upon a consistentset of policies and procedures.

 

*Committee Structure.* The committee is made up of two members; both of which areindependent, non-employee members of the board of directors. The Committeemeets on an as needed basis. No prior or current member of the committee hasany interlocking relationships as defined by the Securities and ExchangeCommission.

 

*Objectives of the Compensation Program*. The objectives of the compensation program are: (1) to provide ameans for the Company to attract and retain high-quality executives, (2) totie executive compensation directly to the Company’s business and performanceobjectives, and (3) to reward outstanding individual performance thatcontributes to the long-term success of the Company.

 

*Elements of Compensation.* Each executive officer’s compensation package is ordinarily comprisedof two elements: (1) base compensation, which reflects individualperformance and is designed primarily to be competitive with salary levels in acomparative group, and (2) annual bonus plan compensation ordinarilypayable in cash and tied to both the achievement of individual performanceobjectives and company financial performance goals established by the committee.Although there is a third element, stock options, available, no stock optionshave ever been granted to executives.

 

*Base Compensation.* The base compensation for each executive officer is determined byanalyzing competitive salary ranges of companies similar in size and business. Thecommittee believes that the current base compensation for executive officers isat the mid-range of comparative companies. The committee intends base salary toprovide executives with a level of stability and certainty each year andintends that this particular component of compensation not be affected to anysignificant degree by company performance factors.

 

*Annual Bonus Plan Compensation.* The Company’s annual bonus plan provides for incentive bonuscompensation to all officers based on the achievement of specific corporateperformance targets established during the year.

 

43

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Both the Chief Executive Officer and the Chief Operating Officerreceived no base compensation increase during fiscal 2005 as both salary levelswere deemed to be competitive with the current market. Both the Chief ExecutiveOfficer and the Chief Operating Officer received bonuses commensurate with jobperformance as a result of Opta meeting strategic goals set by the Board ofDirectors.

 

Respectfully Submitted:

 

Compensation Committee

 
| * * | */s/* *LIU, Jian*    | * * |
|----------|---------------------------|----------|
|     | LIU, Jian                 |     |
|     |                      |     |
| * * | */s/* *LIN, Zuoquan* | * * |
|     | LIN, Zuoquan              |     |

 

44

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**StockPrice Performance Graph**

 

The line graph below comparesthe cumulative total shareholder return on our Opta common stock with thecumulative total return for the Standard & Poor’s SmallCap 600 Indexfrom June 30, 2001 through June 30, 2005 and a peer group of consumerelectronic-related companies beginning June 30, 2003. Due to the dramaticshift in business focus from cable modems and cable-modem related equipment toconsumer electronics during fiscal 2003, we are unable to present anymeaningful comparisons to peers prior to June 30, 2003. The graph assumesthe value of the investment in our Opta common stock and the SmallCap 600 Indexwas $100 at June 30, 2001 and $100 investment in consumer electronic-relatedpeer group at June 30, 2003. It also assumes that all dividends paid bythose companies included in the indexes were reinvested. No cash dividends havebeen declared on our Opta common stock.

 

Comparisonof 5 Year Cumulative Total Return*

 

OptaCorporation and Standard & Poor’s SmallCap 600 Index

 

 

 

----

* $100 invested on June 30,2001 in stock or index – including reinvestment of dividends. Fiscal yearending June 30.

 
| ** **                      | ** ** | **June 30,** | ** ** |
|---------------------------------|------------|-------------------|------------|
| ** **                      | ** ** | **2001**          | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Opta Corporation                |       | $                 | 100.00     |   | $ | 9.62 |   | $ | 0.61 |   | $ | 0.41 |   | $ | 0.81 |   |
| S&P SmallCap 600            |       | 100.00            |       | 99.87 |   | 95.39 |   | 127.92 |   | 143.79 |   |
| Consumer Electronic Peer  Group |       |              |       |   |   | 100.00 |   | 120.43 |   | 105.62 |   |
|                                 |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

45

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Theconsumer electronic peer group is composed of the publicly-traded common stockof several consumer electronic-related companies. We believe the consumerelectronic peer group is representative of the industry in which we haveoperated since fiscal 2003.

 

Stockholder returns over the indicatedperiod should not be considered indicative of future stockholder returns.

 

**Item 12. SecurityOwnership of Certain Beneficial Owners and Management**

 

The following table sets forthinformation with respect to the number of shares of Common Stock beneficiallyowned as of June 30, 2005 by (i) all persons who are beneficialowners of five percent or more of the Company’s Common Stock, (ii) theCompany’s executive officers named in the Summary Compensation Table above, (iii) eachdirector and nominee for director of the Company, and (iv) all currentexecutive officers and directors as a group as of January 31, 2006:

 
| **Title  of Class** | ** ** | **Name and Address of  Beneficial Owner**                                                                                                            | ** ** | **Amount  and   Nature of   Beneficial Owner****(1)** | ** ** | **Percent  of Class ****(1)** | ** ** |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------|------------|
| Common Stock        |       | Lotus International Holdings Ltd.(2)  Suite 13 First Fl., Oliaji Trade Center  Francis Rachel Street  Victoria, Mahe Republic Of Seychelle |       | 16,000,000                                            |       | 32.0                               | %          |
| Common Stock        |       | TCL Industries Holdings (HK) Ltd.(3)  13/F TCL Tower  8 Tai Chung Road  Tsuen Wan, Hong Kong                                                    |       | 9,606,671                                             |       | 19.2                               | %          |
| Common Stock        |       | LI, Dongsheng                                                                                                                                        |       | —                                                |       | —                             |       |
| Common Stock        |       | YAN, Vincent Yong                                                                                                                                    |       | —                                                |       | —                             |       |
| Common Stock        |       | LIU, James Jiam                                                                                                                                      |       | —                                                |       | —                             |       |
| Common Stock        |       | LIN, Zuoquan                                                                                                                                         |       | —                                                |       | —                             |       |
| Common Stock        |       | WANG, Sean                                                                                                                                           |       | —                                                |       | —                             |       |
|                |       | All directors and executive officers as a  group (consisting of 5 persons)                                                                           |       | —                                                |       | —                             |       |

 

----

(1) All information is as of January 31, 2006 and determined inaccordance with Rule 13d-3 under the Securities Exchange Act of 1934, asamended, based solely upon information furnished by the persons listed orcontained in filings made by them with the Securities and Exchange Commission.

(2) Lotus International Holdings Ltd. is controlled by TCL IndustriesHoldings (HK) Ltd.

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

 

The stockholders approved the2000 Equity Incentive Plan (“Incentive Plan”) on April 28, 2000. The Boardof Directors administers the Incentive Plan. Employees, directors, andconsultants of the Company and its affiliates, who in the judgment of the Boardrender significant service to the Company, are eligible to participate. TheIncentive Plan provides for the award of a broad variety of stock-basedcompensation alternatives such as nonstatutory stock options, incentive stockoptions, restricted stock, performance awards and stock appreciation rights.The Incentive Plan provided 11,355,000 shares of common stock to be offered.The vesting provisions of individual options may vary. The exercise priceshall not be less than 100% of the fair market value of a common stock on thegrant date. No options have been granted since the Incentive Plan’s adoption.

 

As part of the 1999acquisition of Correlant,Opta entered into share exchange agreements with Correlant. As stipulated bythe agreement, Opta set aside a total of 1,708,000 of contingently issuableshares of Opta common stock. The contingent shares were to be issued asCorrelant stock options, specified in the purchase agreements, were exercised. Foreach option exercised by a Correlant stock option holder, 81% of such shareswere to be transferred to Opta in exchange for 0.5364 shares of Opta commonstock for each share of Correlant stock transferred. There were 0, 3,000 and1,017,000 Opta shares contingently issuable in connection with both shareexchange agreements as of June 30, 2005, 2004 and 2003, respectively.

 

46

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**Item 13. CertainRelationships and Related Transactions**

 

In addition to Mr Yan’semployment agreement discussed in Item 11, Opta entered into the followingtransactions during fiscal 2005 required to be reported under Item 404 ofRegulation S-K:

 

On July 7, 2004, theCompany’s Board of Directors approved the commencement of a new wholly-ownedsubsidiary, DigiTech, which will be located in Guangdong, China. DigiTech willmarket GoVideo’s MP3 players. The Company invested approximately $500,000 inthe new subsidiary. TCL Multimedia, an affiliate company of TCL, expended someresources during the start up phase of DigiTech. On July 7, 2004, theCompany’s Board of Directors approved the closure of Beijing Lotus. All assetsof Beijing Lotus were transferred to DigiTech during September, 2004.

 

On April 19, 2005, theCompany’s subsidiary, DigiTech entered a short term loan for $725,000 with TCLthat originally matured June 30, 2005. The loan has been automaticallyextended for two six-month periods and may be automatically extended foradditional six month terms if DigiTech and TCL mutually agree to renew the loan.The annual interest rate is 5.2% and interest is paid upon maturity of theloan.

 

Subsequent to fiscal 2005, Optaentered into the following transactions required to be reported under Item 404of Regulation S-K:

 

As previously reported,pursuant to a purchase and sale agreement dated July 26, 2005 amongGoVideo, TCL MM, TCL Industries, Asia Focus and Opta, TCLMM agreed to assumethe debt obligations owed by GoVideo to TCL Industries and Asia Focus underthree promissory notes, with obligations totaling approximately $11,000,000 at July 26,2005. The Existing Obligations were previously guaranteed by Opta, and securedby Opta’s pledge of 100% of the Common Stock and Series D Preferred Stockof Correlant, held by Opta. Pursuant to the TCLMM Agreement, TCL Industries andAsia Focus released Opta’s obligations as guarantor under the ExistingObligations and released Opta’s pledge of the Correlant shares.

 

In consideration for TCLMM’sassumption of the Existing Obligations, GoVideo (i) assigned to TCLMM allof GoVideo’s right, title and interest in and to certain significantintellectual property assets of GoVideo (the “GoVideo IP”) and (ii) issueda promissory note in favor of TCLMM (the “TCLMM Note”) for an initial principalamount of $1,000,000, representing the preliminary difference between the valueof the GoVideo IP, as determined by a third-party appraiser, and the ExistingObligations assumed by TCLMM. A subsequent independent appraisal of the GoVideo IP was completed,which reduced the final valuation of the GoVideo IP by $700,000. As a result,the TCLMM Note automatically increased to $1,700,000.

 

The TCLMM Note principal and interest, at amonthly interest rate of 0.257%, was originally due and payable on January 26,2006. Pursuant to the agreement, GoVideo granted to TCLMM a subordinated lienon all of GoVideo’s assets, as security for the TCLMM Note, junior to the lienunder the Wells Credit Agreement. In addition, Opta agreed to guaranty GoVideo’sobligations under the TCLMM Note pursuant to a Guaranty dated July 26,2005. GoVideo paid the principal and intereston the TCLMM Note in full on February 14, 2006.

 

On August 30, 2005,GoVideo and TCLMM entered into a non-exclusive license agreement through October 24,2008, with an automaticrenewal for subsequent two year terms unless terminated by either party byninety days written notice of intention not to renew. Under the terms of the agreement,GoVideo will pay TCLMM a royalty based on the cost of goods sold in connectionwith the distribution, sale, advertising and promotion of certain consumer electronicsproducts under the GoVideo tradename.

 

TCLMM and Asia Focus areaffiliates of TCL Industries, a stockholder controlling a majority of theoutstanding shares of Opta. Two of Opta’s directors, Messrs. Li Dongshengand Vincent Yan, are affiliated with TCL Industries, TCLMM and Asia Focus. Theremaining two members of the Opta Board of Directors, Professor Zuoquan Lin andMr. James Jian Liu, who are not affiliated with TCL Industries or itsaffiliates, participated in the negotiations and separately approved thetransaction on behalf of the Opta Board of Directors.

 

47

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**Item 14 —Principal Accounting Fees and Services**

 

The following table is asummary of the fees that Opta paid or accrued for the audit and other servicesprovided by Hein for through the date of this filing:

 
| **Fee Category**   | ** ** | **Year  Ended   June 30,   2005** | ** ** | **Year    Ended June   30, 2004** | ** ** |
|--------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Audit fees         |       | $                                      | 63,000     |                                   | $          | 221,000 |   |
| Audit-related fees |       | —                                 |       | 7,000                                  |       |
| Tax fees           |       | 30,000                                 |       | 125,000                                |       |
| All other fees     |       | —                                 |       | —                                 |       |
|                    |            |                                        |            |                                        |            |  |  |

 

From the date Clancy wasengaged, September 27, 2005, through the date of this filing, Opta haspaid or accrued audit fees of $100,000 related to the audit of fiscal 2005. Nofees, other than auditing fees, have been billed for products and services byour current accountants.

 

***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.

 

***Audit-RelatedFees.***Consists of fees billed for assurance and related services that are reasonablyrelated to the performance of the audit or review of our consolidated financialstatements and are not reported under “Audit fees.” These services includeemployee benefit plan audits, accounting consultations in connection withacquisitions, attest services that are not required by statute or regulation,and consultations concerning financial accounting 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.

 

***All OtherFees.***Noother fees have been billed for products and services billed by ouraccountants.

 

***PolicyRelated to Audit Committee Pre-Approval of Audit and Permissible Non-AuditServices of Independent Auditors.***

 

Our Audit Committee has apolicy of pre-approving all audit and permissible non-audit services providedby the independent auditors. These services may include audit services,audit-related services, tax services, and other services. Pre-approval isgenerally provided for up to one year and any pre-approval is detailed as tothe particular service or category of services and is generally subject to aspecific budget. The independent auditors and management are required toperiodically report to the AuditCommittee regarding the extent of services provided by the independent auditorsin accordance with this pre-approval, and the fees for the services performedto date. The Audit Committee may also pre-approve particular services on acase-by-case basis.

 

48

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**PART IV**

 

**Item 15. Exhibits, Financial StatementSchedules and Reports on Form 8-K**

 

(a)          Documents filed as part of this report.

 

**1.****             ****Financial Statements**

 
|   | (i)   | Report of Clancy and Co., P.L.L.C.,  Registered Public Accounting Firm        |   |   |
|--------|-------|-------------------------------------------------------------------------------|--------|--------|
|   | (ii)  | Report of Hein & Associates, LLP,  Registered Public Accounting Firm |   |   |
|   | (iii) | Consolidated Balance Sheets                                                   |   |   |
|   | (iv)  | Consolidated Statements of Operations                                         |   |   |
|   | (v)   | Consolidated Statements of Stockholders’  Equity                         |   |   |
|   | (vi)  | Consolidated Statements of Cash Flows                                         |   |   |
|   | (vii) | Notes to Consolidated Financial Statements                                    |   |   |

 

**2.****             ****Financial Statement Schedules**

 

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

 

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

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                         | ** ** | **Method of Filing**                                                                                |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Certificate of Incorporation,  as amended                                                                                                                                                                    |       | Incorporated by reference to Exhibit 3.1  to Form 10-K, filed February 18, 2005                |
| 3.2                 |       | Amended and Restated Bylaws                                                                                                                                                                                  |       | Incorporated by reference to Exhibit 3.2  to Form 10, filed October 27, 1998                   |
| 3.3                 |       | Amendment to Bylaws                                                                                                                                                                                          |       | Incorporated by reference to Exhibit 99.1  to Form 8-K, 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                |       | Opta, Executive Employment  Agreement                                                                                                                                                                        |       | Incorporated by reference to Exhibit 10.11  to Form 10-K, filed October 15, 2001               |
| 10.3                |       | Sale agreement of TCL Digital  dated December 20, 2003                                                                                                                                                  |       | Incorporated by reference to Exhibit 10.9  to Form 10-K, filed April 16, 2004                  |
| 10.4                |       | Current Lease – GoVideo  Office Lease                                                                                                                                                                   |       | Incorporated by reference to Exhibit 10.10  to Form 10-K, filed April 16, 2004                 |
| 10.5                |       | Current Lease – GoVideo Lease  for Commercial Space                                                                                                                                                     |       | Incorporated by reference to Exhibit 10.11  to Form 10-K, filed April 16, 2004                 |
| 10.6                |       | Current Lease – Opta  Corporation Executive Office Lease, as amended                                                                                                                                    |       | Filed herewith                                                                                                |
| 10.7                |       | Participation agreement  between Opta and Wells Fargo Business Credit, Inc dated July 26, 2005,  as amended                                                                                             |       | Filed herewith                                                                                                |
| 10.8                |       | Purchase and sale agreement  among Opta, GoVideo, TCL Multimedia Technology Holdings Limited, TCL  Industries (H.K.) Holdings Limited and Asia Focus Industrial Limited and  Opta, dated July 26, 2005. |       | Filed herewith                                                                                                |

 

49

----

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                            | ** ** | **Method of Filing** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| 10.9                |       | Intellectual Property  Assignment between Opta Systems, LLC and TCL Multimedia Technology Holdings  Limited, dated July 26, 2005                                           |       | Filed herewith                 |
| 10.10               |       | Promissory note between Opta  Systems, LLC and TCL Multimedia Technology Holdings Limited, dated July 26,  2005.                                                           |       | Filed herewith                 |
| 10.11               |       | Opta’s guarantee of GoVideo’s  debt agreement with TCL Multimedia Technology Holdings Limited, dated July 26,  2005.                                             |       | Filed herewith                 |
| 10.12               |       | Debt agreement between  DigiTech and TCL dated April 19, 2005.                                                                                                             |       | Filed herewith                 |
| 10.13               |       | Loan sale agreement between  Opta and Wells Fargo Business Credit, Inc dated January 20, 2006                                                                              |       | Filed herewith                 |
| 14.1                |       | Code of Ethics                                                                                                                                                                  |       | Filed herewith                 |
| 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 the  Principal Executive Officer and Principal Financial Officer Pursuant to Section 1350  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith                 |

 

50

----

 

**Signatures**

 

Pursuant to the requirements ofSection 13 or 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/ YAN,  Vincent Yong* |       | President, Chief Executive  Officer, Director           |       | March 14, 2006 |       |
| YAN, Vincent Yong        |       |                                                    |       |                |       |
| * *                 |       |                                                    |       |                |       |
| */s/ WANG,  Sean*        |       | Chief Financial Officer  (Principal Accounting Officer) |       | March 14, 2006 |       |
| WANG, Sea.               |       |                                                    |       |                |       |
|                          |            |                                                         |            |                     |            |  |

 

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

 
| **Signature**            | ** ** | **Title**                                     | ** ** | **Date**            | ** ** |
|--------------------------|------------|-----------------------------------------------|------------|---------------------|------------|
| ** **               | ** ** | ** **                                    | ** ** | ** **          | ** ** |
| */s/ LI,  Dongsheng*     |       | Chairman of the Board                         |       | March 14, 2006 |       |
| LI Dongsheng             |       |                                          |       |                |       |
| * *                 |       |                                          |       |                |       |
| */s/ YAN,  Vincent Yong* |       | President, Chief Executive  Officer, Director |       | March 14, 2006 |       |
| YAN, Vincent Yong        |       |                                          |       |                |       |
| * *                 |       |                                          |       |                |       |
| */s/ LIU,  Jian*         |       | Director                                      |       | March 14, 2006 |       |
| LIU, Jian                |       |                                          |       |                |       |
| * *                 |       |                                          |       |                |       |
| */s/ LIN,  Zuoquan*      |       | Director                                      |       | March 14, 2006 |       |
| LIN, Zuoquan             |       |                                          |       |                |       |
|                          |            |                                               |            |                     |            |  |

 

51

----

 

 

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

 

Index to Consolidated Financial Statements

 
| Financial Statements:                                                                                                                                        |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                         |   |
| Report  of Independent Registered Public Accounting Firm                                                                                                     |   |
|                                                                                                                                                         |   |
| Report  of Independent Registered Public Accounting Firm                                                                                                     |   |
|                                                                                                                                                         |   |
| Consolidated  Balance Sheets as of June 30, 2005 and 2004                                                                                               |   |
|                                                                                                                                                         |   |
| Consolidated  Statements of Operations for the years ended June 30, 2005, 2004 and  2003                                                                |   |
|                                                                                                                                                         |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the years  ended June 30, 2005, 2004 and 2003                        |   |
|                                                                                                                                                         |   |
| Consolidated  Statements of Cash Flows for the years ended June 30, 2005, 2004 and  2003                                                                |   |
|                                                                                                                                                         |   |
| Notes  to Consolidated Financial Statements                                                                                                                  |   |
|                                                                                                                                                         |   |
| Financial Statement  Schedules:                                                                                                                              |   |
|                                                                                                                                                         |   |
| All schedules are omitted because they are not  required or the required information is included in the consolidated  financial statements or notes thereto. |   |

 

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders of

OptaCorporation

 

Wehave audited the accompanying consolidated balance sheet of Opta Corporationand subsidiaries as of June 30, 2005, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for the yearended June 30, 2005. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of OptaCorporation and subsidiaries as of June 30, 2005, and the consolidatedresults of their operations and their cash flows for the year ended June 30,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 2 to the financialstatements, the Company incurred net losses of $18,861,000 during fiscal 2005,resulting in an accumulated deficit of $124,472,000 at June 30, 2005 andthe Company’s main operating subsidiary, GoVideo, was in default under certaindebt covenant provisions of its line of credit. This raises substantialdoubt about the Company’s ability to continue as a goingconcern. Management’s plans in regard to these matters are also describedin Note 2. The financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.

 

 

Clancyand Co., P.L.L.C.

Phoenix,AZ

 

December 30,2005, except Note 20 which is dated February 9, 2006

 

F-2

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders of

OptaCorporation

 

Wehave audited the accompanying consolidated balance sheet of Opta Corporationand subsidiaries as of June 30, 2004, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for the yearsended June 30, 2004 and 2003. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Opta Corporationand subsidiaries as of June 30, 2004, and the results of their operationsand their cash flows for the years ended June 30, 2004 and 2003, inconformity with accounting principles generally accepted in the United Statesof America.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 2 to the financialstatements, the Company incurred net losses of $7,722,000 and $6,366,000 duringfiscal 2004 and 2003, respectively, resulting in an accumulated deficit of$105,611,000 at June 30, 2004 and the Company’s sole operating subsidiary,GoVideo, was, and still is, in default under certain debt covenant provisionsof its line of credit. This raises substantial doubt about the Company’sability to continue as a going concern. Management’s plans in regard tothese matters are also described in Note 2. The financial statements donot include any adjustments that might result from the outcome of thisuncertainty.

 

Hein &Associates LLP

Irvine,California

 

September 24,2004

 

F-3

----

 

**OPTA CORPORATIONCONSOLIDATED BALANCE SHEETS**

(in thousands)

 
| ** **                                                                                                                                                                     | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **2005**          | ** ** | **2004** | ** ** |
|                                                                                                                                                                           |       |              |       |   |   |
| **ASSETS**                                                                                                                                                                     |       |              |       |   |   |
|                                                                                                                                                                           |       |              |       |   |   |
| Current assets:                                                                                                                                                                | ** ** | ** **        | ** ** | ** ** | ** ** |
| Cash and  cash equivalents                                                                                                                                                     | ** ** | **$**             | **2,844**  |   | $ | 3,037 |   |
| Short-term  investments                                                                                                                                                        | ** ** | **16,128**        |       | 17,643 |   |
| Accounts receivable,  net                                                                                                                                                      | ** ** | **10,637**        |       | 25,528 |   |
| Inventories,  net                                                                                                                                                              | ** ** | **10,234**        |       | 18,004 |   |
| Income tax  receivable                                                                                                                                                         | ** ** | **1,638**         |       | 909 |   |
| Prepaid  expenses and other current assets                                                                                                                                     | ** ** | **607**           |       | 2,270 |   |
| Total  current assets                                                                                                                                                          | ** ** | **42,088**        |       | 67,391 |   |
|                                                                                                                                                                           |       |              |       |   |   |
| Property and equipment, net                                                                                                                                                    | ** ** | **335**           |       | 1,083 |   |
| Tradenames                                                                                                                                                                     | ** ** | **2,456**         |       | 2,420 |   |
| Other assets                                                                                                                                                                   | ** ** | **—**        |       | 226 |   |
| ** **                                                                                                                                                                     |       | **$**             | **44,879** |   | $ | 71,120 |   |
|                                                                                                                                                                           |       |              |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                 |       |              |       |   |   |
|                                                                                                                                                                           |       |              |       |   |   |
| Current liabilities:                                                                                                                                                           |       |              |       |   |   |
| Line of  credit                                                                                                                                                                | ** ** | **$**             | **6,172**  |   | $ | 15,833 |   |
| Notes and  interest payable to related parties                                                                                                                                 | ** ** | **11,686**        |       | 10,795 |   |
| Accounts  payable                                                                                                                                                              | ** ** | **16,356**        |       | 12,496 |   |
| Accounts  payable to related parties                                                                                                                                           | ** ** | **—**        |       | 170 |   |
| Accrued  restructuring charges                                                                                                                                                 | ** ** | **—**        |       | 796 |   |
| Accrued  expenses                                                                                                                                                              | ** ** | **2,310**         |       | 1,739 |   |
| Warranty  reserve                                                                                                                                                              | ** ** | **490**           |       | 490 |   |
| Income tax  payable                                                                                                                                                            | ** ** | **—**        |       | 27 |   |
| Total current  liabilities                                                                                                                                                     | ** ** | **37,014**        |       | 42,346 |   |
|                                                                                                                                                                           |       |              |       |   |   |
| Commitments and contingencies (Note 16)                                                                                                                                        |       |              |       |   |   |
|                                                                                                                                                                           |       |              |       |   |   |
| Non-controlling interest in subsidiaries                                                                                                                                       | ** ** | **6,435**         |       | 8,425 |   |
|                                                                                                                                                                           |       |              |       |   |   |
| Stockholders’ equity:                                                                                                                                                     |       |              |       |   |   |
| Preferred  stock Series A, $.001 par value: 100 shares authorized, 4 shares issued  and outstanding at June 30, 2005 and 2004; $10 per share liquidation  preference | ** ** | **—**        |       | — |   |
| Common  stock, $.001 par value: 100,000 shares authorized; 64,241 shares issued and  50,037 and 50,724 outstanding at June 30, 2005 and 2004, respectively                | ** ** | **64**            |       | 64 |   |
| Additional  paid-in capital                                                                                                                                                    | ** ** | **128,442**       |       | 128,431 |   |
| Less:  treasury stock at cost, 14,204 and 13,517 shares at June 30, 2005 and  2004, respectively                                                                          | ** ** | **(2,478**        | **)**      | (2,410 | ) |
| Accumulated  deficit                                                                                                                                                           | ** ** | **(124,472**      | **)**      | (105,611 | ) |
| Accumulated  other comprehensive loss                                                                                                                                          | ** ** | **(126**          | **)**      | (125 | ) |
| Total  stockholders’ equity                                                                                                                                               | ** ** | **1,430**         | ** ** | 20,349 |   |
| ** **                                                                                                                                                                     |       | **$**             | **44,879** | ** ** | $ | 71,120 |   |

 

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

 

F-4

----

 

**OPTA CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per shareamounts)

 
| ** **                                                                        | ** ** | **Year Ended June 30,** | ** **  |
|-----------------------------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                                        | ** ** | **2005**                     | ** **  | **2004** | ** ** | **2003** | ** ** |
|                                                                              |       |                         |        |   |   |   |   |
| Net revenues:                                                                     |       |                         | ** **  |   |   |   |   |
| Products                                                                          | ** ** | **$**                        | **129,119** | ** ** | $ | 125,161 |   | $ | 10,000 |   |
| Products –  related party                                                    | ** ** | **—**                   | ** **  | 163 |   | 9,454 |   |
| Total net revenues                                                                | ** ** | **129,119**                  | ** **  | 125,324 |   | 19,454 |   |
|                                                                              |       |                         | ** **  |   |   |   |   |
| Cost of net revenues:                                                             |       |                         | ** **  |   |   |   |   |
| Products                                                                          | ** ** | **128,650**                  | ** **  | 113,012 |   | 7,936 |   |
| Products –  related party                                                    | ** ** | **—**                   | ** **  | 92 |   | 7,258 |   |
| Write down  of inventory to lower of cost or market                               | ** ** | **3,019**                    | ** **  | 2,095 |   | 238 |   |
| Total cost of net revenues                                                        | ** ** | **131,669**                  | ** **  | 115,199 |   | 15,432 |   |
|                                                                              |       |                         | ** **  |   |   |   |   |
| Gross profit (loss)                                                               | ** ** | **(2,550**                   | **)**       | 10,125 |   | 4,022 |   |
|                                                                              |       |                         | ** **  |   |   |   |   |
| Operating expenses:                                                               |       |                         | ** **  |   |   |   |   |
| General and  administrative                                                       | ** ** | **5,516**                    | ** **  | 8,414 |   | 8,324 |   |
| Sales and  marketing                                                              | ** ** | **6,727**                    | ** **  | 4,604 |   | 652 |   |
| Restructuring  charges                                                            | ** ** | **(78**                      | **)**       | 1,845 |   | — |   |
| Research and  development                                                         | ** ** | **2,113**                    | ** **  | 2,637 |   | 7,513 |   |
| Impairment  of assets                                                             | ** ** | **538**                      | ** **  | 1,831 |   | 498 |   |
| Total operating expenses                                                          | ** ** | **14,816**                   | ** **  | 19,331 |   | 16,987 |   |
|                                                                              |       |                         | ** **  |   |   |   |   |
| Loss from operations                                                              | ** ** | **(17,366**                  | **)**       | (9,206 | ) | (12,965 | ) |
|                                                                              |       |                         | ** **  |   |   |   |   |
| Other income (expense):                                                           |       |                         | ** **  |   |   |   |   |
| Gain (loss)  on sale of investments                                               | ** ** | **(7**                       | **)**       | 1,053 |   | — |   |
| Interest  income                                                                  | ** ** | **419**                      | ** **  | 552 |   | 545 |   |
| Interest  expense                                                                 | ** ** | **(2,918**                   | **)**       | (1,166 | ) | (16 | ) |
| Equity in  loss of joint venture                                                  | ** ** | **—**                   | ** **  | (647 | ) | (62 | ) |
| Other                                                                             | ** ** | **883**                      | ** **  | 130 |   | 3,650 |   |
| Total other income (expense), net                                                 | ** ** | **(1,623**                   | **)**       | (78 | ) | 4,117 |   |
| Loss from  continuing operations before income taxes and non-controlling interest | ** ** | **(18,989**                  | **)**       | (9,284 | ) | (8,848 | ) |
| Benefit for income taxes                                                          | ** ** | **(714**                     | **)**       | (498 | ) | (109 | ) |
| Loss from continuing operations before  non-controlling interest                  | ** ** | **(18,275**                  | **)**       | (8,786 | ) | (8,739 | ) |
|                                                                              |       |                         | ** **  |   |   |   |   |
| Non-controlling interest in (income) loss  of consolidated subsidiaries           | ** ** | **(586**                     | **)**       | 1,064 |   | 2,373 |   |
|                                                                              |       |                         | ** **  |   |   |   |   |
| Net loss                                                                          | ** ** | **$**                        | **(18,861** | **)** | $ | (7,722 | ) | $ | (6,366 | ) |
|                                                                              |       |                         | ** **  |   |   |   |   |
| Net loss per common share – basic and  diluted:                              | ** ** | **$**                        | **(0.38**   | **)** | $ | (0.14 | ) | $ | (0.10 | ) |
|                                                                              |       |                         | ** **  |   |   |   |   |
| Weighted average common shares outstanding –  basic and diluted              | ** ** | **50,154**                   | ** **  | 53,994 |   | 63,144 |   |

 

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

 

F-5

----

 

**OPTACORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOMEFOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003**

(in thousands)

 
| ** **                                                                                  | ** ** | ** **        | ** **  | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | ** **      | ** ** | ** **        | ** ** | ** **             | ** ** | **Accumulated**   | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------|-------------|---------------------|------------|------------------|------------|-------------|------------|--------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|-------------|------------|
| ** **                                                                                  | ** ** | ** **        | ** **  | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**  | ** ** | ** **        | ** ** | ** **             | ** ** | **Other**         | ** ** | **Total**   | ** ** |
| ** **                                                                                  | ** ** | **Comprehensive** | ** **  | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Treasury** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                  | ** ** | **Loss**          | ** **  | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**     | ** ** | **Stock**         | ** ** | **Deficit**            | ** ** | **Income (Loss)** | ** ** | **Equity**  | ** ** |
| 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 |   |
| Issuance of Common Stock upon conversion of subsidiary stock                           |       | —            |        | —              |       | —           |       | 5           |       | —       |       | 36              |       | —            |       | —                 |       | —            |       | 36          |       |
| Compensation expense recognized by subsidiaries upon issuance of options and  warrants |       | —            |        | —              |       | —           |       | —      |       | —       |       | (75             | )          |              |       | —                 |       | —            |       | (75         | )          |
| Acquisition of treasury stock                                                               |       |              |        |                |       |             |       |        |       |         |       |            |       | (2,260            | )          |                   |       |              |       | (2,260      | )          |
| Issuance of stock by subsidiary                                                             |       | —            |        | —              |       | —           |       | —      |       | —       |       | 1               |       | —            |       | —                 |       | —            |       | 1           |       |
| Unrealized loss on securities                                                               |       | (196              | )           |                |       |             |       |        |       |         |       |            |       | —            |       |                   |       | (196              | )          | (196        | )          |
| Net loss                                                                                    |       | (7,722            | )           | —              |       | —           |       | —      |       | —       |       | —          |       | —            |       | (7,722                 | )          | —            |       | (7,722      | )          |
| Balances at June 30, 2004                                                              |       | $                 | (7,918      | )                   | 4          |             | $          | —      |       | 64,241       |       | $               | 64         |              | $          | 128,431                |       | $                 | (2,410     | )           | $          | (105,611 | ) | $ | (125 | ) | $ | 20,349 |   |
| Acquisition of treasury stock                                                               | ** ** | ** **        | ** **  | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | ** **      | ** ** | **(68**           | **)**      | ** **             | ** ** | ** **        | ** ** | **(68**     | **)**      |
| Acquisition of treasury stock by subsidiary                                                 |       | —            |        | —              |       | —           |       | —      |       | —       | ** ** | **11**          | ** ** | **—**        | ** ** | **—**             | ** ** | **—**        | ** ** | **11**      | ** ** |
| Unrealized loss on securities                                                               | ** ** | **(1**            | **)**       | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | ** **      | ** ** | **—**        | ** ** | ** **             | ** ** | **(1**            | **)**      | **(1**      | **)**      |
| Net loss                                                                                    | ** ** | **(18,861**       | **)**       | **—**          | ** ** | **—**       | ** ** | **—**  | ** ** | **—**   | ** ** | **—**      | ** ** | **—**        | ** ** | **(18,861**            | **)**      | **—**        | ** ** | **(18,861** | **)**      |
| Balances at June 30, 2005                                                              | ** ** | **$**             | **(18,862** | **)**               | **4**      | ** **       | **$**      | **—**  | ** ** | **64,241**   | ** ** | **$**           | **64**     | ** **        | **$**      | **128,442**            | ** ** | **$**             | **(2,478** | **)**       | **$**      | **(124,472** | **)** | **$** | **(126** | **)** | **$** | **1,430** | ** ** |

 

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

 

F-6

----

 

**OPTA CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

 
| ** **                                                              | ** ** | **Year Ended June 30,** | ** **  |
|-------------------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                              | ** ** | **2005**                     | ** **  | **2004** | ** ** | **2003** | ** ** |
|                                                                    |       |                         |        |   |   |   |   |
| **Operating activities**                                                |       |                         |        |   |   |   |   |
| Net loss                                                                | ** ** | **$**                        | **(18,861** | **)** | $ | (7,722 | ) | $ | (6,366 | ) |
| Adjustments  to reconcile net loss to cash used in operating activities |       |                         | ** **  |   |   |   |   |
| Depreciation  and amortization                                          | ** ** | **591**                      | ** **  | 432 |   | 656 |   |
| Reserve for  uncollectible receivables                                  | ** ** | **567**                      | ** **  | 481 |   | 1,979 |   |
| Reserve for  obsolete and excess inventories                            | ** ** | **3,019**                    | ** **  | 2,095 |   | 238 |   |
| Stock compensation  expense (recovery) recorded by subsidiary           | ** ** | **—**                   | ** **  | (103 | ) | 592 |   |
| Gain on sale  of property and equipment                                 | ** ** | **—**                   | ** **  | (12 | ) | — |   |
| Loss (gain)  on sale of investments                                     | ** ** | **7**                        | ** **  | (1,053 | ) | — |   |
| Gain on  acquisition of treasury stock                                  | ** ** | **(842**                     | **)**       | (179 | ) | (150 | ) |
| Equity in  loss of unconsolidated entity                                | ** ** | **—**                   | ** **  | 647 |   | 62 |   |
| Impairment  of assets                                                   | ** ** | **538**                      | ** **  | 1,831 |   | 498 |   |
| Non-controlling  interest in income (loss) of subsidiaries              | ** ** | **586**                      | ** **  | (1,064 | ) | (2,373 | ) |
| Non-cash  recovery of bad debt                                          | ** ** | **(1,946**                   | **)**       | — |   | — |   |
| Non-cash  reversal of restructuring over accrual                        | ** ** | **(78**                      | **)**       | — |   | — |   |
| Interest  expense accrued on notes payable                              | ** ** | **166**                      | ** **  | 329 |   | — |   |
| Changes in  operating assets and liabilities:                           |       |                         | ** **  |   |   |   |   |
| Accounts  receivable                                                    | ** ** | **14,324**                   | ** **  | (19,162 | ) | (3,641 | ) |
| Accounts  receivable from related parties                               | ** ** | **—**                   | ** **  | 39 |   | 5,090 |   |
| Inventories                                                             | ** ** | **4,751**                    | ** **  | (13,661 | ) | (7,672 | ) |
| Income tax  receivable                                                  | ** ** | **(729**                     | **)**       | 1,566 |   | 726 |   |
| Prepaid  expenses and other assets                                      | ** ** | **1,663**                    | ** **  | (1,394 | ) | (593 | ) |
| Other non  current assets                                               | ** ** | **226**                      | ** **  | (175 | ) | — |   |
| Accounts  payable to related parties                                    | ** ** | **—**                   | ** **  | 97 |   | (174 | ) |
| Accounts  payable                                                       | ** ** | **3,860**                    | ** **  | 9,593 |   | (1,142 | ) |
| Accrued  expenses and other current liabilities                         | ** ** | **544**                      | ** **  | (1,053 | ) | 1,626 |   |
| Accrued  restructuring charges                                          | ** ** | **(718**                     | **)**       | 796 |   | — |   |
| Income tax  payable                                                     | ** ** | **—**                   | ** **  | (64 | ) | 91 |   |
| Warranty  reserve                                                       | ** ** | **—**                   | ** **  | (198 | ) | (44 | ) |
| Cash  provided (used) by operating activities                           | ** ** | **7,668**                    | ** **  | (27,934 | ) | (10,597 | ) |
|                                                                    |       |                         | ** **  |   |   |   |   |
| **Investing activities**                                                |       |                         | ** **  |   |   |   |   |
| Payments  received on notes receivable from related parties             | ** ** | **—**                   | ** **  | 1,592 |   | 1,930 |   |
| Purchase of  property and equipment                                     | ** ** | **(411**                     | **)**       | (591 | ) | (64 | ) |
| Purchase of  tradename                                                  | ** ** | **(36**                      | **)**       | — |   | — |   |
| Proceeds  from sale of property and equipment                           | ** ** | **30**                       | ** **  | 156 |   | — |   |
| Proceeds  from sale of joint venture                                    | ** ** | **—**                   | ** **  | 3,762 |   | — |   |
| Investment  in joint venture                                            | ** ** | **—**                   | ** **  | (1,820 | ) | (3,440 | ) |
| Purchase of  subsidiary                                                 | ** ** | **—**                   | ** **  | — |   | (5,808 | ) |
| Purchase of  short-term investments                                     | ** ** | **(1,200**                   | **)**       | (10,450 | ) | (16,552 | ) |
| Proceeds  from sale of short-term investments                           | ** ** | **2,711**                    | ** **  | 6,500 |   | 7,645 |   |
| Cash  provided (used) by investing activities                           | ** ** | **1,094**                    | ** **  | (851 | ) | (16,289 | ) |
|                                                                    |       |                         | ** **  |   |   |   |   |
| **Financing activities**                                                |       |                         | ** **  |   |   |   |   |
| Proceeds  from advances on line of credit                               | ** ** | **136,079**                  | ** **  | 110,191 |   | — |   |
| Payments on  line of credit                                             | ** ** | **(145,740**                 | **)**       | (94,358 | ) | — |   |
| Proceeds  from advances from related parties                            | ** ** | **725**                      | ** **  | 10,842 |   | 6,283 |   |
| Payments on  advances from related parties                              | ** ** | **—**                   | ** **  | (4,817 | ) | — |   |
| Purchase of  treasury stock                                             | ** ** | **—**                   | ** **  | (2,081 | ) | — |   |
| Purchase of  treasury stock by subsidiary                               | ** ** | **(19**                      | **)**       | — |   | — |   |
| Proceeds  from issuance of stock by subsidiaries                        | ** ** | **—**                   | ** **  | 1 |   | — |   |
| Cash  provided (used) by financing activities                           | ** ** | **(8,955**                   | **)**       | 19,778 |   | 6,283 |   |
|                                                                    |       |                         | ** **  |   |   |   |   |
| Decrease in cash and cash equivalents                                   | ** ** | **(193**                     | **)**       | (9,007 | ) | (20,603 | ) |
|                                                                    |       |                         | ** **  |   |   |   |   |
| Cash and cash equivalents at beginning of  year                         | ** ** | **3,037**                    | ** **  | 12,044 |   | 32,647 |   |
|                                                                    |       |                         | ** **  |   |   |   |   |
| Cash and cash equivalents at end of year                                | ** ** | **$**                        | **2,844**   | ** ** | $ | 3,037 |   | $ | 12,044 |   |

 

F-7

----

 
| ** **                                              | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Supplemental disclosures of cash flow  information**  |       |                         |       |   |   |   |   |
| Cash paid  during the year for:                         |       |                         |       |   |   |   |   |
| Interest                                                | ** ** | **$**                        | **1,568**  |   | $ | 1,071 |   | $ | — |   |
| Income taxes                                            | ** ** | **$**                        | **—** |   | $ | 247 |   | $ | — |   |
| Non-cash  investing and financing activities            |       |                         |       |   |   |   |   |
| Acquisition  of subsidiary stock with issuance of stock | ** ** | **$**                        | **—** |   | $ | 36 |   | $ | 21 |   |
| Unrealized  gain on short term investments              | ** ** | **$**                        | **—** |   | $ | 271 |   | $ | 98 |   |
| Application  of proceeds to notes payable               | ** ** | **$**                        | **—** |   | $ | 1,842 |   | $ | — |   |

 

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

 

F-8

----

 

**OPTACORPORATION AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 – Business and Background**

 

***Description of Business***

 

OptaCorporation (formerly Lotus Pacific, Inc) (“Opta” or “Company”), a Delawarecorporation, is a holding company whose operations are conducted through itssubsidiaries. Opta develops, manages, and operates emerging consumerelectronics and communications companies, focusing on developing nextgeneration consumer electronics and communication products. Opta provides itssubsidiaries with capital and strategic infrastructure services.

 

Optahas entered into several significant transactions subsequent to fiscal 2005,which have had a material impact on the Company’s operations and strategy. SeeNote 20.

 

InMarch 1999, the Company acquired 94.5% of the issued and outstandingcommon shares of Correlant Communications, Inc. (formerly TurboNetCommunications, Inc.) (“Correlant”), representing an 81% ownershipinterest in Correlant. Based in San Diego, California, Correlant designed,developed and marketed telecommunications products to cable operators, networkservice providers, and communications network users in the United States andAsian countries. See Note 4.

 

InMarch 1999, the Company acquired 77% of the issued and outstanding commonshares of Arescom, Inc. (“Arescom”). See Note 4. Based in Fremont,California, Arescom designs, manufactures and markets a broad range of highquality remote access products, such as routers and remote managing software,and other inter-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 its investment in Arescom, representing65% of the outstanding securities of Arescom, to an unrelated third party. In September 2003,the Company divested its remaining 6% ownership in Arescom by settling alllegal claims against Arescom. See Note 4.

 

InJune 2001, Lotus Pacific Communications Technology (Beijing) Co., Ltd. (“BeijingLotus”), a wholly-owned subsidiary, was formed to support business activity inBeijing. Beijing Lotus has no material independent operations. See Note 20.

 

OnJune 29, 2001, a majority of the Company’s stockholders, led by T.C.L.Industries Holdings (H.K.) Limited (“TCL Industries”), were successful in theirsolicitation to gain control of the Company and to replace prior management andBoard of Directors of the Company. On June 29, 2001, new directors andofficers were appointed and the then existing directors and officers wereimmediately terminated.

 

Followingthe takeover of the Board of Directors of the Company on June 29, 2001,new management of the Company began a thorough review of all aspects of thebusiness operations of the Company and its subsidiaries and engaged in numeroustransactions to reorganize the Company’s business. Under new management, theCompany’s primary strategy for business operations has been to reorganize itsunprofitable businesses, acquire undervalued or underutilized companies andfocus on profitable growth. The Company has moved aggressively to sell,reorganize or shutdown its businesses which were either not operating profitablyor may have required significant future cash investment.

 

InFebruary 2003, Opta, 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, Opta had only onerepresentative on Correlant’s Board of Directors and did not control Correlant’sBoard or its operations. Immediately thereafter, the Board of Directors createda new Executive Committee of the Board, comprised of two members who are alsoOpta management, to act on behalf of the Board of Directors and overseeCorrelant’s management and operations. In July 2003, Correlant’sPresident, Chief Executive Officer and co-founder resigned as a director ofCorrelant. From that date forward he no longer served as President and CEO ofCorrelant. In July 2003 the Vice President of Engineering, Secretary, andco-founder of Correlant resigned as director and secretary of Correlant. Fromthat date forward, he no longer served as VP of Engineering. In connection withtheir resignations, the Company entered into Employment Separation andConsulting Agreements with both former employees. See Note 16. Uponrecommendation of its consultants, following the two co-founder’s resignations,Correlant began a substantial reduction in its workforce and operations toreduce operating expenses, reducing the number of Correlant

 

F-9

----

 

employeesfrom 34 as of August 1, 2003 to 18 employees as of December 23, 2003.As a result of declining margins and demand for its products, Correlant’s Boardof Directors approved the wind down and cessation of Correlant’s historicaloperations in the cable modem business effective December 23, 2003.Correlant’s wind down was substantially completed by March 31, 2004. Fromthe wind down of Correlant until July 18, 2005, Correlant and Optatogether explored business opportunities to utilize Correlant’s assets.However, no business opportunities were identified and on July 18, 2005,the Board of Directors of Correlant approved the dissolution of Correlant,pending approval by the Correlant shareholders. At a Special Meeting ofShareholders held August 5, 2005, Correlant shareholders approved thedissolution of Correlant. See Note 20.

 

InApril 2003, the Company purchased 100% of the outstanding membershipinterests of Opta Systems, LLC a Delaware LLC (“Opta Systems” or “GoVideo”)from Carmco Investments, LLC (“Carmco”), a Connecticut limited liabilitycompany, which had acquired substantially all assets and assumption of certainliabilities of a product line known as “GoVideo” See Note 4. GoVideo,established in 1984, designs and manufactures product lines in the consumerelectronics industry, including MP3 Rave MP branded product (“MP3”), digitalvideo disc (“DVD”) players, portable DVDs, DVD-Video Cassette Recorder (“VCR”)Combos, Dual-Deck VCRs, DVD Recorders, DVD Recorder + VCRs, and LCD TVs.GoVideo held various patents covering Dual-Deck technology as well as otherelectronics products and systems. GoVideo was purchased as part of the Company’sstrategic direction of investing in companies which will benefit from theCompany’s strategic relationships with Asian consumer electronic manufacturers.GoVideo’s potential for growth under the Company’s ownership and establishedbrand name were the primary reasons for the purchase of GoVideo at a priceresulting in goodwill being recognized. As of December 31, 2003, GoVideowas, and still is, the main operating subsidiary of the Company. Since thepurchase date, GoVideo has had liquidity issues. In an effort to manage theseliquidity issues, GoVideo consummated several significant transactionssubsequent to fiscal 2005. See Note 20.

 

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 affiliate of TCLIndustries 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. In September 2003, the Company entered into anagreement with TCL Information Technology Industrial (Group) Ltd, an affiliateof TCL Industries whereby the Company sold its entire 50% interest in TCLDigital. See Note 5.

 

OnJuly 7, 2004, the Company’s Board of Directors approved the commencementof a new wholly-owned subsidiary, GoVideo DigiTech (Huizhou) Co., Ltd. (“DigiTech”),to sell GoVideo’s MP3 players in the China market. See Note 4.

 

Asof June 30, 2005, 2004 and 2003, the only significant subsidiaries wereGoVideo 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.

 

***Delays in Reporting***

 

**Change in Management.**Following the replacement of prior managementdiscussed above, the new management began reviewing various transactionsundertaken by old management prior to June 29, 2001. During itspreliminary investigation, new management of the Company 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 tothe preliminary results, the Company dismissed its then existing independentaccountants, engaged new independent accountants and re-audited all periodsunder investigation. The Company completed such restatements in its Form 10-Kfor fiscal 2002 filed on April 16, 2004. The subsequent Form 10-Ksfor fiscal 2003 and 2004 were filed on August 24, 2004 and February 18,2005, respectively.

 

F-10

----

 

Asa result of the restatement, on January 30, 2003, the Company and TCLIndustries, a stockholder of the Company with holdings of greater than 10% ofthe Company’s outstanding shares, settled all disputes with the prior auditorsconcerning their audits of the Company for fiscal 2001 and prior. The priorauditors deny that they are liable for any damages to Opta, but consented tothe settlement to avoid the costs of litigation. Pursuant to an agreement datedMarch 24, 2003 between the Company and TCL Industries, the Company and TCLIndustries agreed on the allocation of the settlement funds, whereby TCLIndustries received $6,500,000 in cash, the Company received $3,500,000 cash,which is included in Other income (expense) on the fiscal 2003 consolidatedstatement of operations. Additionally, the Company may be entitled to receiveup to $3,500,000 in cash held in an escrow account, plus interest accruedtherein. In connection with the agreement, Opta and TCL agreed to forbear frombringing claims against each other with respect to the allocation of funds orotherwise.

 

**Filing of Going Private Documents**. Opta is currently taking steps (“GoingPrivate Transaction”) to complete a corporate reorganization that will enableOpta to become a non-reporting company with the Securities and ExchangeCommission (the “Commission”). Opta originally intended to complete the GoingPrivate Transaction prior to the deadline for filing its Form 10-K for theperiod ended June 30, 2005, but efforts were delayed due to a series oftransactions effected by Opta in the past few months to address the continuinglosses at Opta Systems, LLC d/b/a GoVideo (“Opta Systems” or “GoVideo”), ourmain operating subsidiary and the dissolution of Correlant Communications, Inc.(“Correlant”), Opta’s non-operating subsidiary. Additionally, as previouslyreported Opta recently dismissed its former accountant and engaged a newprincipal accountant on September 27, 2005 as part of a continuing effortto save costs. As a result, Opta was unable to complete this Form 10-K bythe required due date.

 

**Note 2 – Liquidity and Going Concern**

 

TheCompany incurred net losses of $18,861,000, $7,722,000 and $6,366,000 duringfiscal 2005, 2004 and 2003, respectively. Additionally, cash decreased$193,000, $9,007,000 and $20,603,000 during fiscal 2005, 2004 and 2003,respectively; and working capital decreased to $5,074,000 at June 30, 2005from $25,045,000 at June 30, 2004. At June 30, 2005, the Company hadan accumulated deficit of $124,472,000 and the Company’s main operatingsubsidiary, GoVideo, was in default under certain debt covenant provisions ofits line of credit. See Note 9.

 

Additionally,in June 2003, GoVideo borrowed substantial funds from two entitiesaffiliated with TCL, to fund inventory purchases and operating expenses. SeeNote 10. Both loans, which were subordinate to GoVideo’s line of credit,matured during fiscal year 2004. The maturity date was extended multiple timesand GoVideo was never able to pay off the loans under normal operatingcircumstances. The debt was restructured subsequent to June 30, 2005. SeeNote 20.

 

Duringfiscal 2004, Opta entered into a financing agreement with TCL Industries. SeeNote 10. Opta ultimately loaned the funds to GoVideo to fund inventorypurchases and operating expenses. The financing agreement was extended multipletimes and Opta was never able to pay off the loans under normal operatingcircumstances. The debt was restructured subsequent to June 30, 2005. SeeNote 20.

 

Theabove matters raise substantial doubt about the Company’s ability to continueas a going concern. Although the Company expects GoVideo to incur additionallosses until the new GoVideo business model is implemented or GoVideooperations are shut down, the Company anticipates that its current cash andcash equivalents and the ability to borrow from related parties will be sufficientto fund its operations at least through June 30, 2006. This assumes theCompany either achieves GoVideo’s new business plan, which envisionssignificant reductions in the cost structure and the cash burn rate from theresults experienced in the recent past, or efficiently shuts down GoVideo’soperations. If, however, the Company is unable to realize GoVideo’s newbusiness plan and additional resources are required to shut down GoVideo, theCompany may be forced to borrow additional funds, which could increase the riskof operating as a going concern.

 

Theconsolidated financial statements do not include any adjustments relating tothe recoverability and classification of recorded asset amounts or the amountand classification of liabilities or any other adjustment that might be

 

F-11

----

 

necessaryshould the Company be unable to continue as a going concern.

 

**Note 3 – Significant Accounting Policies**

 

***Principles of Consolidation***

 

Theconsolidated financial statements include the accounts of Opta and itssubsidiaries. All significant intercompany transactions and balances have beeneliminated. Subsidiaries in which Opta owns at least 50% are consolidated,except for investments in which control is deemed to be temporary, in whichcase the equity method of accounting is used. Equity investments in which Optaowns 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 of accounting is used for all investmentsin which Opta owns less than 20%.

 

***Estimates and Assumptions***

 

Thepreparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the U.S. requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Significant estimates are required as part ofinventory valuation, product warranty reserve, allowance for doubtful accounts,goodwill and long-lived asset impairments, valuation allowances on deferredincome taxes, the potential outcome of future tax consequences of eventsrecognized in our financial statements or tax returns, and determining wheninvestment impairments are other-than-temporary. Actual results and outcomesmay differ from management’s estimates and assumptions.

 

***Foreign Operations***

 

Thefunctional currency of the Company is the U.S. dollar. Any accounts denominatedin a currency other than the U.S. dollar, mainly the Chinese RMB, are re-measuredand resultant gains and losses are recorded in the Company’s consolidatedstatement of operations. Foreign currency transaction gains (losses) are alsoincluded in the Company’s consolidated statement of operations. To date,transaction gains (losses) have not been material.

 

***Cash and Cash Equivalents***

 

Cashand cash equivalents consist of cash and highly liquid investments, whichinclude debt securities with remaining maturities when acquired of three monthsor less and are stated at cost, which approximates market value.

 

***Short-Term Investments***

 

TheCompany accounts for short-term investments in accordance with Statement ofFinancial Accounting Standards (“SFAS”) SFAS 115, *Accounting for Certain Investments in Debt and Equity Securities*(“SFAS 115”), and classifies investments as available-for-sale in accordancewith that standard. Available-for-sale securities are carried at fair marketvalue. Unrealized gains and losses, net of tax, are reported in stockholders’equity. Realized gains and losses and declines in value judged to be other-than-temporary,if any, on available-for-sale securities are included in investment income. Thecost of securities sold is based on the specific-identification method. As of June 30,2005 and 2004, short-term investments, and any difference between the fairmarket value and the underlying cost of such investments, consisted of thefollowing (*in thousands*):

 

F-12

----

 

| ** **             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair  Market  Value** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **June 30, 2005** |       |                |       |                        |       |                        |       |                    |       |
| Government Securities  | ** ** | **$**               | **10,692** | ** **                  | **$**      | **—**                  | ** ** | **$**                   | **(125**   | **)** | **$** | **10,567** | ** ** |
| Corporate Bonds        | ** ** | **5,607**           | ** ** | **—**                  | ** ** | **(46**                     | **)**      | **5,561**               | ** ** |
| ** **             | ** ** | **$**               | **16,299** | ** **                  | **$**      | **—**                  | ** ** | **$**                   | **(171**   | **)** | **$** | **16,128** | ** ** |
| **June 30, 2004** |       |                |       |                        |       |                        |       |                    |       |
| Government Securities  |       | $                   | 11,042     |                        | $          | —                      |       | $                       | (132       | ) | $ | 10,910 |   |
| Corporate Bonds        |       | 6,774               |       | —                      |       | (41                         | )          | 6,733                   |       |
|                   |       | $                   | 17,816     |                        | $          | —                      |       | $                       | (173       | ) | $ | 17,643 |   |

 

Theabove unrealized loss relates to Correlant. Therefore, only Opta’s portion ofthe unrealized loss, ($1,000) and ($196,000) as of June 30, 2005 and 2004,respectively, is included as Other comprehensive income. The remaining loss of($1,000) and ($75,000) as of June 30, 2005 and 2004, respectively isincluded as Non-controlling interest in subsidiaries on the balance sheet.

 

Asof June 30, 2005 and 2004, short-term investments consisted of governmentand corporate debt securities with the following maturities (see Note 20) (*in thousands*):

 

| ** **                  | ** ** | **Market value as of June 30,** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| One year or less            | ** ** | **$**                                | **13,171** |   | $ | 2,512 |   |
| Between one and three years | ** ** | **2,957**                            |       | 15,131 |   |
| Greater than three years    | ** ** | **—**                           |       | — |   |
| ** **                  |       | **$**                                | **16,128** |   | $ | 17,643 |   |

 

***Fair Value of Financial Instruments***

 

Theestimated fair values of all financial instruments on the Company’s balancesheets were determined by using available market information and appropriatevaluation methodologies. Fair value is described as the amount at which theinstrument could be exchanged in a current transaction between informed willingparties, other than a forced liquidation. However, considerable judgment isrequired in interpreting market data to develop the estimates of fair value.Accordingly, the estimates presented herein are not necessarily indicative ofthe amounts the Company could realize in a current 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 haveany off balance sheet financial instruments.

 

Cashand cash equivalents, trade accounts receivable, notes receivable, tradeaccounts payable and certain other current liabilities are reported on thebalance sheet at carrying value which approximates fair value due to theshort-term maturities of these instruments.

 

Thefair value of the Company’s debt is estimated based on current rates offered tothe Company for similar debt and approximates carrying value.

 

***Concentration of Credit Risk andSignificant Customers and Vendors***

 

Creditrisk represents the accounting loss that would be recognized at the reportingdate if counterparties failed completely to perform as contracted.Concentrations of credit risk (whether on or off balance sheet) that arise fromfinancial instruments exist for groups of customers or counterparties when theyhave similar 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, 2005 and 2004,the Company had consolidated balances of $2,444,000 and $2,621,000,respectively, which were not guaranteed by Federal Deposit Insurance Corporation(“FDIC”). The Company has not experienced any losses in such accounts and

 

F-13

----

 

believesthe exposure is minimal. As of June 30, 2005 and 2004, all the Company’sreceivables were unsecured.

 

Arelatively small number of customers account for a significant percentage ofthe Company’s revenues. The percentage of revenues derived from significantcustomers is detailed as follows:

 
| ** **                                                                          | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                |       |                         |       |   |   |   |   |
| Costco                                                                              | ** ** | **42**                       | **%**      | 41 | % | 31 | % |
| QVC                                                                                 | ** ** | **5**                        |       | 14 |   | — |   |
| TurboComm  Technologies, Inc  (“TurboComm”), (Related party, see Note 13) | ** ** | **—**                   |       | — |   | 48 |   |

 

Grossaccounts receivable from these customers totaled $3,999,000 and $14,900,000 at June 30,2005 and 2004, respectively.

 

TheCompany purchases products from a relatively small number of vendors. Duringthe years ended June 30, 2005, 2004 and 2003 the Company purchasedapproximately $97,095,000, $101,103,000 and $8,297,000 of product from thesevendors. Payables to these vendors totaled $12,696,000 and $11,643,000 at June 30,2005 and 2004, respectively.

 

TheCompany had three main products that each account for more than 10% of itstotal consolidated revenues as follows:

 
| ** **         | ** ** | **Year ended  June 30,  2005** | ** ** | **Year ended  June 30,  2004** | ** ** | **Period from  April 18, 2003  through June  30, 2003** | ** ** |
|--------------------|------------|-------------------------------------|------------|-------------------------------------|------------|--------------------------------------------------------------|------------|
|               |       |                                |       |                                |       |                                                         |       |
| MP3 player         | ** ** | **22**                              | **%**      | —                              | %          | —                                                       | %          |
| DVR                | ** ** | **35**                              |       | 57                                  |       | 38                                                           |       |
| DVD Recorder + VCR | ** ** | **26**                              |       | 18                                  |       | —                                                       |       |

 

***Allowance for Doubtful Accounts***

 

Thefollowing are recorded at net realizable value:

 

•                  Accounts receivable, net;

•                  Accounts receivable from related parties,net; and

•                  Notes and interest receivable from relatedparties, net.

 

TheCompany does business and extends credit based on an evaluation of thecustomers’ financial condition generally without requiring collateral. Exposureto losses on trade receivables is expected to vary by customer due to thefinancial condition of each customer. The Company monitors exposure to creditlosses and maintains allowances for anticipated losses considered necessaryunder the circumstances.

 

TheCompany records interest income from interest-bearing loans using anappropriate rate of interest over the life of the loan. Related fees and/orcosts are deferred and amortized over the life of the loan using the effectiveinterest method. Interest income recognition is suspended for interest-bearingloans in default and deemed uncollectible. Any payments received subsequentlyare first applied against the accrued interest balance. Interest incomerecognition does 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

 

F-14

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projectedeconomic conditions. The Company evaluates the past-due status of itsreceivables based on contractual terms of sale. If the financial condition ofthe Company’s customers were to deteriorate, resulting in an impairment ofability to make payments, additional allowances may be required. The followingtable shows activity in the allowance for doubtful accounts (*in thousands*):

 
| **Year ended June 30,**                                | ** ** | **Beginning  Balance** | ** ** | **Expense/  (Recovery)** | ** ** | **Write off  and other** | ** ** | **Ending  Balance** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------------------------------|------------|---------------------|------------|
| Allowance – Accounts receivable:                                 |       |                   |       |                     |       |                               |       |                |       |
| **2005**                                                              | ** ** | **$**                  | **517**    | ** **               | **$**      | **567**                            | ** ** | **$**               | **(780**   | **)** | **$** | **304** | ** ** |
| 2004                                                                  |       | 39                     |       | 481                      |       | (3                                 | )          | 517                 |       |
| 2003                                                                  |       | 44                     |       | 33                       |       | (38                                | )          | 39                  |       |
| Allowance – Accounts receivable from  related parties:           |       |                   |       |                     |       |                               |       |                |       |
| **2005**                                                              | ** ** | **$**                  | **1,946**  | ** **               | **$**      | **—**                         | ** ** | **$**               | **(1,946** | **)** | **$** | **—** | ** ** |
| 2004                                                                  |       | 1,946                  |       | —                   |       | —                             |       | 1,946               |       |
| 2003                                                                  |       | —                 |       | 1,946                    |       | —                             |       | 1,946               |       |
| Allowance – Notes and interest receivable  from related parties: |       |                   |       |                     |       |                               |       |                |       |
| **2005**                                                              | ** ** | **$**                  | **—** | ** **               | **$**      | **—**                         | ** ** | **$**               | **—** | ** ** | **$** | **—** | ** ** |
| 2004                                                                  | ** ** | —                 |       | —                   |       | —                             |       | —              | ** ** |
| 2003                                                                  |       | 1,734                  |       | —                   |       | (1,734                             | )          | —              |       |

 

***Inventories***

 

Inventoriesare stated at the lower of cost (first-in, first-out) or market value. As of June 30,2005 and 2004, inventories consist of service replacement parts and consumerelectronics on hand and in transit from the manufacturer, which are generallypurchased FOB shipping point. See Note 7.

 

TheCompany provides inventory reserves for estimated obsolescence or unmarketableinventory equal to the difference between the cost of inventory and theestimated realizable value based upon assumptions about future demand andmarket conditions. The activity in the allowance for obsolete and excessinventory is shown below (*in thousands*):

 

| **Year ended June 30,** | ** ** | **Beginning  Balance** | ** ** | **Expense/  (Recovery)** | ** ** | **Write off  and other** | ** ** | **Ending  Balance** | ** ** |
|----------------------------------------|------------|------------------------|------------|--------------------------|------------|------------------------------------|------------|---------------------|------------|
| **2005**                               | ** ** | **$**                  | **2,095**  | ** **               | **$**      | **3,019**                          | ** ** | **$**               | **(1,150** | **)** | **$** | **3,964** | ** ** |
| 2004                                   |       | —                 |       | 2,095                    |       | —                             |       | 2,095               |       |
| 2003                                   |       | 600                    |       | 238                      |       | (838                               | )          | —              |       |
|                                        |            |                        |            |                          |            |                                    |            |                     |            |  |  |  |  |

 

***Shipping and Handling Charges***

 

TheCompany includes costs of shipping and handling billed to customers in revenueand the related expense of shipping and handling costs is included in cost ofsales.

 

***Property and Equipment***

 

Propertyand equipment are stated at cost less accumulated depreciation. Depreciationand amortization expense is provided using the straight-line method over theestimated useful lives of the assets, which range from 18 months to eightyears. Leasehold improvements are amortized using the straight-line method overthe shorter of their estimated useful lives or the lease period.

 

Totaldepreciation and amortization expense was $591,000, $432,000 and $656,000 forfiscal 2005, 2004, and 2003, respectively. As part of the shut down of theCorrelant’s historical operations, all property and equipment was sold duringfiscal 2004.

 

F-15

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***Impairment of Long-Lived Assets***

 

TheCompany accounts for any impairment of long-lived assets in accordance withSFAS 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets* (“SFAS 144”). In accordance withSFAS 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 liability sectionsof the balance sheet.

 

Duringfiscal 2005, the Company recorded a charge of $538,000 relating to theimpairment of GoVideo’s property and equipment resulting from the down-sizingof operations subsequent to fiscal 2005. See Note 20.

 

Duringfiscal 2003, the Company recorded a charge of $477,000 relating to theimpairment of Correlant’s property and equipment resulting from the wind downand cessation of Correlant’s historical operations in the cable modem industry.See Note 1. The fair value of the property and equipment sold was based onmarket value as determined by the sales proceeds received.

 

***Tradenames***

 

TheCompany sold its Tradenames subsequent to fiscal 2005. See Note 20.

 

TheCompany accounts for its Tradenames in accordance with SFAS 142, *Goodwill and Other Intangible Assets*(“SFAS142”). As such, its Tradenames are not amortized as the lives have been deemedindefinite. The Company assesses the impairment of its Tradenames annuallyusing the discounted cash flow method. As of June 30, 2005 and 2004, theCompany determined the fair value of the Tradenames exceeded the carryingvalues.

 

Duringfiscal 2005, the GoVideo acquired all the rights, title and interest in and theTradename “Rave,” which is used by GoVideo to market its MP3 player. All costsassociated with the purchase were capitalized. There were no material changesin the gross carrying amounts of the Company’s Tradenames during fiscal 2004.

 

***Goodwill***

 

TheCompany accounts for goodwill in accordance with SFAS 141*, Business Combinations*(“SFAS 141”), andSFAS 142. As part of its annual review of financial results, the Company notedindicators that the carrying value of its goodwill may not be recoverable. Theimpairment review was performed due to the prolonged economic downturnaffecting the operations and revenue forecasts of these subsidiaries. As theCompany determined the continued decline in market conditions faced by itssubsidiaries was significant and prolonged, the Company evaluated therecoverability of its goodwill. Based on the annual testing performed, theCompany recorded a goodwill impairment charge of $1,831,000 and $21,000 infiscal 2004 and 2003, respectively.

 

Thefollowing table summarizes the activity in the Company’s goodwill accountassociated with all acquisitions and dispositions (*in thousands*):

 

| ** **                                     | ** ** | **Correlant** | ** ** | **GoVideo** | ** ** | **Total**  | ** ** |
|------------------------------------------------|------------|---------------|------------|-------------|------------|------------|------------|
| 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      |       |
| Acquisition of additional stock of  subsidiary |       | 36            |       | —      |       | 36         |       |
| Impairment charge                              |       | (36           | )          | (1,795      | )          | (1,831     | )          |
| **Balance at June 30, 2005 and 2004**     | ** ** | **$**         | **—** | ** **  | **$**      | **—** | ** ** | **$** | **—** | ** ** |
|                                                |            |               |            |             |            |            |            |  |  |  |

 

F-16

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Therewas no Goodwill activity during fiscal 2005.

 

***Treasury Stock***

 

Treasurystock is recorded at cost. In the event of subsequent reissue, the treasurystock account will be reduced by the cost of such stock on the average costbasis with any excess proceeds credited to additional paid-in capital.

 

***Comprehensive Income (Loss)***

 

### Comprehensive income(loss) consists of net income and other gains (losses) affecting shareholders’equity that, under generally accepted accounting principles are excluded from netincome (loss) in accordance with SFAS 130, *ReportingComprehensive Income* (“SFAS 130”). Other comprehensive income (loss)includes unrealized gains (losses) on marketable securities and foreigncurrency translation adjustments. During fiscal 2005, 2004 and 2003, theCompany’s Other comprehensive income (loss) was comprised of Opta’s portion,($1,000) and $(196,000) and $71,000, respectively, of the unrealized gains(losses) on Correlant’s short term investments categorized asavailable-for-sale.

 

***Revenue Recognition***

 

GoVideosells consumer electronics. Revenue is recognized when persuasive evidence ofan arrangement exists, product has been shipped, fees are fixed anddeterminable, collectibility is probable and when all other significantobligations have been fulfilled. At the time of the sale, the Company recordsan allowance for estimated sales returns based on estimates derived fromhistorical trends. The Company also establishes an allowance for estimatedpayment term discounts expected to be taken by customers based on analysis ofhistorical trends. Payment term discounts granted are recorded in net revenues.

 

GoVideoprovides limited labor and parts warranties on certain of its products for amaximum of one year. GoVideo records a warranty reserve based upon historicalexperience and an estimate of total exposure associated with products sold toconsumers through retail outlets.

 

Correlantsold cable modems, CMTS and, in certain instances, the Media Access Controller(“MAC”), a key component of the cable modem. Cable modem and CMTS revenue wasrecognized upon shipment of the completed unit to the customer. MAC revenue wasrecognized upon passage of title of the MAC for use by the cable modemmanufacturer in its own product. Correlant did not provide a warranty for itsproducts, primarily the cable modem and CMTS. The warranty liability fordefective products was the responsibility of the third-party manufacturer.

 

***Stock-Based Compensation***

 

SFAS123, *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. In December 2002, the Financial AccountingStatements Board (“FASB”) issued SFAS 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure* (“SFAS 148”).SFAS 148 amends the disclosure requirements of SFAS 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.

 

Inaccordance with SFAS 148, the following table illustrates the effect on theCompany’s net loss and loss per share as if the Company had applied the fairvalue recognition provisions of SFAS 123 to its stock-based employee

 

F-17

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compensationawards, and recognized expense over the applicable award vesting period (*in thousands, except per share amounts*):

 

| ** **                                                                                                                                       | ** ** | **Year Ended June 30,** | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                                                                                                       | ** ** | **2005**                     | ** **  | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                             |       |                         |        |   |   |   |   |
| Net loss, as  reported                                                                                                                           | ** ** | **$**                        | **(18,861** | **)** | $ | (7,722 | ) | $ | (6,366 | ) |
| Add:  Stock-based employee compensation expense (reversal) included in reported net  loss                                                        | ** ** | **—**                   | ** **  | (75 | ) | 429 |   |
| Less:  Stock-based employee compensation (expense) reversal determined under fair  value based method for all awards, net of related tax effects | ** ** | **—**                   | ** **  | 147 |   | (1,169 | ) |
| Pro-forma  net loss                                                                                                                              | ** ** | **$**                        | **(18,861** | **)** | $ | (7,650 | ) | $ | (7,106 | ) |
|                                                                                                                                             |       |                         | ** **  |   |   |   |   |
| Basic and  diluted net loss per share, as reported                                                                                               | ** ** | **$**                        | **(0.38**   | **)** | $ | (0.14 | ) | $ | (0.10 | ) |
|                                                                                                                                             |       |                         | ** **  |   |   |   |   |
| Pro-forma  basic and diluted net loss per share                                                                                                  | ** ** | **$**                        | **(0.38**   | **)** | $ | (0.14 | ) | $ | (0.11 | ) |

 

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 14.

 

### ***Research and Development Costs***

###  

Researchand development costs are charged to operations as incurred.

 

***Advertising Costs***

 

Advertisingcosts include payroll, employee benefits, and other headcount-related costs aswell as expenses related to advertising, promotions and tradeshows, and areexpensed as incurred. Advertising expense was $2,510,000, $770,000 and $87,000in fiscal 2005, 2004 and 2003, 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 orliability is computed for the expected future impact of differences between thefinancial reporting and tax basis of assets and liabilities and for theexpected future tax benefit to be derived from tax credits and losscarryforwards. Deferred tax assets are reduced by a valuation allowance when,in the opinion of management, it is more likely than not that some portion orall of the deferred tax assets will not be realized.

 

***Net Loss per Share***

 

TheCompany calculates basic net loss per share by dividing net loss by theweighted average number of shares of common stock outstanding during the periodand diluted net loss per share by dividing net loss by the weighted averagenumber of shares of common stock and common stock equivalents outstandingduring the period. There were no employee stock options or common stockwarrants outstanding as of June 30, 2005, 2004 or 2003. There were 0,3,000 and 1,017,000 shares contingently issuable in connection with shareexchange agreements (See Note 4), as of June 30, 2005, 2004 and 2003,respectively, which were not considered in calculating diluted net loss percommon share as their effect would be anti-dilutive. As a result, for allperiods presented, the Company’s basic and diluted net loss per share are thesame.

 

***Reclassifications and Adjustments***

 

Certainprior period amounts have been reclassified to conform to the current periodpresentation. Such reclassifications had no effect on net loss.

 

F-18

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***Recently Issued Accounting Standards***

 

InMay 2003, the FASB issued SFAS 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*(“SFAS 150”).  SFAS 150 represents the first phase ofthe FASB’s project to clarify the accounting treatment of certain instrumentsthat possess characteristics of both liabilities and equity.  SFAS 150generally requires that freestanding financial instruments that obligate theissuer to redeem the holders’ shares, or are indexed to such an obligation, andare settled in cash or settled with shares meeting certain conditions betreated as liabilities.  The provisions of SFAS 150 are effectiveimmediately for instruments entered into or modified after May 31, 2003and 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.  We adopted SFAS 150 during fiscal 2005. The adoption did not have amaterial effect on our financial position, results of operations, or cash flowsas of or for the year ended June 30, 2005.

 

InNovember 2004, the FASB issued SFAS 151, *InventoryCosts*(SFAS 151), which revised Accounting Research Bulletin (“ARB”)43, relating to inventory costs. This revision is to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial (spoilage). This Statement requires that these items be recognized asa current period charge regardless of whether they meet the criterion specifiedin ARB 43. In addition, this Statement requires the allocation of fixedproduction overheads to the costs of conversion be based on normal capacity ofthe production facilities. SFAS 151 is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. We do not believe theadoption of SFAS 151 will have a material impact on our financial statements.

 

InDecember 2004, the FASB issued SFAS 123R, *Share-BasedPayment* (“SFAS 123R”), which is a revision of SFAS 123 andsupersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25and the intrinsic value method of accounting, and requires companies torecognize the cost of employee services received in exchange for awards ofequity instruments, based on the grant date fair value of those awards, in thefinancial statements. The effective date of SFAS 123R is the first reportingperiod beginning after June 15, 2005. SFAS 123R permits companies to adoptits requirements using either a “modified prospective” method, or a “modifiedretrospective” method. Under the “modified prospective” method, compensationcost is recognized in the financial statements beginning with the effectivedate, based on the requirements of SFAS 123R for all share-based paymentsgranted after that date, and based on the requirements of SFAS 123 for allunvested awards granted prior to the effective date of SFAS 123R. Under the “modifiedretrospective” method, the requirements are the same as under the “modifiedprospective” method, but also permits entities to restate financial statementsof previous periods based on proforma disclosures made in accordance with SFAS123. We do not believe the adoption of SFAS 123R will have a material impact onour financial statements.

 

InDecember 2004, the FASB issued Statement 153, *Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions*(“SFAS 153”). SFAS 153addresses the measurement of exchanges of nonmonetary assets and redefines thescope of transactions that should be measured based on the fair value of theassets exchanged. We expect to adopt this new standard during fiscal 2006. Wedo not believe adoption of SFAS 153 will have a material effect on ourconsolidated financial position, results of operations or cash flows.

 

InJune 2005, the FASB issued Statement 154, *AccountingChanges and Error Corrections*(“SFAS 154”), a replacement of APBOpinion 20, *Accounting Changes*,and Statement 3, *Reporting AccountingChanges in Interim Financial Statements*. SFAS 154 changes therequirements for the accounting for and reporting of a change in accountingprinciple. Previously, most voluntary changes in accounting principles wererequired recognition via a cumulative effect adjustment within net income ofthe period of the change. SFAS 154 requires retrospective application to priorperiods’ financial statements, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change. SFAS 154 iseffective for accounting changes made in fiscal years beginning after December 15,2005; however, the Statement does not change the transition provisions of anyexisting accounting pronouncements. We do not believe adoption of SFAS 154 willhave a material effect on our

 

F-19

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consolidatedfinancial position, results of operations or cash flows.

 

**Note 4 – Acquisitions and Dispositions – MajorityOwned Subsidiaries**

 

***Correlant Communications, Inc.***

 

OnMarch 31, 1999, the Company entered into a share exchange agreement whichprovided for the acquisition of 94.5% of the issued and outstanding commonshares of Correlant, representing an 81% ownership interest in Correlant.Consideration paid for the purchase was 9,657,000 Opta common shares valued at$7.21 per share plus contingently issuable shares of up to 1,435,000. Thecontingent shares were issuable as Correlant options specified in the agreementwere exercised. For each option exercised, 81% of such shares were to betransferred to Opta in exchange for 0.5364 shares of Opta common stock for eachshare 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, *Business Combinations*(“APB 16”), the contingent consideration is not recorded until suchdetermination can be reasonably made. At the acquisition date, the excess ofthe purchase price and related costs over the value assigned to the nettangible assets acquired was $74,545,000 and was assigned to goodwill. Therewere no contingently issuable shares issued during fiscal 2005. The Companyrecorded $36,000 and $21,000 as additional goodwill as a result of issuing5,000 and 3,000 of the contingently issuable shares in fiscal year 2004 and2003, respectively.

 

InApril 2000, as part of the Correlant acquisition agreement, Opta providedCorrelant with $10,000,000 of non-interest bearing convertible debt financing.The debt was converted into 10,000 shares of Series D preferred stock on September 30,2000. As of June 30, 2005, Correlant has Series A, B, C and Dconvertible preferred stock with total liquidation preferences over the commonstockholders of $2,400,000, $1,000,000, $2,500,000 and $10,000,000,respectively. All preferred stock was liquidated at full liquidation valuesubsequent to June 30, 2005. See Note 20.

 

FromDecember 1999 through October 2000, the Company sold a total of4,313,000 of its common shares in Correlant to various third parties. As of June 30,2005, Opta owned 74% of Correlant’s outstanding common stock, representing a66% ownership interest.

 

***Arescom, Inc.***

 

OnMarch 31, 1999, the Company entered into a share exchange agreement whichprovided for the acquisition of 81% of the issued and outstanding common sharesof Arescom. Consideration for the purchase was 3,886,000 Opta common shares.

 

DuringJuly 2000, Opta sold 300,000 shares of its Arescom stock to an unrelatedparty, which had minimal impact on its ownership percentage.

 

EffectiveDecember 18, 2001, Opta sold, to an unrelated party approximately 92% ofits investment in Arescom, representing 65% of the outstanding securities ofArescom for $10,000,000. In connection with this agreement, all relatedpurchase agreements from March 1999 were terminated and the Company wasreleased from all liability as a guarantor of Arescom’s indebtedness to anunrelated third party. In addition, the Company and Arescom entered into anexchange agreement, whereby the Company forgave $13,235,000 due from Arescom inexchange for a new promissory note (“New Note”) for the principal sum of$2,192,000 and 11,000 shares of subordinated preferred stock of Arescom.Immediately following the sale of its majority interest in Arescom, the Companydetermined that the value of its remaining 6% interest in Arescom was impaired.

 

TheNew Note became due November 3, 2002 and accrued interest at a rate of 4%per annum. The payment of principal under the New Note and interest thereon,was secured by the grants to Opta of a security interest in all of the Company’sright, title and interest in all amounts owing to the Company from MicrosoftCorporation under the Modem Purchase Agreement, dated February 7, 2000among Arescom and Microsoft Corporation pursuant to the

 

F-20

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Loanand Security Agreement. Arescom was unable to make payments in accordance withthe terms of the agreement and became delinquent on the note. In May 2003,the Company filed an action against Arescom seeking to recover from 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. In September 2003, the Company sold its remaining 6%interest in Arescom. On the sale date, the 6% ownership interest in Arescom hadno value. In September 2003, the Company settled all claims againstArescom, including all amounts previously due on the promissory note dated December 14,2001. The balance due on the New Note at June 30, 2003 of $1,592,000 wasreceived in full during fiscal 2004.

 

Inaddition, as part of the settlement, the Company also exchanged with certainshareholders of Arescom all of the shares of Arescom common stock and Series Bpreferred stock held by the Company for all of the shares of the Company’scommon stock held by such shareholders. Pursuant to the stock swap agreement,the Company was to acquire up to 3,886,000 shares of its stock. To date, theCompany has received 3,578,000 shares of its stock, which has been accountedfor as treasury stock and valued at $179,000 based on the adjusted closingsales price of $0.05 per share as reported by the National Quotation Bureau’s “PinkSheets” and was recorded in Other income (expense) on the consolidatedstatement of operations during fiscal 2004.

 

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

 

InApril 2003, the Company loaned $5,986,000 to Opta Systems, which was used,in addition to a deposit of $250,000 paid by Opta Systems, to complete itspurchase of substantially all assets and assumption of certain liabilities of aproduct line known as “GoVideo” from SONICblue Incorporated, a Delawarecorporation (NASDAQ: SBLU), and Sensory Science Corporation, a Delawarecorporation and wholly-owned subsidiary of SONICblue. The purchase was pursuantto a purchase agreement and an order issued by the United States BankruptcyCourt, Northern District of California, San Jose Division overseeing SONICblue’sbankruptcy case.

 

Immediatelysubsequent to Opta Systems’s purchase of the GoVideo product line, the Companypurchased 100% of the outstanding membership interests of Opta Systems fromCarmco Investments, LLC (“Carmco”), a Connecticut limited liability company foran adjusted purchase price of $5,808,000. The following is a condensed balancesheet showing the fair values of the assets acquired and the liabilitiesassumed on the date of acquisition (*inthousands*):

 

| Accounts  receivable                  |   | $      | 2,959  |   |
|---------------------------------------|--------|--------|--------|--------|
| Inventory                             |   | 1,361  |   |
| Equipment                             |   | 814    |   |
| Intangibles assets                    |   | 4,215  |   |
| Current liabilities                   |   | (3,541 | )      |
| Purchase price of net assets acquired |   | $      | 5,808  |   |

 

Theamount allocated to intangible assets includes $2,420,000 allocated to theGoVideo Tradename, for the acquisition cost of the tradename used to market theGoVideo products 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 Tradename is not amortized in accordance with SFAS142, as its life is deemed indefinite. The goodwill was considered impaired at June 30,2004 and fully written off.

 

***GoVideo DigiTech (Huizhou) Co., Ltd***

 

OnJuly 7, 2004, the Company’s Board of Directors approved the commencementof a new wholly-owned subsidiary, DigiTech, located in Guangdong, China.DigiTech generates revenue by selling GoVideo’s MP3 players in the Chinamarket. Opta invested approximately $500,000 in the new subsidiary. TCLMultimedia Electronics R&D Center (“TCL Multimedia”), an affiliate companyof TCL, expended some resources during the start up phase of GoVideo DigiTech.On July 7, 2004, the Company’s Board of Directors approved the closure ofBeijing Lotus. All assets of Beijing Lotus were transferred to DigiTech during September 2004.

 

F-21

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**Note 5 – Acquisitions and Dispositions – Equity MethodInvestess**

 

***TCL Digital Technologies, Ltd.***

 

Asdiscussed in Note 1, in January 2003, the Company entered into anagreement to form a joint venture with Youbang, TCL Computer, an affiliate ofTCL 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. (“TCL Digital”), and operates as acomputer notebook manufacturing company in China. The Company contributed 50%of the total 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. In September 2003,the Company entered into an agreement with TCL Information TechnologyIndustrial (Group) Ltd, an affiliate of TCL Industries whereby the Company soldits 50% interest in TCL Digital for an aggregate amount of $5,604,000, of which$1,842,000 was applied to repay the sum payable under the promissory note datedAugust 18, 2003 issued by the Company in favor of TCL InternationalHoldings Limited (“TCL Holdings”), TCL Industries parent company. The balanceof $3,762,000 was paid to the Company resulting in a gain of $1,053,000included with Gain on sale of investments in the Company’s statement ofoperations during fiscal 2004.

 

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

 

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

 
| ** **                      | ** ** | **June 30,** | ** ** |
|---------------------------------|------------|-------------------|------------|
| ** **                      | ** ** | **2005**          | ** ** | **2004** | ** ** |
|                            |       |              |       |   |   |
| Accounts receivable             | ** ** | **$**             | **10,941** |   | $ | 26,045 |   |
| Allowance for doubtful accounts | ** ** | **(304**          | **)**      | (517 | ) |
| ** **                      |       | **$**             | **10,637** |   | $ | 25,528 |   |

 

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

 
| ** **                                | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2005**          | ** ** | **2004** | ** ** |
| ** **                                | ** ** | ** **        | ** ** | ** ** | ** ** |
| Accounts  receivable from related parties | ** ** | **$**             | **—** |   | $ | 1,946 |   |
| Allowance for doubtful accounts           | ** ** | **—**        |       | (1,946 | ) |
|                                      |       | $                 | —     |   | $ | — |   |

 

F-22

----

 

**Note 7 – Inventories**

 

Thefollowing summarizes components of inventories (*in thousands*):

 

| ** **                        | ** ** | **June 30,** | ** ** |
|-----------------------------------|------------|-------------------|------------|
| ** **                        | ** ** | **2005**          | ** ** | **2004** | ** ** |
|                              |       |              |       |   |   |
| Raw materials                     | ** ** | **$**             | **—** |   | $ | — |   |
| Service replacement parts         | ** ** | **1,340**         |       | 1,494 |   |
| Finished goods                    | ** ** | **12,858**        |       | 18,605 |   |
|                              | ** ** | **14,198**        |       | 20,099 |   |
| Allowance  for obsolete inventory | ** ** | **(3,964**        | **)**      | (2,095 | ) |
|                              | ** ** | **$**             | **10,234** |   | $ | 18,004 |   |

 

**Note 8 – Property and Equipment**

 

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

 

| ** **                                | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2005**          | ** ** | **2004** | ** ** |
|                                      |       |              |       |   |   |
| Computer hardware and purchased software  | ** ** | **$**             | **382**    |   | $ | 255 |   |
| Office furniture and lab equipment        | ** ** | **1,096**         |       | 852 |   |
| Leasehold improvements                    | ** ** | **474**           |       | 464 |   |
|                                      | ** ** | **1,952**         |       | 1,571 |   |
| Accumulated depreciation and amortization | ** ** | **(1,617**        | **)**      | (488 | ) |
|                                      | ** ** | **$**             | **335**    |   | $ | 1,083 |   |

 

**Note 9 – Line of Credit**

 

InJuly 2003, GoVideo entered into a financing agreement last amended andrestated subsequent to June 30, 2005. See Note 20 for a description of thecurrent financing agreement. The following is a description of the agreementduring the reporting period.

 

Theoriginal maximum line of credit available was $40,000,000 (reduced to$30,000,000 on July 15, 2004) limited by a borrowing base (“Borrowing Base”)determined by specific inventory and receivable balances, and provides for cashloans, letters of credit and acceptances. The agreement, as amended, matures July 21,2007. Interest is charged at prime plus 1/2 percent subject to a minimum of$15,000 per calendar month with a monthly fee on the unused balance of the lineof 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 Opta. Under the current credit facility,GoVideo is required to comply with certain financial covenants and conditionswhich include earning minimum levels of net income. During April and June,2004, GoVideo was unable to comply with the financial covenants as the requiredminimum net income was not achieved. GoVideo received a waiver letter from thelender for the April 2004 noncompliance. As a result, interest beganaccruing at the default rate of prime plus 3 1/2% on June 1, 2004.

 

OnNovember 1, 2004, GoVideo entered a forbearance agreement (“Agreement”)with its line of credit lender as a result of the noncompliance with thefinancial covenants. Under the Agreement, GoVideo:

 

•                  Paid the lender’s costs and expensesassociated with existing default;

•                  Paid $15,000 as consideration of forbearanceand other accommodations provided by the lender under the Agreement;

•                  Paid the lender all the accrued interest atthe default rate for the period between June 1, 2004 and September 1,2004 in the amount of $122,000;

•                  Agreed to not pay any subordinateindebtedness or interest; and

•                  Agreed not to incur capital expenditures inexcess of $100,000.

 

F-23

----

 

TheAgreement also called for the following modifications:

 

•                  A reduction of the maximum line from$30,000,000 to $25,000,000 effective December 28, 2004;

•                  A change to the minimum net income per monthrequirement;

•                  The increase of the minimum interest chargefrom $15,000 to $22,500 per month; and

•                  A reduction in the borrowing base.

 

Subsequentto the above forbearance agreement, Wells further reduced the maximum line ofcredit. And as of June 30, 2005, the maximum line of credit was$10,000,000. At June 30, 2005, GoVideo owed Wells $6,172,000. GoVideo’sunused line of credit at June 30, 2005 was $3,828,000. See Note 20.

 

**Note 10 – Notes Payable to Related Parties**

 

AllGoVideo’s notes payable to related parties outstanding at June 30, 2005were paid off subsequent to year end. See Note 20.

 

InJune 2003, GoVideo borrowed $6,283,000 from TCL Industries and Asia FocusIndustrial Ltd., entities affiliated with TCL, to fund inventory purchases andoperating expenses. These advances, which were subordinate to GoVideo’s line ofcredit, were originally due at various dates during 2004. GoVideo was unable topay off the loans and extended each of the loan’s due dates multiple times.Both loans accrued interest at approximately 4%, which totaled $191,000 and$240,000 for fiscal 2005 and 2004, respectively. Both loans were collateralizedby 100% of the Common and Series D preferred stock of CorrelantCommunications owned by Opta. The principal owed TCL Industries at June 30,2005 was $1,500,000. The principal owed Asia Focus at June 30, 2005 was$4,700,000.

 

Duringfiscal 2004, Opta entered into a financing agreement with TCL Industries. On October 22,2003, Opta entered the first agreement to borrow $4,500,000 with a maturitydate of January 22, 2004 and an interest rate of approximately 3%. Optaultimately loaned the funds to GoVideo to fund inventory purchases andoperating expenses. The financing agreement was extended multiple times. Theloan was collateralized by 100% of Opta’s Common and Series D preferredstock of Correlant. The principal owed TCL at June 30, 2005 was$4,500,000.

 

OnApril 19, 2005, the Company’s subsidiary, DigiTech entered a short termloan for $725,000 with TCL that originally matured June 30, 2005. Theannual interest rate is 5.2% and interest is paid upon maturity of the loan. OnJune 30, 2005, the loan was automatically extended six months and may beautomatically extended for an additional six month terms if DigiTech and TCLmutually agree to renew the loan.

 

**Note 11 – Restructuring Charges**

 

Duringthe second quarter of fiscal 2004, Correlant’s board of directors approved thewind down and cessation of Correlant’s historical operations in the cable modemand CMTS business. See Note 1. In connection with the shut down, Correlantrecorded a restructuring charge of $1,845,000 during fiscal 2004.

 

F-24

----

 

Thefollowing table summarizes the activity in Correlant’s reserves associated withits shut down of historical operations (*inthousands*):

 
| ** **                         | ** ** | **Separation  costs for  terminated  employees  and  contractors** | ** ** | **Facilities  closing** | ** ** | **Other**  | ** ** | **Total  restructuring  charges** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|-----------------------------------|------------|
| Balance at June 30, 2003      |       | $                                                                  | —     |                    | $          | —     |       | $                                 | —     |   | $ | — |   |
| Fiscal 2004  restructuring charges |       | 890                                                                |       | 583                     |       | 372        |       | 1,845                             |       |
| Cash  payments                     |       | (628                                                               | )          | (49                     | )          | (372       | )          | (1,049                            | )          |
| Balance at June 30, 2004      |       | 262                                                                |       | 534                     |       | —     |       | 796                               |       |
| **Cash  payments**                 | ** ** | **(262**                                                           | **)**      | **(456**                | **)**      | **—** | ** ** | **(718**                          | **)**      |
| **Reversal  of over accrual**      | ** ** | **—**                                                         | ** ** | **(78**                 | **)**      | **—** | ** ** | **(78**                           | **)**      |
| **Balance at June 30, 2005**  | ** ** | **$**                                                              | **—** | ** **              | **$**      | **—** | ** ** | **$**                             | **—** | ** ** | **$** | **—** | ** ** |

 

**Note 12 – Warranty Reserve**

 

Thefollowing table presents changes in the Company’s product warranty reserve (*in thousands*):

 

| Balance on  the purchase date of GoVideo April 18, 2003 |       | $           | 732,000     |       |
|--------------------------------------------------------------|------------|-------------|-------------|------------|
|                                                         |       |        |        |
| Accruals for warranties issued                               |       | —      |        |
| Cost of warranties honored during the  period                |       | (44,000     | )           |
| Balance at June 30, 2003                                |       | 688,000     |        |
| Accruals for warranties issued                               |       | 86,000      |        |
| Cost of warranties honored during the  period                |       | (284,000    | )           |
| **Balance at June 30, 2004**                            |       | 490,000     |        |
| **Accruals for warranties issued**                           | ** ** | **25,000**  | ** **  |
| **Cost of warranties honored during the  period**            | ** ** | **(25,000** | **)**       |
| **Balance at June 30, 2005**                            | ** ** | **$**       | **490,000** | ** ** |

 

#### **Note 13– Related Party Transactions**

 

***Opta***

 

Duringfiscal year 2003, the Company leased a portion of the building to a significantshareholder.  See Note 16.  There were no such related partytransactions during fiscal 2005 or 2004 nor were there any related amounts duefrom this shareholder as of June 30, 2005 or 2004.

 

***GoVideo***

 

Duringfiscal 2004 and 2003, Opta advanced $7,300,000 and $3,353,000, respectively, toGoVideo for inventory purchases and operating expenses. The advances accrueinterest at annual rates of 3% to 5% and were due at various dates through January 2004.GoVideo paid back $2,000,000 on June 30, 2004. GoVideo owed Opta$8,566,000 and $8,653,000 at June 30, 2005 and 2004, respectively.Subsequent to year end, $4,500,000 of the outstanding balance was paid. SeeNote 20. All such advances have been eliminated in the accompanying financialstatements.

 

BetweenDecember 2003 and May 2005, GoVideo obtained up to $13,000,000 creditterms from various suppliers, through corporate guarantee letters from TCLIndustries and TCL International Holdings Limited, both of which are relatedparties. In addition, GoVideo is able to obtain more advantageous terms from certainvendors in China by purchasing products from those vendors through TCL.

 

***Correlant***

 

**Cooperative Research and Development Agreement**. In 1997, Correlant established arelationship with Toshiba Corporation (“Toshiba”), a shareholder of Correlant,by entering into a cooperative research and development

 

F-25

----

 

agreement.As part of this arrangement, Correlant agreed to pay Toshiba a percentage ofthe selling price of each developed product sold to customers, other thanToshiba, which utilized the technology developed under the agreement. EffectiveFebruary 1, 2002 as part of the aforementioned change in business model,Correlant no longer sold completed cable modems. As a result, there were noroyalties paid to Toshiba subsequent to February 1, 2002.

 

Aspart of the cessation of Correlant’s historical operations in the cable modemand CMTS business, Correlant and Toshiba entered into a settlement and releaseagreement dated February 5, 2004. As part of the settlement agreement,Toshiba agreed to release Correlant from any and all liabilities associatedwith cable modems previously sold to Toshiba in exchange for Correlant’s bestefforts in submitting two Toshiba cable modem models for Cablelabs’ DOSCIS 1.1certification. During the third and forth quarters of fiscal 2004, Correlantincurred costs totaling $372,000 associated with the certification process,which is included in Restructuring charges (see Note 11) on the Company’sstatement of operations. Correlant received the DOCSIS 1.1 certification forboth cable modems submitted to Cablelabs on behalf of Toshiba.

 

**Manufacturing and Sales.**Prior to the shut down, Correlant had anestablished relationship with TurboComm, a company located in Taiwan thatmanufactures high-speed data over cable technology products. Correlantpurchased the completed cable modems and CMTS units from TurboComm. Duringfiscal 2005, 2004 and 2003, purchases from TurboComm were $0, $97,000 and$271,000, respectively. As of June 30, 2005 the Company did not oweTurboComm. As of June 30, 2004 the Company was liable to TurboComm for$170,000, which is included in Accounts payable to related parties in theconsolidated balance sheet.

 

Additionally,during fiscal 2001, Correlant began selling the MAC to TurboComm for use bythem in their own products. During fiscal 2005 and 2004, MAC sales to TurboCommaccounted for less than 1% of total consolidated net revenues. During fiscal2003, MAC sales to TurboComm accounted for approximately 42% of totalconsolidated net revenues. Correlant filed a lawsuit against TurboComm duringfiscal 2004 and the accounts receivable from TurboComm was fully reserved at June 30,2004. See Note 16.

 

**Note 14 – Stockholders’ Equity**

 

**Preferred Stock**

 

Optahas one class of preferred stock, which is designated Series A preferredstock. The par value is $0.001 per share and 100,000 shares are authorized. Series Apreferred stock has the same voting rights as common stock, a liquidationpreference of $10 per share, is entitled to the right to receive dividends onthe same per share basis as common shareholders and is redeemable by theCompany, at its sole option in whole or in part, at any time at $10 per share.There are 4,300 shares issued and outstanding at June 30, 2005, 2004, and2003.

 

**Common Stock Transactions**

 

Therewere no common stock transactions during fiscal 2005. During fiscal 2004 and2003, the Company issued 5,000 and 3,000 shares of common stock valued at$36,000 and $21,000, respectively, to Correlant shareholders in connection withthe Share Exchange Agreement. See Note 4.

 

**Treasury Stock Transactions**

 

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 Directors plans to continue to review potential repurchases of itscommon stock and will continue to approve the repurchase transactions on a caseby case basis.

 

OnAugust 31, 2004 Opta reached a settlement agreement with TurboComm. Underthe agreement, TurboComm agreed to pay Opta $20,000 and deliver 686,000 sharesof Opta, constituting all shares owned by TurboComm. Both parties mutuallyagreed to release and discharge any and all claims that each may have againstthe other party. This transaction resulted in an $88,000 gain included in Otherincome (expense) on the consolidated statement of operations for fiscal 2005.

 

F-26

----

 

Asdiscussed in Note 4, the Company has received 3,578,000 shares of its stock asa result of the settlement with Arescom.

 

**Subsidiary Stock Transactions**

 

Correlantissued no shares during fiscal 2005. During fiscal 2004 and 2003, Correlantissued 12,000 and 7,000 shares upon the exercise of options for proceeds of$1,000 and $250, respectively. As a result, the Company recorded $1,000 inconsolidated equity for the issuance of these shares during fiscal 2004. Thesetransactions did not materially affect the Company’s ownership of Correlant.

 

Duringfiscal 2005, Correlant purchased 272,000 shares of its common stock from one ofCorrelant’s co-founders. During fiscal 2005, as a result of settling a lawsuit,Correlant received 700,000 Series A and 300,000 Series C shares ofCorrelant preferred stock. See Note 16. As a result of these transactions, Opta’sownership increased to 66%.

 

Duringfiscal 2005, Correlant recognized no compensation expense. During fiscal 2004and 2003, Correlant recognized compensation expense (reversal) of $(104,000)and $592,000, respectively for the difference between the exercise price andfair value of stock options issued to employees. During fiscal 2005, 2004 and2003, the Company recorded $0, $(75,000) and $429,000 in consolidated equityfor the recognition of the compensation expense (reversal). The remainingamount was recorded as Non-controlling interest in subsidiaries on theconsolidated balance sheet.

 

Atthe date the Company acquired the majority interest in Correlant, Correlant hadpreferred stock outstanding that Opta did not acquire. In addition, in April andMay 1999, Correlant sold preferred stock to third parties for net proceedsof $1,463,000, which was recorded as Non-controlling interest in subsidiarieson the consolidated balance sheet. The preferred stock held by third partieshas a liquidation preference over the common shareholders of $5,900,000 and$8,425,000 at June 30, 2005 and 2004, respectively, which was included inNon-controlling interest in subsidiaries on the consolidated balance sheets.

 

**Stock Option Plans**

 

***Opta***

 

Optastockholders approved 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 stockappreciation rights. The Incentive Plan provided 11,355,000 shares of commonstock to be offered. The vesting provisions of individual options may vary. Theexercise price shall not be less than 100% of the fair market value of a commonstock on the grant date. No options have been granted since the Incentive Plan’sadoption.

 

***GoVideo***

 

Currently,GoVideo has 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 provides for the grant of incentive andnon-statutory options and issuance of common stock under the stock issuanceprogram (as defined) to employees, directors, and consultants. There were

 

F-27

----

 

nooptions outstanding at June 30, 2005.

 

Theexercise price of incentive stock options must equal at least the fair value onthe date of grant and the exercise price of non-statutory stock options and theissuance price of common stock under the stock issuance program may be no lessthan 85% of the fair value on the date of grant or issuance. The options areexercisable for a period of up to ten years after the date of grant. Optionsgranted prior to August 2001 vest over four years at the rate of 25% oneach anniversary of the vesting start date. Options granted subsequent to August 2001vest over three years at the rate of 33% after the first and secondanniversaries and the remainder after the third anniversary.

 

Correlantwas required to book deferred stock compensation as a result of issuing stockat an exercise price determined by Correlant’s Board of Directors and the fairvalue per share for accounting purposes at the grant date. Correlant recognizedand amortized deferred stock compensation on an accelerated basis in accordancewith FASB Interpretation 28, *Accounting forStock Appreciation Rights and Other Variable Stock Option or Award Plans*(“FIN28”) over the vesting period of the related options, generally four years.

 

Thefollowing table summarizes stock option activity under the 1998 Stock OptionPlan and related information through June 30, 2005 (*in thousands*):

 

| ** **                            | ** ** | **Options** | ** ** | **Weighted-  Average Exercise  Price** | ** ** |
|---------------------------------------|------------|-------------|------------|----------------------------------------|------------|
| 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, 2003     |       | 3,700,000   |       | $                                      | 1.41       |   |
| Granted                               |       | —      |       | —                                 |       |
| Exercised                             |       | (12,000     | )          | 0.08                                   |       |
| Cancelled                             |       | (3,669,000  | )          | 1.41                                   |       |
| Outstanding at June 30, 2004     |       | 19,000      |       | $                                      | 1.09       |   |
| **Granted**                           | ** ** | **—**  | ** ** | **—**                             | ** ** |
| **Exercised**                         | ** ** | **—**  | ** ** | **—**                             | ** ** |
| **Cancelled**                         | ** ** | **(19,000** | **)**      | **1.09**                               | ** ** |
| **Outstanding at June 30, 2005** | ** ** | **—**  | ** ** | **—**                             | ** ** |

 

Therewere no options exercisable at June 30, 2005. As of June 30, 2004 and2003, there were 19,000 and 2,868,000 options exercisable, respectively, at theweighted average prices of $1.09 and $1.31 per share, respectively. There are8,247,000 shares available for future grant at June 30, 2005.

 

Asdiscussed in Note 3, the Company accounts for stock-based awards using theintrinsic value method in accordance with APB 25 and its relatedinterpretations. SFAS 123 requires the disclosure of pro forma net income(loss) and earnings (loss) per share as if the Company had adopted the fairvalue method as of the beginning of 1996. There were no options granted duringfiscal 2005, 2004 or 2003. The weighted-average fair value of options grantedduring the year ended June 30, 2002 was $1.14. The calculations were madeusing the Black-Scholes option-pricing model. The fair value of the Company’sstock-based awards to employees was estimated assuming no expected dividend andthe following weighted-average assumptions for 2002:  expected volatility of 78%; risk-freeinterest rate of 5.5%; and a weighted-average expected life of the options offive years. For purposes of pro forma disclosures, the estimated fair value isamortized on an accelerated basis in accordance with FIN 28 over the vestingperiod.

 

F-28

----

 

**Note 15 – Income Taxes**

 

Theprovision (benefit) for income taxes for fiscal 2005, 2004 and 2003 iscomprised of the following (*in thousands*):

 

| ** ** | ** ** | **Year Ended June 30,** | ** ** |
|------------|------------|------------------------------|------------|
| ** ** | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|       |       |                         |       |   |   |   |   |
| Current:   |       |                         |       |   |   |   |   |
| Federal    | ** ** | **$**                        | **405**    |   | $ | (500 | ) | $ | (111 | ) |
| State      | ** ** | **(1,119**                   | **)**      | 2 |   | 2 |   |
| Foreign    | ** ** | **—**                   |       | — |   | — |   |
| ** ** |       | **(714**                     | **)**      | (498 | ) | (109 | ) |
| Deferred:  |       |                         |       |   |   |   |   |
| Federal    | ** ** | **—**                   |       | — |   | — |   |
| State      | ** ** | **—**                   |       | — |   | — |   |
| Foreign    | ** ** | **—**                   |       | — |   | — |   |
| ** ** |       | **—**                   |       | — |   | — |   |
| Total      | ** ** | **$**                        | **(714**   | **)** | $ | (498 | ) | $ | (109 | ) |

 

Thereported provision (benefit) for income taxes for the year ended June 30,2005, 2004 and 2003 differ from the amount computed by applying the statutoryfederal income tax rate of 35 percent to the consolidated income (loss)before income taxes as follows (*in thousands*):

 

| ** **                                       | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                             |       |                         |       |   |   |   |   |
| Provision (benefit) computed at statutory  rates | ** ** | **$**                        | **(6,192** | **)** | $ | (2,702 | ) | $ | (2,266 | ) |
| Increase (reduction) resulting from:             |       |                         |       |   |   |   |   |
| Non-deductible  goodwill                         | ** ** | **—**                   |       | — |   | — |   |
| Non-deductible  expenses                         | ** ** | **23**                       |       | 18 |   | 8 |   |
| State taxes,  net of federal benefit             | ** ** | **9**                        |       | 2 |   | 2 |   |
| Utilization  of NOLs                             | ** ** | **—**                   |       | — |   | (111 | ) |
| Utilization  of tax credits                      | ** ** | **—**                   |       | (171 | ) | — |   |
| Valuation  allowance                             | ** ** | **5,446**                    |       | 2,355 |   | 2,258 |   |
| Total                                            | ** ** | **$**                        | **(714**   | **)** | $ | (498 | ) | $ | (109 | ) |

 

Thecomponents of the Company’s net deferred income tax assets are as follows (*in thousands*):

 

| ** **                                  | ** ** | **As of June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **2005**                | ** ** | **2004** | ** ** |
|                                        |       |                    | ** ** |   |   |
| Current deferred tax assets:                |       |                    | ** ** |   |   |
| Accrued  expenses                           | ** ** | **$**                   | **808**    | ** ** | $ | 658 |   |
| Deferred  compensation                      | ** ** | **5,624**               | ** ** | 4,734 |   |
| Deferred  revenue                           | ** ** | **74**                  | ** ** | 97 |   |
| Inventory  reserves                         | ** ** | **1,795**               | ** ** | 676 |   |
| Allowance  for bad debts                    | ** ** | **1,225**               | ** ** | 1,123 |   |
| Other                                       | ** ** | **(1,364**              | **)**      | — |   |
| Total                                       | ** ** | **8,162**               | ** ** | 7,288 |   |
| Valuation allowance for deferred tax assets | ** ** | **(8,162**              | **)**      | (7,288 | ) |
| Net deferred tax assets                     | ** ** | **$**                   | **—** | ** ** | $ | — |   |
|                                        |       |                    | ** ** |   |   |
| Non-current deferred tax assets:            |       |                    | ** ** |   |   |
| Net  operating loss carryforwards           | ** ** | **$**                   | **17,961** | ** ** | $ | 8,937 |   |
| Tax credit  carryforwards                   | ** ** | **1,712**               | ** ** | 1,883 |   |
| Other                                       | ** ** | **884**                 | ** ** | 633 |   |
| Total                                       | ** ** | **20,557**              | ** ** | 11,453 |   |
| Valuation allowance for deferred tax assets | ** ** | **(20,557**             | **)**      | (11,453 | ) |
| Net deferred tax assets                     | ** ** | **$**                   | **—** | ** ** | $ | — |   |

 

Thenet change in the total valuation allowance for fiscal 2005 and 2004 was anincrease of $9,978,000 and $1,371,000, respectively. In assessing therealizability of deferred tax assets, the Company considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible. The Company considers the projected futuretaxable income and tax planning strategies in making this assessment. Based onthe level of historical operating results and projections of taxable income forthe future, the Company has determined that it is more likely than not that thedeferred tax assets

 

F-29

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willnot be realized through future taxable earnings. Accordingly, a valuationallowance was recorded to reduce deferred tax assets to the amount that is morelikely than not to be realized. There can be no assurance that the Company willever be able to realize the benefit of some or all of the federal and stateloss carryforwards either due to ongoing operating losses or due to ownershipchanges, which limit the usefulness of the loss carryforwards.

 

AtJune 30, 2005, the Company had a California net operating losscarryforward of $51,300,000 which will begin to expire in 2013 unlesspreviously utilized. At June 30, 2005, the Company had a Federal netoperating loss carryforward of $35,800,000 which will begin to expire in 2023unless previously utilized.

 

AtJune 30, 2005, Correlant has federal and California research anddevelopment credit carryforwards of approximately $569,000 and $971,000,respectively. The federal credit will begin to expire in 2023 unless previouslyutilized.

 

Incometax receivable at June 30, 2005 consists of the following:

 

(i) Federal tax of $441,000: The Company waspreviously under audit by the Internal Revenue Service (“IRS”) for tax yearsended June 30, 2001, 2000, and 1999, which was resolved by the JointCommittee on Taxation (“JCT”) during fiscal 2005. The JCT approved the Company’srefund of income tax of approximately $1,486,000, which was reduced by interestowed by the Company to the IRS (restricted interest). See Note 20.

 

(ii) Federalincome tax of $63,000: Correlant filed an amended tax return in June 2004for the year ended September 30, 2000, which is currently being processedby the IRS. To date, no payment has been received.

 

(iii) Stateincome tax of $1,134,000: As a result of re-auditing and restating the Company’sfinancial statements and an IRS examination, the Company amended its tax returnfor the year 2000 with the State of New Jersey to apply net operating lossesgenerated in 2001and 2002 to taxable income reported in 2000. See Note 20.

 

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

 

**Note 16 – Commitments and Contingencies**

 

***Leases***

 

Duringthe period covered by this report, the Company leased its facilities andcertain equipment under non-cancelable operating leases, expiring at variousdates through 2007.

 

Duringfiscal 2003, the Company leased a portion of the building to a significantshareholder of the Company.  See Note 13.  The sublease terminated August 1,2003 when the Company moved to a new building.  Sublease income totaled$1,000 during fiscal 2003.

 

GoVideohad an operating lease for a 33,000 square foot facility used for both officespace and warehousing. The lease expired January 31, 2006. Monthly rentalswere based on a fixed schedule that provides for periodic rentaladjustments during the lease term. There was no option to extend the lease.

 

GoVideoalso leased a 13,000 square foot facility under a separate operating lease thatwas used for warehousing. The original term of the lease was five yearsbeginning November 1999. During fiscal 2004, the lease was renegotiated toexpire January 31, 2006 to coincide with GoVideo’s other facility lease.Monthly rentals were based on a fixed schedule that provides for periodicrental adjustments during the lease term. As part of the renegotiation, theoriginal option to extend the lease term for an additional five years wasremoved from the agreement.

 

Upontermination of the above two leases, GoVideo negotiated a month-to-month leaseof approximately 2,400 square of office space to accommodate its downsizedoperations.

 

F-30

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Duringthe fiscal years covered by this report, Correlant leased approximately 26,000square feet of office space in San Diego, California, which was scheduled toexpire November 2007. All future lease obligations, net of anticipatedlease termination benefits, as of June 30, 2004 were accrued during fiscal2004 as part of the shut down of Correlant’s historical operations. Such amountsare included in Restructuring charges (see Note 11) on the Company’s statementof operations. On November 4, 2004 Correlant entered a lease terminationagreement for its San Diego facility.

 

Futureminimum annual lease payments under non-cancelable operating leases at June 30,2005 are as follows*(in thousands)*:

 

| **Year Ending June 30,** | ** ** | **Future  Minimum Lease  Payments** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|
| 2006                                    |       | $                                        | 304        |   |
| 2007                                    |       | 14                                       |       |
| 2008                                    |       | 1                                        |       |
| 2009 and  thereafter                    |       | —                                   |       |
|                                    |       | $                                        | 319        |   |

 

DuringOctober 2005, Opta extended its office lease through October 2006.Future minimum lease payments, not included in the above table, related to thelease extension total approximately $30,000.

 

Rentexpense totaled $641,000, $856,000 and $591,000 during fiscal 2005, 2004 and2003, respectively.

 

***Purchase Obligations***

 

Asof June 30, 2005 and 2004, GoVideo had inventory purchase obligationstotaling $2,864,000 and $32,575,000, respectively, which were part of thenormal course of business.

 

***Litigation (See Note 20)***

 

Fromtime to time the Company may be involved in various disputes and litigationmatters arising in the normal course of business.

 

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 paymentof the purchase order totaling $1,150,000. Correlant filed an answer on June 16,2003, stating the components delivered by Sharp Electronics did not meetproduct specification and were unusable. On that same date, Correlant filed acounter suit for seeking recovery of components previously delivered by Sharp,which also did not meet product specification. Correlant sought to recover damagestotaling $1,450,000. On January 21, 2004 Sharp agreed to settle alldisputes with Correlant for $500,000, which was accrued as of June 30,2003. Additionally, as part of the settlement, Correlant dropped itscountersuit.

 

InFebruary 1999, the Company acquired 100% of Professional Market Brokerage, Inc.(“PMB”), a Chicago-based financial trading firm that provides online tradingservices and 100% of US Securities & Futures Corp. (“USSF”), a fullservice brokerage firm in New York, NY. In June 1999, the Company createdUSS Online, Inc., (“USS Online”) a wholly-owned subsidiary, andtransferred all of its ownership interests in each of USSF and PMB to USSOnline to run those two financial service subsidiaries. In February 2000,the Company sold 72% of its ownership in USS Online to Travelway. The remaining28% was deemed impaired during fiscal 2000 and written off. On January 16,2002, Opta filed a lawsuit in the Supreme Court of the State of New York, NewYork County against USS Online, Travelway, and Huaya Lu Tung, seeking torecover $1,800,000 in principal and interest due on loans made to USS Online,and seeking to pierce the corporate veil and recover such amounts fromdefendants Travelway and Huaya Lu Tung. The Company asserted that Ms. Tungwas the Chairperson and sole owner of Travelway and Chairperson of USS Onlineand the former Treasurer of the Company.

 

F-31

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InFebruary 2003, the Company entered into a settlement agreement with USSOnline, Travelway, Mr. Hu, Ms. Tung, Lotus International HoldingsCorp (“LIH”), a shareholder of the Company and three individuals to settle allclaims against the defendants in the two cases cited above, subject to a numberof conditions. In entering into the settlement agreement, none of thedefendants admitted or conceded any liability in connection with the claimsasserted in the cases. As conditions to the settlement agreement, the Companywas required to receive: (a) 3,000,000 shares of the Company’s commonstock; (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 of 3% perannum (the “Note”); (c) a stock pledge agreement, granting to the Companya first priority security agreement in 1,000,000 shares of the Company’s commonstock as partial security for the Note (the “Pledged Shares”); (d) originalstock certificates representing the Pledged Shares; (e) personal guarantyof the Note; and (f) all of the assets of USSF. To date, the Company hasreceived 3,000,896 shares of the Company’s common stock. However, the Companyhas not received stock certificates for the Pledged Shares or the assets ofUSSF and has made demand on the other parties for fulfillment of the conditionsto the settlement. The Company has reserved the right to take all actions forbreach of the settlement, including reinstituting the original action. The3,000,896 shares of common stock received as part of the settlement areaccounted for as treasury stock and valued at $150,000 based on the adjustedclosing sales price of $0.05 per share as reported by the National QuotationBureau’s “Pink Sheets” and was recorded in Other income (expense) on theconsolidated statement of operations during fiscal 2003.

 

OnApril 1, 2004, Opta 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, Opta filed a Request to EnterDefault against TurboComm. On June 29, 2004, a Default was entered againstTurboComm. On August 31, 2004 Opta reached a settlement agreement withTurboComm. Under the agreement, TurboComm agreed to pay Opta $20,000 anddeliver 686,000 shares of Opta, constituting all shares owned by TurboComm.Both parties mutually agreed to release and discharge any and all claims thateach may have against the other party.

 

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 allproducts and license fees, yet TurboComm refused to pay. On July 30, 2004,Correlant reached a settlement agreement with TurboComm. Under the agreement,Correlant dismissed its lawsuit against TurboComm in exchange for the transferof 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.

 

TheCompany is involved in various legal proceedings in the normal course ofbusiness and its management believes that any liability to the Company that mayarise as a result of these proceedings will not have a material adverse effecton its consolidated financial position, results of operations or cash flows.However, litigation is subject to inherent uncertainties. Were an unfavorableruling to occur, there exists the possibility of a material adverse impact onthe Company’s results of operations of the period in which the ruling occurs.The Company’s estimate of the potential impact on its financial position oroverall results of operations for new legal proceedings could change in thefuture.

 

***Employee Separation Agreements***

 

Inconnection with the Vice President of Engineering and co-founder’s resignationfrom Correlant in July 2003 (see Note 1), the Company entered into anEmployment Separation Agreement/Consulting Agreement with the former VicePresident of Engineering. Under the terms of the agreement, Correlant paid theformer Vice President of Engineering $2,000 and repurchased 272,000 Correlantshares held by the former Vice President of Engineering for $0.07 per share fora total of $19,000 during fiscal 2005. In addition, the Company paid the formerVice President of Engineering $20,000 per month for one year, from January 2004through December 2004, to provide advice and input related to certainCorrelant business matters.

 

Inconnection with the President and co-founder’s resignation from Correlant in July 2003(see Note 1), the Company entered into an Employment SeparationAgreement/Consulting Agreement with the former President. 

 

F-32

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Underthe terms of the agreement, Correlant paid the former President $20,000 andagreed to repurchase 327,000 Correlant shares held by the former President for$0.07 per share for a total of $23,000. The former President remained in possessionof his Correlant stock until Correlant dissolved subsequent to June 30,2005. In addition, the Company paid the former President $23,000 per month forone year, from January 2004 through December 2004, to provide adviceand input related to certain Correlant business matters.

 

InMarch 2004, GoVideo executed two-year employment agreements with its topexecutives for a base salary plus a severance package to include nine to tenmonths, depending on the individual agreement, of base salary for terminationswithout cause. As of June 30, 2005, $860,000 remained in effect.

 

**Note 17 – Employee Benefit Plan**

 

Optahas a 401(k) salary deferral Plan (“Opta Deferral Plan”), which is funded basedon employee contributions. The terms of the original Opta Deferral Plan do notrequire Opta to make contributions to the Deferral Plan on behalf of eacheligible employee. As such, there were no matching contributions during fiscal2005, 2004 or 2003.

 

DuringApril 2003, GoVideo established a 401(k) plan (“GoVideo Deferral Plan”).The terms of the GoVideo Deferral Plan do not require GoVideo to make acontribution. Rather, matching contributions are on a discretionary basis,equal to a percentage of an employee’s contribution to the GoVideo DeferralPlan for the year. There were no matching contributions during fiscal 2005,2004 or 2003.

 

Duringthe fiscal years covered by this report, Correlant had a 401(k) salary deferralPlan (“Correlant Deferral Plan”), which was funded based on employeecontributions. The terms of the Plan provided for the Company to makecontributions to the Plan on behalf of each eligible employee (as defined) inan amount equal to 100% on the first 6% of the eligible employee’s deferredcompensation contribution (as defined). Correlant’s contributions to theDeferral Plan were approximately $1,000, $74,000 and $213,000 during fiscal2005, 2004 and 2003, respectively. As part of the wind down and cessation ofCorrelant’s historical operations, Correlant’s Board of Directors approved thetermination of the Correlant Deferral Plan effective August 31, 2004.

 

**Note 18 –Segment and Geographic Information**

 

**Segment Information**

 

FASBStatement 131, *Disclosures about Segments ofan Enterprise and Related Information*(“SFAS 131”), establishesstandards for reporting information about operating segments. Operatingsegments are defined as components of an enterprise about which separatefinancial information is available and is evaluated regularly by the chiefoperating decision maker, or decision making group. The Company’s chiefoperating decision maker is the Chief Executive Officer. The Company isorganized geographically and by line of business. While the Chief ExecutiveOfficer evaluates results in a number of different ways, the primary basis forwhich the allocation of resources and financial results are assessed is producttype. Duirng the period covered by this report, the Company operated in twosegments: the development, manufacture and distribution of products used forbroadband Internet access, including data-over-cable equipment and digitalsubscriber line (“DSL”) access and networking devices and the development,marketing, and distribution of innovative, high performance consumer electronicproducts.

 

F-33

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Thefollowing table presents a summary of the Company’s businesses and operatingsegments (*in thousands*):

 
| ** **                                               | ** ** | **As of or for the Year Ended June 30,** | ** **  |
|----------------------------------------------------------|------------|----------------------------------------------------------------------------------|-------------|
| ** **                                               | ** ** | **2005**                                                                         | ** **  | **2004** | ** ** | **2003** | ** ** |
| **Broadband  Internet access products:**                 |       |                                                                             |        |   |   |   |   |
| Net revenues                                             | ** ** | **$**                                                                            | **—**  | ** ** | $ | 622 |   | $ | 10,178 |   |
| Cost of net  revenues                                    | ** ** | **—**                                                                       | ** **  | 259 |   | 7,919 |   |
| Gross profit                                             | ** ** | **—**                                                                       | ** **  | 363 |   | 2,259 |   |
| Income  (loss) from operations                           | ** ** | **$**                                                                            | **1,384**   | ** ** | $ | (5,191 | ) | $ | (9,971 | ) |
|                                                     |       |                                                                             | ** **  |   |   |   |   |
| Total assets                                             | ** ** | **$**                                                                            | **18,058**  | ** ** | $ | 19,101 |   | $ | 24,603 |   |
|                                                     |       |                                                                             | ** **  |   |   |   |   |
| **Consumer  electronics:**                               |       |                                                                             | ** **  |   |   |   |   |
| Net revenue                                              | ** ** | **129,119**                                                                      | ** **  | 124,702 |   | 9,276 |   |
| Cost of net  revenues                                    | ** ** | **131,669**                                                                      | ** **  | 114,940 |   | 7,513 |   |
| Gross profit  (loss)                                     | ** ** | **(2,550**                                                                       | **)**       | 9,762 |   | 1,763 |   |
| Loss from  operations                                    | ** ** | **$**                                                                            | **(16,818** | **)** | $ | (1,334 | ) | $ | 669 |   |
|                                                     |       |                                                                             | ** **  |   |   |   |   |
| Total assets                                             | ** ** | **$**                                                                            | **25,567**  | ** ** | $ | 49,235 |   | $ | 20,166 |   |
|                                                     |       |                                                                             | ** **  |   |   |   |   |
| **Total  operating segments:**                           |       |                                                                             | ** **  |   |   |   |   |
| Net revenue                                              | ** ** | **129,119**                                                                      | ** **  | 125,324 |   | 19,454 |   |
| Cost of net  revenues                                    | ** ** | **131,669**                                                                      | ** **  | 115,199 |   | 15,432 |   |
| Gross profit                                             | ** ** | **(2,550**                                                                       | **)**       | 10,125 |   | 4,022 |   |
| Loss from  operations attributable to operating segments | ** ** | **$**                                                                            | **(15,434** | **)** | $ | (6,525 | ) | $ | (9,302 | ) |
|                                                     |       |                                                                             | ** **  |   |   |   |   |
| Total assets  attributable to operating segments         | ** ** | **$**                                                                            | **43,625**  | ** ** | $ | 68,336 |   | $ | 44,769 |   |

 

Disclosedin the table below is the reconciliation of the loss from operationsattributable to operating segments to loss from continuing operations beforeincome taxes and non-controlling interest and total assets attributable tooperating segments to total assets (*inthousands*):

 
| ** **                                                                        | ** ** | **As of or for the Year Ended June 30,** | ** **  |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------|-------------|
| ** **                                                                        | ** ** | **2005**                                      | ** **  | **2004** | ** ** | **2003** | ** ** |
| Loss from  operations attributable to operating segments                          | ** ** | **$**                                         | **(15,434** | **)** | $ | (6,525 | ) | $ | (9,302 | ) |
| Corporate  general and administrative expenses                                    | ** ** | **1,932**                                     | ** **  | 2,681 |   | 3,614 |   |
| Total other  income (expense), net                                                | ** ** | **(1,623**                                    | **)**       | (78 | ) | 4,068 |   |
| Loss from  continuing operations before income taxes and non-controlling interest | ** ** | **$**                                         | **(18,989** | **)** | $ | (9,284 | ) | $ | (8,848 | ) |
|                                                                              |       |                                          | ** **  |   |   |   |   |
| Total assets  attributable to operating segments                                  | ** ** | **$**                                         | **43,625**  | ** ** | $ | 68,336 |   | $ | 44,769 |   |
| Total assets  attributable to non-reporting segments                              | ** ** | **1,254**                                     | ** **  | 2,784 |   | 8,218 |   |
| Total assets                                                                      | ** ** | **$**                                         | **44,879**  | ** ** | $ | 71,120 |   | $ | 52,987 |   |

 

F-34

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**Geographic Information**

 

Duringfiscal 2005, 2004 and 2003, the Company recorded revenues throughout the U.S.,China, Taiwan, Japan and Europe as determined by the final destination of theproduct. The following table summarizes total net revenues attributable tosignificant countries (*in thousands*):

 
| ** **       | ** ** | **Year Ended June 30,** | ** **  |
|------------------|------------|------------------------------|-------------|
| ** **       | ** ** | **2005**                     | ** **  | **2004** | ** ** | **2003** | ** ** |
| Japan            | ** ** | **$**                        | **—**  |   | $ | 215 |   | $ | 54 |   |
| Taiwan and China | ** ** | **1,409**                    |        | 163 |   | 9,446 |   |
| U.S.             | ** ** | **127,710**                  |        | 124,819 |   | 9,478 |   |
| Europe and other | ** ** | **—**                   |        | 127 |   | 476 |   |
| ** **       |       | **$**                        | **129,119** |   | $ | 125,324 |   | $ | 19,454 |   |

 

Presentedbelow is information regarding identifiable assets from continuing operations,classified by operations located in the U.S. and Asia (*in thousands*):

 
| ** ** | ** ** | **June 30,** | ** ** |
|------------|------------|-------------------|------------|
| ** ** | ** ** | **2005**          | ** ** | **2004** | ** ** | **2003** | ** ** |
| U.S.       | ** ** | **$**             | **43,522** |   | $ | 70,755 |   | $ | 52,586 |   |
| Asia       | ** ** | **1,357**         |       | 365 |   | 401 |   |
| ** ** |       | **$**             | **44,879** |   | $ | 71,120 |   | $ | 52,987 |   |

 

**Note 19 – Selected Quarterly Financial Data (*Unaudited*)**

 

Thefollowing table sets forth selected unaudited quarterly information for theCompany’s last two fiscal years. The Company believes that all necessaryadjustments (which consisted only of normal recurring adjustment) have beenincluded in the amounts stated below to present fairly the results of suchperiods when read in conjunction with the financial statements and relatednotes included elsewhere herein *(inthousands, except per share data):*

 
| ** **                       | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|----------------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
| Fiscal 2005:                     |       |              |       |               |       |              |       |               |       |
| Total net  revenues              | ** ** | **$**             | **38,769** | ** **         | **$**      | **50,772**        | ** ** | **$**              | **18,980** | ** ** | **$** | **20,598** | ** ** |
| Gross profit  (loss)             | ** ** | **(1,514**        | **)**      | **2,776**          | ** ** | **(1,870**        | **)**      | **(1,942**         | **)**      |
| Net loss                         | ** ** | **$**             | **(3,784** | **)**              | **$**      | **(3,171**        | **)**      | **$**              | **(5,677** | **)** | **$** | **(6,229** | **)** |
| Net loss per  share – basic | ** ** | **$**             | **(0.07**  | **)**              | **$**      | **(0.06**         | **)**      | **$**              | **(0.11**  | **)** | **$** | **(0.14** | **)** |
| ** **                       | ** ** | ** **        | ** ** | ** **         | ** ** | ** **        | ** ** | ** **         | ** ** |
| Fiscal 2004:                     |       |              |       |               |       |              |       |               |       |
| Total net  revenues              |       | $                 | 20,820     |               | $          | 36,579            |       | $                  | 32,886     |   | $ | 35,039 |   |
| Gross profit                     |       | 1,262             |       | 4,418              |       | 3,554             |       | 891                |       |
| Net loss                         |       | $                 | (2,704     | )                  | $          | (141              | )          | $                  | (638       | ) | $ | (4,239 | ) |
| Net loss per  share – basic |       | $                 | (0.05      | )                  | $          | 0.00              |       | $                  | (0.01      | ) | $ | (0.08 | ) |

####  

#### **Note 20– Subsequent Events**

####  

*Litigation*

 

OnAugust 14, 2005, Daewoo Electronics America, Inc. (“Daewoo”) filed alawsuit in the Superior Court of California, County of San Mateo, Case No. CIV448845, entitled Daewoo Electronics America, Inc., Plaintiff v. OptaCorporation and Does 1 through 25, Defendants. The Complaint in the suitalleges that Opta Corporation executed a written guaranty dated December 4,2003 in favor of Daewoo in which Opta Corporation unconditionally guaranteedthe payment of all obligations of GoVideo to Daewoo, in a principal amount notto exceed $5,000,000. Daewoo alleges that it sold GoVideo goods of an agreedpurchase price in excess of $10,000,000, for which 

 

F-35

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GoVideohas not paid. Daewoo alleges Opta Corporation owes Daewoo $5,000,000 inprincipal amount, plus interest, attorneys’ fees and costs under the guaranty.In a separate lawsuit filed in the Superior Court of California, County of SanMateo, on September 14, 2005, Case No. CIV 449577, entitled DaewooElectronics America, Inc., Plaintiff v. Opta Systems, LLC, dba GoVideo andDoes 1 through 25, Defendants, Daewoo sued GoVideo for the alleged purchaseprice of the goods in the amount of approximately $10,700,000, in principalamount, plus interest, attorneys’ fees and costs. Opta Corporation denies thatit has any liability under the alleged guaranty. GoVideo denies that it has anyliability to Daewoo. A motion to quash the service of Daewoo’s Summons andComplaint on Opta Corporation for lack of jurisdiction was taken off calendar followingDaewoo’s re-service on Opta Corporation of the summons and complaint. A similarmotion on GoVideo’s behalf was granted by the Court, finding that GoVideo isnot subject to the jurisdiction of California courts. Opta Corporation’sdemurrer challenging the legal sufficiency of Daewoo’s original Complaint wastaken off calendar after Daewoo filed a First Amended Complaint on or about December 8,2005. Opta Corporation filed a demurrer to the First Amended Complaint which ispresently set for hearing on March 23, 2006. Opta Corporation also filedmotions to dismiss the First Amended Compliant based on the filing of theGoVideo New Jersey Action described below, or, alternatively, to stay allaction on the First Amended Complaint pending the outcome of the GoVideo NewJersey Action. A hearing on the motions to dismiss or stay is also set for March 23,2006. The Court has set July 24, 2006 for jury trial of the San MateoCounty action. Opta Corporation intends to defend Daewoo’s suit and to pursueany and all remedies to which it may be entitled.

 

OnNovember 14, 2005, GoVideo filed an action in the United States DistrictCourt for the District of New Jersey, entitled Opta Systems, LLC d/b/a/ GoVideov. Daewoo Electronics America, Inc. et al., Civil Action No. 05-5387(JAP) (the “GoVideo New Jersey Action”), in which GoVideo brought claimsagainst Daewoo Electronics America, Inc. and Daewoo Electronics Corp.(together, “Daewoo”) for breach of contract, breach of duty of good faith andfair dealing, breach of express and implied warranties, negligence, fraud,tortious interference, unjust enrichment, and alter ego liability, arising outof a series of purchase order contracts and related agreements. In the GoVideoNew Jersey Action, GoVideo seeks compensatory damages from Daewoo in an amountnot less than $19,400,000, plus punitive damages and certain other sums, andother relief. On December 13, 2005, Daewoo obtained an automatic clerk’sextension of Daewoo’s time to file an Answer or otherwise respond to the Complaint,which extended such time to December 27, 2005. Subsequently, by consentorder dated December 29, 2005, Opta consented to further extend such timeto January 27, 2006. On January 26, 2006, Daewoo filed an Answer toComplaint, Separate Defenses, Counterclaims, and Jury Demand, and on January 27,2006, Daewoo filed an Amended Answer to Complaint, Separate Defenses,Counterclaims, and Jury Demand, denying any and all liability alleged in theComplaint, and alleging counterclaims against GoVideo based on causes of actionfor account stated, breach of contract, unjust enrichment, and fraud. By thecounterclaims, Daewoo seeks damages in the total amount of approximately$30,200,000, plus punitive damages and certain other sums. GoVideo will timelyfile an Answer and Affirmative Defenses to the Counterclaims denying any andall liability. As of June 30, 2005, the financial statements include anaccount payable to Daewoo of approximately $7,700,000 representing goods boughtfrom Daewoo.

 

*Going Private Transaction*

 

Asdiscussed in Note 1, Opta is currently in the process of a corporatereorganization that will enable Opta to become a non-reporting company. On June 17,2005 and August 2, 2005, Opta’s Board of Directors adopted resolutionsproposing and approving the Going Private Transaction. On July 18, 2005and August 2, 2005, stockholders who collectively own approximately 60.2%of Opta’s outstanding capital stock, consented in writing to the Going PrivateTransaction; the vote of more than 50% of Opta’s outstanding stock wasrequired. The Going Private Transaction was approved twice by both the Board ofDirectors and the stockholders as a result of entering into several materialtransactions subsequent to the first approval.

 

OnJuly 8, 2005 Opta filed a preliminary Schedule 14C and a Schedule 13E-3describing the planned Going Private Transaction. Both documents were amendedto incorporate significant company events and filed August 3, 2005. TheStaff of the Commission reviewed our Schedules 14C and 13E-3 and responded withinquires and requests for additional information. Opta answered all of theCommission’s inquires and requests for additional information in a letter datedOctober 3, 2005 and amended its Schedule 14C and Schedule 13E-3on October 3, 2005. Opta 

 

F-36

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subsequentlyreceived a further letter from the Staff dated October 18, 2005. Opta hasnot yet filed an amendment to the 14C and 13E, in response to the Staff’scomments because of the delay in completing its audited financials statementsfor the year ended June 30, 2005 and the interim periods ended September 30,2005 and December 31, 2005, which would be required to be included in suchamendments. Because Opta has not cleared comments from the Commission withrespect to its Schedule 14C and Schedule 13E-3, Form 15 –Certification and Notice of Termination of Registration has not been filed yet,and Opta is required to continue its periodic reporting under the SecuritiesExchange Act of 1934.

 

OnJuly 15, 2005, GoVideo management began taking additional steps toimplement further cost reductions, including discussions with GoVideoemployees. Subsequent to year end, as part of a cost reduction effort, 28employees were terminated from GoVideo. Additionally, several employees quit asa result of the continued losses and down-sizing. As of January 31, 2006,GoVideo had six full-time employees, including three in product management andthree in sales, general and administration.

 

*Correlant Dissolution*

 

OnJuly 18, 2005, the Board of Directors of Correlant approved thedissolution of Correlant, pending approval by the Correlant shareholders. At aSpecial Meeting of Shareholders held August 5, 2005, Correlantshareholders approved the dissolution of Correlant. At the time of thedissolution, Opta held 10,000 shares of Series D preferred stock ofCorrelant and approximately 13,900,000 shares of common stock of Correlant. Todate, Opta has received liquidation proceeds of $10,000,000 for its Series Dpreferred stock and $1,276,000 for its common stock. The Company sold itsentire investment portfolio subsequent to June 30, 2005 as part ofliquidating Correlant.

 

OnJuly 5, 2005, Opta entered into a loan and security agreement withCorrelant for $200,000 bearing interest at 6.00% per annum, maturing on June 2,2006 and secured by Opta’s entire ownership interest in DigiTech. On July 26,2005, Opta entered into an additional loan and security agreement withCorrelant for $5,000,000 bearing interest at 2.75% per annum, maturing on December 31,2005, and secured by 6,000 shares of Correlant Series D preferred stockheld by Opta. On August 19, 2005 Opta repaid the entire $5,200,000principal balance and accrued interest using the proceeds received from the Series Dpreferred stock liquidation as discussed above.

 

*Line of Credit*

 

Pursuantto a Participation Agreement (the “Participation Agreement”) between Opta andWells Fargo Business Credit, a division of Wells Fargo Bank, NA (“Wells”), Optaacquired an 80% participation interest in the credit facility of GoVideo (seenote 9), under the Credit and Security Agreement dated July 21, 2003, asamended to date (the “Wells Credit Agreement”) between GoVideo and Wells. On October 13,2005, Opta amended the Participation Agreement to provide for revolvingadvances in an amount up to $2,000,000 over the borrowing base (such revolvingadvances over the borrowing base to be referred to as “Overline Advances”) andas a result, the participation percentage was 80% with respect to the revolvingadvances that are not Overline Advances and 100% with respect to OverlineAdvances. The maximum amount of the line of credit remained at $4,000,000.Concurrently with the purchase of the participation and Opta’s collateraldeposit of $800,000 in cash collateral to secure its obligations and guarantythe Wells Credit Agreement, Wells released its lien on the intellectualproperty assets of GoVideo under the Wells Credit Agreement.

 

Pursuantto a forbearance agreement dated July 22, 2005, most recently amended January 20,2006, between GoVideo and Wells (the “Forbearance Agreement”), Wells agreed toforbear from exercising its rights and remedies with respect to existingdefaults under the Wells Credit Agreement from the date of the agreement throughJanuary 27, 2006 and modify certain terms of the Wells Credit Agreement,including reducing the maximum line of credit to $4,000,000 and waiving thetermination fee. Wells also agreed that defaults by GoVideo under financialcovenants in the Wells Credit Agreement and with respect to material adversechanges will not constitute new defaults under that agreement. As a conditionto the forbearance by Wells, GoVideo agreed to pay to Wells a fee of $300,000by adding to the loan’s principal balance in two installments, $150,000 on September 2,2005 and $150,000 on January 4, 2006. Opta agreed to enter into theParticipation Agreement and to deposit $800,000 in cash collateral to secureOpta’s guaranty as described above.

 

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OnJanuary 27, 2006, pursuant to a Loan Sale Agreement dated January 20,2006 between Opta and Wells, the Participation Agreement was terminated andOpta purchased the entire right, title and interest of Wells under, and Optabecame the Lender under, the Wells Credit Agreement. The purchase price was$2,148,000, which consisted of the following: $2,113,000 principal, $23,000interest and unused line of credit fees, and $12,000 legal and audit feesincurred by Wells. The full amount of Opta’s participation interest wascredited against such purchase price. On February 1, 2006, Opta, as suchLender, and GoVideo further amended the Forbearance Agreement to extend theForbearance Period to April 30, 2006, and to terminate the guaranty and thesubordination agreement previously delivered by Opta to Wells under the CreditAgreement.

 

*Notes Payable to Related Parties*

 

Pursuantto a purchase and sale agreement dated July 26, 2005 (the “TCLMM Agreement”)among GoVideo, TCL Multimedia Technology Holdings Limited, a Cayman Islandscompany with shares listed on the Stock Exchange of Hong Kong Limited (“TCLMM”),TCL Industries, Asia Focus Industrial Limited (“Asia Focus”) and Opta, TCLMMagreed to assume the debt obligations owed by GoVideo to TCL Industries andAsia Focus under three promissory notes, with obligations totalingapproximately $11,000,000 at July 26, 2005 (“Existing Obligations”). TheExisting Obligations were previously guaranteed by Opta, and secured by Opta’spledge of 100% of the Common Stock and Series D preferred stock ofCorrelant, held by Opta. Pursuant to the TCLMM Agreement, TCL Industries andAsia Focus released Opta’s obligations as guarantor under the ExistingObligations and released Opta’s pledge of the Correlant shares.

 

Inconsideration for TCLMM’s assumption of the Existing Obligations, GoVideo (i) assignedto TCLMM all of GoVideo’s right, title and interest in and to certainsignificant intellectual property assets of GoVideo (the “GoVideo IP”) and (ii) issueda promissory note in favor of TCLMM (the “TCLMM Note”) for an initial principalamount of $1,000,000, representing the difference between the preliminary valueof the GoVideo IP, as determined by a third-party appraiser, and the ExistingObligations assumed by TCLMM. A subsequent independent appraisal of the GoVideoIP was completed, which reduced the final valuation of the GoVideo IP by$700,000. As a result, the TCLMM Note automatically increased to $1,700,000.

 

TheTCLMM Note principal and interest, at a monthly rate of 0.257%, was originallydue and payable on January 26, 2006. Pursuant to the TCLMM Agreement,GoVideo had granted to TCLMM a subordinated lien on all of GoVideo’s assets, assecurity for the TCLMM Note, junior to the lien under the Wells Credit Agreement.In addition, Opta had agreed to guaranty GoVideo’s obligations under the TCLMMNote pursuant to a Guaranty dated July 26, 2005.

 

Underthe TCLMM Agreement, TCLMM granted to GoVideo a 90-day, non-exclusive,worldwide license to use the GoVideo IP on a royalty-free basis. On August 30,2005, GoVideo and TCLMM entered into a non-exclusive license agreement through October 24,2008, with an automatic renewal for subsequent two year terms unless terminatedby either party by ninety days written notice of intention not to renew. Underthe terms of the agreement, GoVideo will pay TCLMM a royalty based on the costof goods sold in connection with the distribution, sale, advertising andpromotion of certain consumer electronics products under the GoVideo tradename.

 

*Opta Income Tax Refunds*

 

Subsequent to fiscal year end, the Company receivedtwo income tax refunds for $473,000 and $1,134,000 from the IRS and the Stateof New Jersey, respectively. See Note 15.

 

*Other*

 

Duringfiscal 2006, GoVideo began changing its business model from an OriginalEquipment Manufacturer (“OEM”) model, which required significant workingcapital to meet inventory needs, to a brand licensing provider by bridgingmanufacturers and retailers. The Company believes this new model will enableGoVideo to reduce the overhead and risks of carrying obsolete inventories.GoVideo’s management is actively working with GoVideo’s 

 

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suppliersin finalizing the form of business model for GoVideo’s future businessoperations. Management currently believes that if the new business model cannotbe successfully implemented,, GoVideo will cease operations. If GoVideo isshutdown and has any assets subsequent to the shutdown, the assets will becombined with the proceeds from the liquidation of Correlant and used toidentify market opportunities that will create and accelerate the growth andsuccess of Opta complementary with the Company’s business and long-termstrategies while leveraging the Company’s significant experience in theconsumer electronics market.

 

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