** **

**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, 2004**

 

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

**For thetransition period from           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 730, Burlingame, CA 94010**

(Addressof principal executive offices, Zip code)

 

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

 

Securities registered pursuantto Section 12(b) of the Act: **None**

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

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the preceding 12months (or for such period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

(1) Yes  o       No    ý      (2) Yes    ý       No  o

 

Indicateby check mark if disclosure of delinquent filer pursuant to Item 405 ofRegistrant S-K is not contained herein, and will not be contained to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. (  )

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).

Yes     o      No    ý     

 

The aggregatemarket value of the registrant’s voting Common Stock held by non-affiliates ofthe registrant was approximately $244,309 (computed using the adjusted closingsales price of $0.01 per share of Common Stock on January 31, 2005 asreported by the Pink Sheets).  Shares ofCommon Stock held by each officer and director and each person who owns 5% ormore of the outstanding Common Stock have been excluded in that such personsmay be deemed affiliates.  Thedetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

 

The number of shares of CommonStock outstanding as of January 31, 2005 was 50,037,538.

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

 

##### None.

#####  

#####  

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##### **PARTI**

#####  

**Item1.  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, 2004 is being filed after the required duedate as a result of restating financial information included in Form 10-K forthe fiscal year ended June 30, 2002 as previously filed with theSecurities and Exchange Commission (“SEC”) on April 16, 2004, and filingthe Form 10-K for the fiscal year ended June 30, 2003 with the SEC on August 24,2004.

 

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

 

Following the replacement ofprior management, the new management began an extensive review of varioustransactions undertaken by and involving old management prior to June 29,2001.  Due to the preliminary results,the Company dismissed its then existing independent accountants and replacedthem with new independent accountants. On March 25, 2002, the new independent accountants were engaged toaudit fiscal 2002.  As previouslyreported, during its preliminary investigation, new management of the Companyidentified various transactions undertaken by prior management which impactedreported financial and operating results with respect to its consolidatedfinancial statements for fiscal 2001, 2000 and 1999 and ultimately concludedthat a reaudit of the financial statements for fiscal 2001, 2000 and 1999 wasrequired.  The Company completed such restatementsin its Form 10-K for fiscal 2002 filed April 16, 2004.  The subsequent Form 10-K for fiscal 2003 wasfiled August 24, 2004.

 

***ExplanatoryNote – Updated Information Subsequent to Fiscal 2004***

 

Because this report relates tofiscal 2004, except as otherwise noted herein, this report speaks as of June 30,2004. 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 stockholder matters;

•                  Item 8. Financial Statements and Supplementary Data Note 1 – Business andBackground and Note 20 – Subsequent Events.

•                  Item 10. Directors and Executive Officers of the Registrant;

•                  Item 12. Security Ownership of Certain Beneficial Owners and Management;

•                  Item 13. Certain Relationships and Related Transactions;

•                  Item 14. Principal Accounting Fees and Services; and

•                  Item 15. Exhibits

 

Accordingly, the disclosure inthis report does not contain complete and updated information regarding theCompany and its operations as of the date of filing this report.  All such information contained in this reporttherefore is subject to updating and supplementing to be provided by the Companyin its reports to be filed with the SEC for periods subsequent to fiscal 2004.

 

###### ***Company Overview and Business Strategy***

######  

On March 7, 2004, theCompany’s board of directors adopted resolutions proposing and approving achange of the Company’s name from “Lotus Pacific, Inc.” to “Opta Corporation.”  The name change became effective August 25,2004 upon filing the Definitive Information statement, Schedule 14C, withthe SEC.  All references to “OptaCorporation,” “Opta,” “Company,” “we,” “our” or “us” mean Opta Corporation andits subsidiaries.

 

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The Company incorporated inDelaware on June 25, 1985.  Underprior management, the Company was significantly restructured in September 1994.  Opta is a holding company that conductsbusiness through its subsidiaries. The Company develops, manages, and operatesemerging consumer electronics and communications companies, focusing ondeveloping next generation consumer electronics and communication products. TheCompany provides its subsidiaries with capital and strategic and infrastructureservices.

 

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

 

Under new management, theCompany’s primary strategy for business operations has been to restructure orshut down its unprofitable businesses, acquire undervalued or underutilizedcompanies and focus on profitable growth. The Company has moved aggressively to sell, restructure or shutdown itsbusinesses which were not operating profitably and/or which may or would haverequired significant cash investments. The Company continues to identify marketopportunities that will create and accelerate the growth and success of itssubsidiary companies and to implement new business plans to improve the returnson these businesses.

 

In April 2003, the Companyacquired Opta Systems, LLC dba “GoVideo” (“GoVideo”) (see ***SignificantBusiness Developments and Subsidiary Activity During the Reporting Period)***.  Following the GoVideo acquisition, theCompany concentrated its business in the related industries of consumerelectronics and telecommunications.

 

The Company’s strategy is toincrease revenue, move toward profitability and generate cashflow fromoperations as a result of focusing on the consumer electronics market.  To achieve these goals, the Company ispursuing the following strategies:

 

•                  Introduce new innovative products to themarket;

•                  Increase the GoVideo brand recognitionin both the U.S. markets and abroad; and

•                  Increase product offerings by leveragingon existing strategic relationships including our majority shareholder - TCL.

 

***Introduce new innovative products to the market***

 

During fiscal 2004, GoVideointroduced its digital video disc (“DVD”) Recorder + VCR, which experiencedexceptional market acceptance. Additionally, GoVideo began distributing the MP3 Rave MP branded productin September 2004.  GoVideo intendsto keep researching market demand for new consumer electronic products todistribute.

 

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

 

Opta approved the formation ofa new wholly-owned subsidiary in China, which will market GoVideo’s MP3 playersunder the GoVideo brand name.  See “***Business Developments and Subsidiary ActivitySubsequent to the Reporting Period.” ***TheCompany will continue to seek other business opportunities to expand whereGoVideo’s products are likely to be market leaders.

 

***Increase product offerings by leveraging on existing strategicrelationships including our majority shareholder -  TCL***

 

 The Company further seeks to improve theefficiencies of the Company’s operations and accelerate growth by utilizing itscompetitive advantages. The Company believes these competitive advantagesinclude the significant experience of current management in the communicationsand consumer electronics industry and business opportunities presented to theCompany in China and Asia through the strength of its relationships with itssignificant shareholders, including TCL. At January 31, 2004, TCL beneficially owned 51.2% of the shares ofcommon stock of the Company and is an affiliated company of TCL InternationalHoldings Limited (HKSE: 1070) (“TCL International”), a leading multimediaconsumer electronics product manufacturer, with a strong brand presence inChina and Asia.  TCL International’s coreproducts include televisions, mobile handsets, personal computers, audio-visualequipment as well as information technology services.  Under its highly recognized andwell-established TCL brand, it is one of the strongest players in the TV andmobile handset marketplace in China. Headquartered in China, it operates anumber of highly efficient manufacturing bases in Asia.  The Company plans to increase market share byintroducing TCL products into the U.S. using our

 

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subsidiary – GoVideo’s –existing distribution channels.

 

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

 

During the reporting period,Opta had two significant subsidiaries, presented in order of significanceduring fiscal 2004:  GoVideo andCorrelant Communications, Inc (“Correlant”). As of March 31, 2004, Correlant’s operations were discontinued.

 

*GoVideo*

 

As previously reported, in April 2003the Company loaned $5,986,000 to Opta Systems, which was used, in addition to adeposit of $250,000 paid by Opta Systems to complete its purchase ofsubstantially all assets and assumption of certain liabilities of a productline known as “GoVideo” from SONICblue Incorporated, a Delaware corporation(NASDAQ: SBLU), and Sensory Science Corporation, a Delaware corporation andwholly-owned subsidiary of SONICblue, for an adjusted purchase price of$5,808,000.

 

*GoVideoBusiness Strategy*.  GoVideo’s strategy is todevelop, market, and distribute innovative, high performance consumerelectronic products that incorporate advanced technology, ease of use, andsuperior industrial design. We believe there is a significant segment of theconsumer electronics market that desires high-performance products that offervalue to the consumer and profit opportunities to dealers. Because many ofGoVideo’s competitors are focused on higher volume, lower priced product lineswhere product and service differentiation is difficult to sustain, we believeGoVideo can capitalize on its technology, engineering and industry know-how,product distribution network and reputation for bringing innovative products tothe electronics marketplace to pursue our objectives and increase our revenuesand earnings.

 

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 consumerelectronics industry has been marked by an increase in what were traditionallycontract manufacturers creating their own brand name and competing in themarketplace.  Under Opta’s ownership,GoVideo is continuing this innovation as well as enhancing its competitiveposition by purchasing and distributing more products from Opta’s parent company,TCL.

 

*GoVideoProducts. * During fiscal 2004 and fiscal 2003, GoVideoaccounted for nearly 100% and 48% of the Company’s consolidated net revenues,respectively.  The GoVideo product line,originally established in 1984, designs and manufactures product lines in theconsumer electronics industry, including DVD players, portable DVDs, DVD-VideoCassette Recorder Combos (“DVR”), Dual-Deck VCRs, DVD Recorders, DVD Recorder +VCR, and liquid crystal display (“LCD”) TVs. GoVideo holds various patentscovering Dual-Deck technology as well as other electronics products andsystems.

 

The principal consumerelectronic products offered by GoVideo during fiscal 2004 and 2003 were the DVRand the DVD Recorder + VCR.

 

*DVR*. GoVideo offers several models of the DVR that vary from one another byfeatures and configurations.  Thisproduct has the ability to:

 

•                  Play DVD discs and VHS tapes;

•                  One touch copy transfer DVD to VHStapes;

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

•                  Schedule recordings in advance.

 

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

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

 

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DVD Recorder + VCR.  The DVD Recorder + VCR was introduced duringthe second quarter of fiscal 2004. GoVideo offers several models of the DVD Recorder + VCR that vary fromone another by features and configurations. This product has the following features:

 

•                  Records on DVD-R or rewritable DVD-RWdiscs or VHS in one easy to use unit;

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

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

•                  AutoPlayTM – Skips ads and menus and goesto right to the start of the DVD movie;

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

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

•                  Schedule recordings in advance.

 

The following table showsrevenues attributable to GoVideo’s DVD Recorder + VCR (*in thousands*):

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

 

*GoVideoRevenue to Significant Countries. *During fiscal 2004 and 2003, all GoVideo’srevenues were generated in the U.S.

 

*GoVideoCustomers*.  A relatively small number of customersaccount for a significant percentage of GoVideo’s revenues.  The percentage revenues derived fromsignificant customers is detailed as follows:

 
| ** **                   | ** ** | **Year  Ended June 30, 2004**           | ** ** | **April 18,  2003, the purchase date of  GoVideo,  Through June 30, 2003** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Percentage  of  GoVideo’s  revenues** | ** ** | **Percentage  of  Consolidated  Revenues**                                           | ** ** | **Percentage  of  GoVideo’s  revenues** | ** ** | **Percentage  of  Consolidated  Revenues** | ** ** |
| Costco Wholesale Corporation |       | 41                                           | %          | 41                                                                                   | %          | 64 | % | 31 | % |
| QVC                          |       | 14                                           | %          | 14                                                                                   | %          | — | % | — | % |

 

 

*GoVideoSeasonality. *General economic conditions have animpact on GoVideo’s business and financial results. And as a result ofcompeting in the consumer electronic industry, GoVideo’s quarterly resultsreflect distinct seasonality in the sale of products.  Revenues are typically highest from September throughDecember.  However, GoVideo is only a “spotsupplier” to some of its customers, i.e. GoVideo sells to certain customersonly when these customers go out to bid for specific products.  GoVideo doesn’t supply a constant stream ofproduct to these customers.  Revenueswith these customers can differ from the traditional seasonality in theconsumer electronics industry depending on various circumstances includingproduct availability and pricing.

 

#### ***GoVideo Product Development andManufacturing.*** Product development activities consist ofhardware, firmware, and software design and engineering as well asco-development and engineering of products with manufacturers and technologypartners. Research has been focused on the development of lower-cost consumerelectronics and evaluation of potential new products, acquisitions, or jointventures.

#### ** **

The following table shows GoVideo-sponsoredresearch and development expenses (*in thousands*):

 

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

 

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#### **Independent companies manufacture most of GoVideo’sproducts.  At any one time, GoVideo hasmultiple contract manufacturers.  Thesemanufacturers are constantly evaluated in order to minimize the risksassociated with outsourcing the manufacturing process.  These manufacturers are located in Korea,Taiwan and China.**

#### ** **

*GoVideoSales and Marketing*.  GoVideo’s current marketingstrategy is to sell products with the support of independent salesrepresentatives specific to certain geographic territories throughout the U.S.and who also represent many other brand name consumer electronic products.  GoVideo currently sells its product linesdirectly to retailers nationwide including numerous national and regionalchains, catalog accounts, specialty stores, warehouse clubs and home shoppingchannels.

 

*GoVideoBacklog and Inventory. *GoVideo purchases completed units fromcontract manufacturers.  As such, GoVideodoes not carry a raw materials inventory. GoVideo’s practice is to maintain sufficient finished goods inventory tofill orders promptly and not carry a backlog of orders.  Accordingly, backlog information is notmeaningful to an understanding of its business and may not be indicative ofactual shipments made to customers in any period.  GoVideo seeks to manage and maintaininventory in a way that will allow it to meet all expected product demand whilemaintaining flexibility to reallocate manufacturing capacity to improveefficiency and respond to changes in supply and demand.  GoVideo’s practice is to purchase inventorybased on customer orders or forecasts to mitigate the inherent dangers of pricedecreases in the volatile consumer electronics market.  There is still risk with this practice ascustomers may cancel orders or forecasts.

 

#### ***GoVideo Intellectual Property.***   GoVideo developed and owns theproprietary operating system software used by most of its products includingits Dual-Deck technology.  Intellectualproperty rights that apply to various products include patents, trademarks andthe GoVideo trade name.  GoVideomaintains an active program to protect its investment in technology byenforcing intellectual property rights. GoVideo has filed and obtained a number of patents in the UnitedStates.  While patents are an importantelement of GoVideo’s success, business as a whole is not materially dependenton any one patent.  GoVideo believes theduration of the applicable patents granted is adequate relative to the expectedlives of products. Because of the fast pace of innovation and product development,consumer electronics are often obsolete before the patents related to themexpire.

#### ** **

#### **To distinguish GoVideo products from competitors’products, GoVideo obtained certain trademarks and tradenames for products.  These trademarks and tradenames includeGoVideo, AmeriChrome, California Audio Labs, Rave MP, Cinevision, Cal Audio andCalifornia Audio.**

 

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

 

#### ***GoVideo Competition and marketanalysis. ***The market for consumer electronics is extremely competitive and ischaracterized by rapid technological change. In the DVR category, GoVideo’s main competitors include: Cyberhome,Sony, Toshiba, Samsung, Memorex, Magnavox, Apex, Panasonic, Daewoo, and JVC.GoVideo is currently not in the top 10 companies in terms of market share.  GoVideo plans to have single deck DVD productavailable for distribution throughout calendar 2005, which management believesshould help secure a better market position.

#### ** **

#### **In the DVD Recorder + VCR category, GoVideo’s maincompetitors include Panasonic, LG Electronics, Hitatchi, Sharp, Sansui,Sylvania, JVC, Broksonic, Samsung, and Zenith.  GoVideo has maintained a strong market position since its introductionof this product.  In terms of units,GoVideo held the number one market share position for a portion of theyear.  Some product introductions bystrong Japanese brands caused GoVideo to drop to the number three position atcertain points.  In terms of dollars,GoVideo held the top market position for approximately one half of the year,and was consistently in the top three market positions.**

 

#### **GoVideo’s principal competitive factors included:**

 

•                  Price;

•                  Flexibility to move with market demands;

•                  Quality;

•                  Brand recognition;

 

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•                  Product features;

•                  Product support including consumercustomer service and timely delivery per forecast; and

•                  Product innovation including thepatented Dual Deck technology.

 

Because GoVideo doesn’t havemanufacturing capabilities, GoVideo has the competitive advantage of being ableto respond to market demands extremely quickly. The disadvantage to this situation is the fact that GoVideo has lessleverage when negotiating the purchase price with contract manufacturers.  Another negative aspect of not havingmanufacturing capabilities is that GoVideo’s customers can 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 and marketed telecommunicationsproducts to cable operators, network service providers, and communicationsnetwork users in the United States 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. Correlant is a significant subsidiary of Opta and duringfiscal 2002 and 2001 represented essentially 100% of the Company’s consolidatedrevenues, cost of revenues and research and development expense included incontinuing operations. Correlant was much less significant to the Company’sconsolidated results of operations during fiscal 2004 and fiscal 2003 as aresult of the cessation of Correlant’s operations and purchasing GoVideo.

 

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 andowns the proprietary software used in the cable modem.  Effective February 2002, Correlantchanged its business model whereby it primarily sold the MAC+software and onlysold the completed cable modem in specific circumstances.  Instead of focusing on selling the completedcable modem, Correlant concentrated efforts toward selling only theMAC+software.  The new business model wasa result of Correlant’s attempt to increase gross profit percentage, streamlinebusiness operations and reduce operating expenses. However, this business modelultimately proved unsuccessful, as gross margins continued to decrease as aresult of increased competition in the cable modem market and more broadly, thehigh-speed Internet market.  In addition,many of Correlant’s major customers chose to either design and manufacturetheir own DOCSIS 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 adversely affected.

 

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 onerepresentative on Correlant’s Board of Directors and did not control Correlant’sBoard or its operations.  Immediatelythereafter, the Board of Directors created a new Executive Committee of theBoard, comprised of two members who are Opta employees, to act on behalf of theBoard of Directors and oversee 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 date forward he no longer served asPresident and CEO of Correlant.   As part of the separation,Opta entered an agreement in February 2004 to repurchase all shares ofOpta common stock owned by Correlant’s former President.  As of June 30, 2004, Correlant’s formerPresident no longer owns any Opta stock.  In connection with the resignation, Correlantentered into an Employment Separation Agreement with the former President.  Under the terms of the agreement, Correlantagreed to repurchase 327,000 Correlant shares held by the former President for $0.07per share for a total of $23,000.  Todate, this transaction has not been finalized. From July 31, 2003 until December 23, 2003, Correlant workedto

 

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find a permanent CEO andretained outside consultants to advise and assist during the transitionperiod.  Such consultants were chargedwith evaluating Correlant’s business operations, its products and demand forits 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 one employee as of June 30, 2004.

 

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, and could potentially license othertechnology.  The wind down of Correlant’s operationswas substantially completed by March 31, 2004.

 

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

 

#### **During fiscal years 2002 and 2001, Correlant’srevenues accounted for 100% of the Company’s consolidated revenues.  However, due to the purchase of GoVideo,Correlant’s revenues represented less than 1% and 52% of the Company’sconsolidated revenues during fiscal 2004 and 2003, respectively.**

#### ** **

*CorrelantProducts*.  Correlant’s products were divided into twocategories:

 

•                  Cable modems.  Cable modems, installed at the end user’spremises, 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 cable modems received both the *DOCSIS 1.0* and *1.1*certifications.  The cable modems connectto the end user’s computer via a standard Ethernet or Universal Serial Bus (“USB”)connector, and to the cable network via a 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,** | ** ** | **Revenue** | ** ** | **Percentage  of  Consolidated Total  Net Revenue** | ** ** |
|-------------------------------|------------|-------------|------------|-----------------------------------------------------|------------|
| 2004                          |       | $           | —     |                                                | —     | % |
| 2003                          |       | 133         |       | 1                                                   | %          |
| 2002                          |       | 34,713      |       | 62                                                  | %          |
|                               |            |             |            |                                                     |            |  |

 

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

 

| **Year Ended June 30,** | ** ** | **Revenue** | ** ** | **Percentage  of  Consolidated Total  Net Revenue** | ** ** |
|------------------------------|------------|-------------|------------|-----------------------------------------------------|------------|
| 2004                         |       | $           | 39         |                                                | —     | % |
| 2003                         |       | 8,161       |       | 42                                                  | %          |
| 2002                         |       | 19,672      |       | 35                                                  | %          |
|                              |            |             |            |                                                     |            |  |

 

Infrastructure Equipment.  During fiscal 2002, Correlant completedinitial development of a CMTS to complement its cable modems.  Its CMTS was designed to enable cableoperators to provide a complete solution for two-way data transfer between theInternet and the end-user, utilizing its cable modem at one end and itshead-end equipment at the other.  CMTSsales were less than 1% of consolidated total net revenue during fiscal 2004,2003 and 2002.

 

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

 
| ** **       | ** ** | **Year  Ended June 30,** | ** ** |
|------------------|------------|-------------------------------|------------|
| ** **       | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Japan            |       | $                             | 215        |   | $ | 54 |   | $ | 30,033 |   |
| Taiwan           |       | 163                           |       | 9,446 |   | 20,757 |   |
| United States    |       | 116                           |       | 201 |   | 5,090 |   |
| Europe and other |       | 127                           |       | 476 |   | — |   |
|             |       | $                             | 622        |   | $ | 10,177 |   | $ | 55,880 |   |
|                  |            |                               |            |  |  |  |  |  |  |  |  |

 

Segment disclosures andgeographical information for fiscal 2004, 2003 and 2002 are presented in “Item8.  Financial Statements andSupplementary Data Note 18 – Segment and Geographic Information.”

 

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

 

#### ** **

| ** **                    | ** ** | **Research  and development  including amortization of  deferred stock compensation** | ** ** | **Research  and development  excluding amortization of deferred  stock  Compensation** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| **Year  ended June 30,** | ** ** | **Dollars**                                                                           | ** ** | **Percentage  of  Correlant’s Total  Revenues**                                   | ** ** | **Dollars** | ** ** | **Percentage  of  Correlant’s Total  Revenues** | ** ** |
| 2004                          |       | $                                                                                     | 1,547      |                                                                                   | 249        | % | $ | 1,543 |   | 248 | % |
| 2003                          |       | 7,340                                                                                 |       | 72                                                                                     | %          | 6,864 |   | 67 | % |
| 2002                          |       | 9,392                                                                                 |       | 17                                                                                     | %          | 8,105 |   | 15 | % |
|                               |            |                                                                                       |            |                                                                                        |            |  |  |  |  |  |  |

#### ** **

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

 

 
| ** **                                                           | ** ** | **Year  Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Synclayer                                                            |       | 35                            | %          | 1 | % | — | % |
| TurboComm Technologies, Inc(“TurboComm,” a  related party) |       | 26                            | %          | 93 | % | 37 | % |
| Toshiba, a related party                                             |       | —                        | %          | — | % | 54 | % |
| Terayon                                                              |       | —                        | %          | — | % | 8 | % |

 

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, Correlant reached a settlement agreement withTurboComm.  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 Correlant preferred stockowned by TurboComm. Both parties mutually agreed to release and discharge anyand all claims that each may have against the other party.

 

#### ***Correlant Manufacturing andDistribution.  ***Correlant had limited in-house manufacturing capability at its facilityin San Diego, California.  This facilitywas used for design, assembly and testing of prototypes, pilot production ofnew modem designs, sample testing of products received from othermanufacturers, developing the manufacturing process and documentation for newproducts in preparation for outsourcing.

#### ** **

Correlant had an establishedrelationship and manufacturing contract with TurboComm, a company located inTaiwan that manufactured the high-speed data-over-cable technologyproducts.  From the early stages ofdesign and development, Correlant worked closely with TurboComm’s engineers toensure optimal and cost effective manufacturing. Correlant’s manufacturingagreement with TurboComm provided TurboComm would supply all

 

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of Correlant’s forecastedorders for cable modems at prices to be agreed to by Correlant and TurboComm ona quarterly basis.  While manufacturingCorrelant’s products, TurboComm was obligated to repair or replace anydefective cable modems and CMTS units. Although the term of the original contract went through May 2003, bothCorrelant and TurboComm mutually agreed to continue the relationship beyondthat date.

 

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

 

*CorrelantBacklog.  *Correlant’s general practice was tocontract with TurboComm andfill orders within delivery dates required by customers, with some adjustmentsbased on Correlant’s forecast. During fiscal 2004, substantially all Correlant’sproducts were produced in accordance with specifications and productionschedules determined by Correlant based on orders placed by its primarycustomers. The amount of unfilled orders at any particular time could beaffected by a number of factors including, but not limited to, the availabilityof cable modem components, and the manufacturing and assembly capacity ofCorrelant’s third party manufacturer. Accordingly, Correlant’s backloginformation is not meaningful to an understanding of its business and may notbe indicative of actual shipments made to customers in any period.

 

#### ***Correlant Working Capital and RawMaterials. *** 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 raw materials inventory, theamount was not material.  Accordingly,inventory requirements, and the impact of inventory requirements on workingcapital, are not meaningful to an understanding of Correlant’s business.

#### ** **

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

#### ** **

#### ***Correlant Competition***.  During fiscal 2004, 90% ofCorrelant’s revenue was generated from the sales of CMTS units.  Primary competitors during fiscal 2004 forthe sale of the CMTS included ADC, Arris, Cisco, Com21, Motorola andTerayon.  Other potential competitorsincluded, among others, Alcatel, Best Data, Dassault, Ericcson, FutureNetworks, NEC, NetGear, Nortel, Pace, Phasecom, Samsung, Scientific-Atlanta,Riverstone, Sony, Thomson Consumer Electronics and Zoom Telephonics.

#### ** **

#### **Correlant’s principal competitive factors included:**

#### ** **

•                  The other technologies described above;

•                  The ability to receive the DOCSIScertification;

•                  Price;

•                  Quality;

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

•                  Product support.

 

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

 

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

 

In February 1999, theCompany acquired 100% of the outstanding shares of Professional MarketBrokerage, Inc. (“PMB”), a Chicago-based financial trading firm that providedonline trading services, and 100% of the outstanding shares of US Securities &Futures Corp. (“USSF”), a full service brokerage firm in New York, NY. In June 1999,the Company created USS Online, Inc. (“USS Online”), a wholly-owned subsidiary,and

 

10

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transferred all of itsownership interests in each of USSF and PMB to USS Online to run those twofinancial service subsidiaries. In February 2000, the Company sold 72% ofits ownership in USS Online.  Theremaining 28% ownership has no impact on Opta’s business operations.  The investment was deemed impaired andwritten off during fiscal 2000.

 

In March 1999, the Companyacquired 77% of the issued and outstanding common shares of Arescom.  Based in Fremont, California, Arescomdesigned, manufactured and marketed a broad range of high quality remote accessproducts, such as routers and remote managing software, and otherinter-networking equipment for Internet Service Providers (“ISP”), resellers,and system integrators in the North America market.  In December 2001, the Company soldapproximately 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 Companydetermined that Arescom would not generate consistent cash flow from operationsin the foreseeable future, and decided to sell its interests for cash to pursueother business opportunities. The Company retained approximately 6% of theoutstanding common shares and 11,048 shares of subordinated preferred stock ofArescom.  The Company determined thatthere was no value associated with the 11,048 shares of subordinated preferredstock of Arescom.  Immediately followingthe sale of its majority interest in Arescom, the Company determined that thevalue of its remaining 6% interest in Arescom was impaired. As previously reported, effective September 10,2003, Opta divested its remaining 6% ownership in Arescom bysettling 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 subsidiary was incorporatedin Delaware in April 1999, and was a private-label Asian languagee-commerce service provider, targeting business-to-business andbusiness-to-customer markets, portals and ISP companies.  Due to the negative response in general toe-commerce, the operations of Lotus World were suspended by prior management in2001.  As previously reported, on March 12,2002, the Company and Lotus World entered into an Asset Purchase and Assignmentand Assumption Agreement with Avtech Technology, whereby the Company assignedits rights to certain contracts and related intangibles to Avtech in exchangefor Avtech’s assumption of all of the Lotus World’s obligations under thecontracts assigned.  Subsequent to thecompletion of the transaction, the Company dissolved Lotus World.

 

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 resultof the 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 inBeijing.  See ***“BusinessDevelopments and Subsidiary Activity Subsequent to the Reporting Period.”***

 

As previously reported, in January 2003,the Company finalized an agreement to form a joint venture with Beijing YoubangOnline Electronics Technology Co., Ltd. (“Youbang”), TCL Computer TechnologyCo., Ltd. and all the equity holders of Youbang, pursuant to which the Companyacquired a 50% interest in a new joint venture to own substantially all ofYoubang’s operations. Pursuant to the agreement, all of Youbang’s assets, otherthan real estate, were transferred to a newly formed Beijing, China jointventure named TCL Digital

 

11

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Technologies, Ltd. (“TCLDigital”), for the purpose of manufacturing computer notebooks in China. TheCompany agreed to contribute approximately $5,240,000, payable in threeinstallments and representing 50% of the 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.  As previously reported, inSeptember 2003, the Company entered into an agreement with TCL InformationTechnology Industrial (Group) Ltd. (“TCL Information”), whereby the Companysold its 50% interest in TCL Digital for approximately $5,600,000 cash.  The transaction was completed in December 2003. TCL Information is an affiliate of TCL, the majority stockholder of theCompany.

 

***BusinessDevelopments and Subsidiary Activity Subsequent to the Reporting Period***

 

Significant businessdevelopments subsequent to fiscal 2004 but before the filing of this report aresummarized below:

 

After commencing a project toreintroduce the Rave MP branded line of MP3 players in April, 2004, GoVideobegan distributing MP3 Rave MP branded product in September 2004.  The Company expects revenue from this newproduct to be approximately 20% of GoVideo’s total revenues with similar grossmargins as other GoVideo products.

 

On July 7, 2004, theCompany’s Board of Directors approved the commencement of a new wholly-ownedsubsidiary, Go Video DigiTech (Huizhou) Co., Ltd. (“DigiTech”), which will belocated in Guangdong, China.  DigiTechwill market GoVideo’s MP3 players under the GoVideo brand name.  The Company plans to invest approximately$500,000 in the new subsidiary.  TCLMultimedia Electronics R&D Center (“TCL Multimedia”), an affiliate companyof TCL, is currently expending some resources during the start up phase ofGoVideo DigiTech.

 

As Beijing Lotus had nomaterial operations since its inception, the Company’s Board of Directorsapproved the closure of Beijing Lotus on July 7, 2004.  All assets of Beijing Lotus were transferredto DigiTech during September, 2004.

 

***Employees***

 

As of June 30,2004, Opta had nine employees, including eight in sales, general andadministration and one in research and development.  Correlant had one employee in sales, generaland administration.  GoVideo had 60full-time employees, including six in product management and 54 in sales,general and administration.

 

As of December 31,2004, Opta had six employees in sales, general and administration.  Correlant had two part-time employees, whoare also Opta employees, in sales, general and administration.  GoVideo had 61 full-time employees, including8 in product management and 53 in sales, 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.

 

**Item2.  Properties**

 

At June 30, 2004,Opta’s executive offices were located at 2402 Michelson Drive, Suite 220,Irvine, California and consisted of approximately 2,100 square feet under amonth-to-month lease.  Effective November 1,2004, Opta moved its executive offices to 1350 Bayshore Highway, Suite 730,Burlingame, California, a 3,196 square foot office under a month-to-monthlease.   At June 30, 2004, Correlantleased approximately 26,000 square feet of office space in San Diego,California, which originally expired November 2007. Due to theshut down of

 

12

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operations, theremaining Correlant employees moved out of the San Diego facility and into Opta’sfacility to reduce expenses.  On November 4,2004 Correlant entered into a lease termination agreement for its San Diegofacility.  After Correlant’s facilities closure inSan Diego, the Company believes its facilities are suitable for its uses andadequate for the Company’s needs.

 

GoVideo leases two facilitiesin Scottsdale, Arizona.  One facility,used for warehousing, is approximately 13,100 square feet.  The other facility, used for administration,warehousing and distribution, is approximately 33,000 square feet.  Both leases expire January 2006 with nooption to extend the lease term.  Theleased space is currently suitable for GoVideo’s current needs.

 

**Item3.  Legal Proceedings**

 

From time to time we may beinvolved in various disputes and litigation matters arising in the normalcourse of business. As of Janauary 31, 2005, we are not involved in any legalproceedings that are expected to have a material adverse effect on ourconsolidated financial position, results of operations or cash flows. However,litigation is subject to inherent uncertainties. Were an unfavorable ruling tooccur, there exists the possibility of a material adverse impact on our resultsof operations of the period in which the ruling occurs. Our estimate of thepotential impact on our financial position or overall results of operations fornew legal proceedings could change in the future.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

As permitted under Section 228 of the Delaware General CorporationLaw, by written consent dated June 10, 2004, 55.42% of the stockholders ofthe Company adopted Opta’s Certificate of Amendment to our Certificate of Incorporationto effect the proposed name change from “Lotus Pacific, Inc.” to “OptaCorporation.”  The board of directors of the Company approved this namechange at a meeting of the board of directors held on March 7, 2004.

 

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**PART II**

** **

**Item5.  Market for Registrant’s commonequity, related stockholder matters and Issuer Purchases 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 Opta filed its Form10-K for fiscal 2002 on April 16, 2004 and its Form 10-K for fiscal 2003on August 24, 2004, Opta is not eligible to trade on the OTC BulletinBoard until Opta becomes current in all its required filings or files a Form 10and clears all comments with the SEC. The Company is working to complete such reports for subsequent periodsand will file them as soon as they are available.  From November 5, 2002 through October 12,2004, the Company’s shares of common stock were quoted on the NationalQuotation 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 common stock prices pershare were as follows:

 

| ** **   | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------|------------|----------|------------|---------|------------|
|         |       |     |       |    |       |
| Fiscal 2005: |       |     |       |    |       |
|         |       |     |       |    |       |
| 1st Quarter  |       | $        | 0.15       |    | $          | 0.08 |   |
| 2nd Quarter  |       | 0.10     |       | 0.03    |       |
|         |       |     |       |    |       |
| 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, 2005,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.

 

**Equity Compensation Plan Information**

 

Information regarding Opta’sequity compensation plans is set forth in “Item 12.  Security Ownership of Certain BeneficialOwners and Management.”  As of the dateof this report, there are no outstanding options or warrants to purchasesecurities of the Company.

 

14

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**RecentSales of Unregistered Securities**

 

There were no sales ofunregistered securities by the Company during fiscal 2004, 2003 or 2002.

 

**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, 2004 |       | None                                    |       | —                              |       | None                                                                                     |       | None                                                                                              |       |
| May 1 through May 31, 2004               |       | None                                    |       | —                              |       | None                                                                                     |       | None                                                                                              |       |
| June 1 through June 30, 2004   |       | 249,270                                 |       | $                                   | 0.30       |                                                                                     | None       |                                                                                              | None       |   |
|                                          |            |                                         |            |                                     |            |                                                                                          |            |                                                                                                   |            |  |

 

The Company has not publiclyannounced any plans to purchase Opta stock.   In the past, the Board of Directors reviewed and approved repurchases ofits common stock on a case by case basis. In addition, the Company has no plans in the future to publicly announceany stock repurchase plans.  The Board ofDirectors plans to continue to review potential repurchases of its common stockand will continue to approve the repurchase transactions on a case by casebasis.

 

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**Item 6.  Selected Consolidated 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)**                 | ** ** | **2004**                                              | ** **  | **2003  (1)** | ** ** | **2002  (2)** | ** ** | **2001** | ** ** | **2000  (3)** | ** ** |
| ** **                                                    | ** ** | ** **                                            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results of Operations**                                     | ** ** | ** **                                            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                                  | ** ** | **$**                                                 | **125,324** | ** ** | $ | 19,454 |   | $ | 55,880 |   | $ | 263,192 |   | $ | 71,839 |   |
| Loss from continuing operations                               | ** ** | **$**                                                 | **(7,722**  | **)** | $ | (6,366 | ) | $ | (36,529 | ) | $ | (7,433 | ) | $ | (2,249 | ) |
|                                                          | ** ** | ** **                                            | ** **  |   |   |   |   |   |   |   |   |
| Net income (loss) per common share – basic  and diluted: | ** ** | ** **                                            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing operations                               | ** ** | **$**                                                 | **(0.14**   | **)** | $ | (0.10 | ) | $ | (0.57 | ) | $ | (0.12 | ) | $ | (0.04 | ) |
| Total gain (loss) from discontinued  operations               | ** ** | **$**                                                 | **—**  | ** ** | $ | — |   | $ | 0.27 |   | $ | (0.45 | ) | $ | (0.19 | ) |
| Net income (loss)                                             | ** ** | **$**                                                 | **(0.14**   | **)** | $ | (0.10 | ) | $ | (0.30 | ) | $ | (0.57 | ) | $ | (0.23 | ) |
| Cash dividends per share                                      | ** ** | **$**                                                 | **—**  | ** ** | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| **Financial Position**                                        | ** ** | ** **                                            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets from continuing operations                       | ** ** | **$**                                                 | **71,120**  | ** ** | $ | 52,987 |   | $ | 53,342 |   | $ | 117,214 |   | $ | 121,737 |   |
| Long-term obligations, less current portion                   | ** ** | **$**                                                 | **—**  | ** ** | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Total stockholders’ equity                               | ** ** | **$**                                                 | **20,349**  | ** ** | $ | 30,565 |   | $ | 36,560 |   | $ | 54,328 |   | $ | 83,730 |   |

 

----

(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.

 

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

 

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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 an executive overview and description of our business.  This is followed by a discussion of why wewere unable to timely file our Form 10-K for the year ended June 30,2004.  The next discussion relates tomaterial acquisitions and dispositions and a comparison of our results ofoperations as follows:

 

•              Fiscal 2004 compared to fiscal 2003;

•              Fiscal 2003 compared to fiscal 2002; and

•              Fiscal 2002 compared to fiscal 2001.

 

These comparisons are providedsolely for readers to understand the historical results of our operationsduring the time periods covered. However, due to the strategic change in direction of Opta discussed in “Item1. Business,” and throughout the MD&A section, these results are notindicative of future results.

 

After the results ofoperations, we analyze the changes in our cash flows, and discuss our financialcommitments in the section entitled “Liquidity and Capital Resources.”  We then address our “Business Outlook” from June 30,2004.   We conclude this MD&A with (I) adiscussion of the Critical Accounting Estimates we believe are important tounderstanding the assumptions and judgments incorporated in our reportedfinancial results; and (II) Recently Issued Accounting Standards and the impactthey had or will have on our results of operations.

 

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

 

•              Item 1. Business;

•              Item 6. Selected Financial Data; and

•              Item 8. Financial Statements and Supplementary Data.

 

The various sections of 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 and particularly in the “BusinessOutlook” section.  Our actual results maydiffer materially from these forward-looking statements.

 

## **Executive Overview andDescription of Business**

## ** **

Opta Corporation (“Opta”), aDelaware corporation, is a holding company and we conduct our business throughour subsidiaries. We presently develop, manage, and operate emerging consumerelectronics and communications companies, focusing on developing nextgeneration consumer electronics and communication products. We provide oursubsidiaries with capital and strategic and infrastructure services.   Currently, GoVideo is our sole operatingsubsidiary.  GoVideo’s strategy is todevelop, market, and distribute innovative, high performance consumerelectronic products that incorporate advanced technology, ease of use, andsuperior industrial design.  Main productsinclude consumer electronic products such as the digital video disc (“DVD”)-VideoCassette Recorder Combos (“DVR”), Dual-Deck VCRs, DVD Recorders, DVD Recorder +VCR, A further description of the Company’s products may be foundin Part I, Item 1 of this document under the heading “Business.” GoVideo’s current marketing strategy isto sell products with the support of independent sales representatives specificto certain geographic territories throughout the United States and who alsorepresent many other brand name consumer electronic products.  GoVideo currently sells its product linesdirectly to retailers nationwide including numerous national and regionalchains, catalog accounts, specialty stores, warehouse clubs and home shoppingchannels.

 

Our business strategy in the consumer electronics segment is toleverage our significant experience in the consumer electronics market,increase the GoVideo brand recognition by introducing products in Asia, andcontinue our product development to bring to our customers compelling newproducts with superior quality and ease-of-use.

 

One of the major challenges facing Opta is managing liquidity.  Liquidity has been, and will continue to be,an issue for us as we have grown our subsidiary, GoVideo, out of bankruptcy.  Our majorityshareholder, TCL Industries Holdings (H.K) Limited (“TCL”), has beeninstrumental in assisting GoVideo obtain credit from

 

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vendors,which has helped us work through some liquidity issues.  We plan to continue to utilize therelationship with our majority stockholder by sourcing more products fromthem.  This will be a challenging andimportant part of GoVideo’s strategy to manage liquidity.

 

The consumer electronicsindustry is constantly facing new trends and challenges, the most prominent ofwhich is severe price competition.  Weexpect competition to intensify in the future. Our strategy to combat the price competition is to continue to focus onthe development of lower-cost consumer electronics, continue the evaluation ofpotential new products and work with our contract manufacturers to reduce thepurchase price of our products.

 

***ExplanatoryNote – Changes in Management and Delays in Reporting***

 

On June 29, 2001, amajority of our stockholders, led by TCL, were successful in a solicitation togain control of Opta and replace prior management of the Company.   On June 29, 2001, new directors andofficers were appointed and the then existing directors and officers wereimmediately removed from office. Following the termination of our relationship with prior independentaccountants, new management concluded that a reaudit of the financialstatements for fiscal 2001, 2000 and 1999 was required.  Effective July 24, 2002, we engaged ournew independent accountants to reaudit and restate these prior periods.  The Company completed such restatements inits Form 10-K for fiscal 2002 filed April 16, 2004.  The late filing of our Form 10-K for fiscal2002 caused our Form 10-K for fiscal 2003, which was filed August 24,2004, to also be late.

 

***Acquisitionsand Dispositions***

 

During fiscal 2004, 2003 and2002, we engaged in multiple acquisitions and dispositions.  The details of these transactions aredescribed in detail in “Item 8. Financial Statements and Supplementary DataNote 4 –Acquisitions and Dispositions – Majority Owned Subsidiaries and Note 5 –Acquisitions and Dispositions – Equity Method Investees.”  However, unless specifically addressed inMD&A, these acquisitions and dispositions were not material to our resultsof operations and the understanding of our business.  As such, the details have been omitted fromMD&A.  The following is a discussionof our acquisitions and dispositions in order of significance to our currentbusiness.

 

*GoVideo*

 

In April 2003, we loaned$5,986,000 to Opta Systems, which was used, in addition to a deposit of$250,000 paid by Opta Systems to complete its purchase of substantially allassets and assumption of certain liabilities of a product line known as “GoVideo”from SONICblue Incorporated, a Delaware corporation (NASDAQ: SBLU), and SensoryScience Corporation, a Delaware corporation and wholly-owned subsidiary ofSONICblue, pursuant to a purchase agreement and an order issued by the UnitedStates Bankruptcy Court, Northern District of California, San Jose Divisionoverseeing SONICblue’s bankruptcy case.

 

Immediately subsequent to OptaSystem’s purchase of the GoVideo product line, we purchased 100% of OptaSystems for an adjusted purchase price of $5,808,000 for GoVideo.

 

The GoVideo product line,established in 1984, designs and manufactures product lines in the consumerelectronics industry, including digital video disc (“DVD”) players, portableDVDs, DVD-Video Cassette Recorder (“VCR”) Combos, Dual-Deck VCRs, DVD Recorders,DVD Recorder + VCRs, and liquid crystal display (“LCD”) TVs. GoVideo holdsvarious patents covering Dual-Deck technology as well as other electronicsproducts and systems.

 

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

 

*CorrelantCommunications, Inc*

 

Correlant Communications, Inc (“Correlant”)is a major subsidiary of Opta.   However, due to the purchase of a newsubsidiary and the strategic change in direction of Opta discussed in “Item 1.Business,” and throughout the MD&A section, Correlant was much lesssignificant to our results of operations during fiscal 2004 and fiscal 2003 ascompared to fiscal 2002 and 2001. Correlant accounted for less than 1% and 52% of our consolidatedrevenues in fiscal 2004 and 2003, respectively, as compared to essentially 100%of our consolidated revenues in fiscal 2002 and 2001.

 

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On March 31, 1999, weentered into a share exchange agreement which provided for the acquisition of94.5% of the issued and outstanding common shares of Correlant, representing an81% ownership interest in Correlant in consideration for the issuance of9,657,000 common shares of the Company valued at $7.21 per share pluscontingently issuable shares of up to 1,435,000. The contingent shares wereissuable as Correlant options specified in the agreement were exercised.  For each option exercised, 81% of such shareswere to be transferred to us in exchange for 0.5364 shares of Opta common stockfor each share of Correlant stock transferred.  At the acquisition date, the excess of the purchase price and relatedcosts over the value assigned to the net tangible assets acquired was$74,545,000 and was assigned to goodwill. During fiscal 2004 and 2003, we recorded $36,000 and $21,000,respectively, as additional goodwill as a result of issuing 5,000 and 3,000 ofthe contingently issuable shares, respectively. The additional goodwill was subsequently expensed as an impairment ofassets.  During fiscal 2001 and 2000, werecorded an additional $18,000 and $554,000, respectively as additionalgoodwill as a result of issuing 79,000 of the contingently issuable shares. Asof December 31, 2004 there were no contingently issuable sharesoutstanding.

 

During March 2000, wesold, to unrelated parties, 3,657,000 shares of Correlant stock, which reducedour ownership to 65%.  During September 2000,we sold to unrelated parties, 656,000 shares of Correlant stock, which furtherreduced our ownership to 62%.

 

*Change inCorrelant’s Business Model*

 

Prior to January 31, 2002,Correlant sold Data-Over-Cable System Interface Specification (“DOCSIS”)certified cable modems and in certain instances, the Media Access Controller (“MAC”)bundled with cable modem software (“MAC+software”), which were both keycomponents of the completed cable modem. Correlant developed and owns the proprietary software used in the cablemodem.  Effective January 31, 2002Correlant changed its business model whereby they only sold the completed cablemodem in certain circumstances.  Insteadof focusing on selling the completed cable modem, Correlant concentratedefforts toward selling only the MAC+software. The new business model was a result of Correlant’s attempt to increasegross profit percentage, streamline business operations and reduce operatingexpenses.  This change had the followingimpacts to our results of operations, cash flows and financial position:

 

•                  *Decreased revenues cost ofrevenues, inventory, accounts receivable and accounts payable*. Because the sales price and the related cost of the MAC+software weresubstantially lower than the completed cable modems, our revenues, cost ofrevenues, inventory, accounts receivable and accounts payable all decreased.

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

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

•                  *Decreased selling, general andadministrative expense.*  As a result of the change in business model,Correlant closed its Taiwan branch.

 

*Demand forCorrelant’s products*

 

During the first half ofcalendar year 2000, cable modem manufacturers experienced shortages and longlead times for component materials such as flash memory and capacitors.  Due to these shortages, the production ofcable modems was constrained and our customers placed substantial orders forour cable modems.  We believe cableoperators also overbought in the second half of calendar year 2000 to ensurethey had sufficient product to meet subscriber demand.  As a result, we believe there was an inflateddemand for cable modems for the first six months of fiscal 2001, June 2000through December 2000.  Starting in January 2001,our customer orders began dropping sharply resulting in lower demand as endcustomers started to work through their inventory levels.  This lower demand continued until thecessation of Correlant’s historical operations discussed below.

 

The extremely competitivenature of the market for broadband access systems resulted in significant priceerosion over time.  We experienceddownward pressure on our completed cable modem average selling price per unit.  This downward pressure on the completed cablemodem selling price places downward pressure on cable modem components,including the MAC+software.  Therefore,Correlant experienced continued price erosion under its new businessmodel.  This price erosion continueduntil Correlant discontinued selling cable modem

 

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and cable modem-relatedproducts as discussed below.

 

*Cessationof Correlant’s Historical Operations*

 

Effective July 31, 2003,Correlant’s President, Chief Executive Officer and co-founder resigned as adirector of Correlant.  From that dateforward, he no longer served as President and CEO of Correlant. From August 1,2003 until December 23, 2003, Correlant worked to find a permanent CEO andretained outside consultants to advise and assist during the transitionperiod.  Such consultants were chargedwith evaluating Correlant’s business operations, its products and demand forits 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.

 

On December 23, 2003, upon recommendation of its consultants,Correlant’s Board of Directors approved the wind down and cessation ofCorrelant’s historical operations in the cable modem and cable modem softwarebusiness.  The wind down wassubstantially complete by March 31, 2004. As of June 30, 2004, Correlant had one employee to maintaincorporate records and to comply with statutory reporting requirements.  Correlant had two part-time employees, whoare also Opta employees, to explore opportunities to acquire or invest in other businesses ortechnologies.  We expect Correlant toidentify market opportunities and implement a new business plan complementarywith our business and long-term strategies. See “Business Outlook.”

 

The cessation of Correlant’shistorical operations, decline in demand for Correlant’s product and the changein Correlant’s business model had a material impact to our results ofoperations, financial position and cash flows as of or for the years ended June 30,2004, 2003, 2002 and 2001.  As a result,year over year comparisons may not be meaningful and future financialstatements will not be comparable to our historical financial statements.

 

*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 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. 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”), 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 enteredinto an agreement with TCL Information Technology Industrial (Group) Ltd, anaffiliate of TCL Industries whereby the Company sold its 50% interest in TCLDigital for an aggregate amount of $5,604,000. $1,842,000 was applied to repay the sum payable under the promissorynote dated August 18, 2003 issued by the Company in favor of TCLInternational Holdings Limited (“TCL Holdings”), TCL Industries’ parentcompany.  The balance of $3,762,000 waspaid to the Company resulting in a gain of $1,053,000 included with Gain onsale of investments in the Company’s statement of operations during fiscal2004.

 

*LotusWorld, Inc.*

 

On April 22, 1999, weorganized Lotus World Inc. (“Lotus World”) to offer Auction Live, an onlineauction service, to international clients. The wholly-owned subsidiary was incorporated in Delaware in April 1999,and was a private-label Asian language e-commerce service provider, targetingbusiness-to-business and business-to-customer markets, portals and ISPcompanies.  Due to the negative responsein general to e-commerce, the operations of Lotus World were suspended in2001.  On March 12, 2002, we enteredinto an Asset Purchase and Assignment and Assumption Agreement with AvtechTechnology, whereby we assigned our rights to certain contracts and relatedintangibles to Avtech in exchange for Avtech’s assumption of all of Lotus World’sobligations under the contracts assigned. Subsequent to the completion of the transaction, we dissolved LotusWorld.

 

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*RegentElectronics Corporation*

 

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

 

## **Results of Operations**

## ** **

**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 as comparedto 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.  Revenues attributable to the new DVD Recorder+ VCR totaled $23,164,000 during fiscal 2004.

 

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 $622,000during 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 ofGoVideo.  GoVideo’s revenues duringfiscal 2004 as well as from April 18, 2003, the date of purchase through June 30,2003 were all generated from sales to domestic customers.

 

*GrossProfit*

 

The increase in gross profitdollars for fiscal 2004 compared to fiscal 2003 was a direct result ofincreased

 

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revenues attributed to GoVideoas 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 theintroduction of these new products, GoVideo’s pricing was aggressive as anattempt to gain market share.

•                  The change in revenue mix betweenGoVideo and Correlant products sold. Historically, consumer electronics bear a lower gross margin than cablemodem related products.

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

 

*OperatingExpenses*

 

General and administrative (“G&A”).  G&A expense consists primarily ofpersonnel costs for our administrative and support staff, allowance fordoubtful accounts, and legal and accounting fees.  The increase in G&A expense for fiscal2004 as compared to fiscal 2003 was primarily a result of including GoVideo forthe entire year in fiscal 2004 as compared to fiscal 2003, which only includedGoVideo from April 18, 2003 through 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 2003to Fiscal 2002.**”

•                  The shut down of Correlant’s historicaloperations.

 

Sales and marketing (“S&M”).  S&M expense consists primarily ofpersonnel costs for our sales staff, advertising and product promotionalexpenses.  The increase in S&Mexpense for fiscal 2004 as compared to fiscal 2003 was primarily due to thefollowing factors:

 

•                  Fiscal 2004 included GoVideo for theentire year 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.  During the second quarter of fiscal 2004, theCompany’s board of directors approved the wind down and cessation of Correlant’shistorical operations in the cable modem and CMTS business.  In connection with the shut down, the Companyrecorded a restructuring charge of $1,845,000 during fiscal 2004.  The following table summarizes the activityin the Company’s reserves associated with its shut down of historicaloperations (*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 |   |

 

Depreciation and amortization (“D&A”).  D&A expense consists of depreciation ofproperty and

 

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goodwill amortization related to the purchase ofCorrelant.  Thedecrease in D&A expense was due to the shut downof Correlant’s historical operations.  Depreciation expense attributable to Correlant decreased $418,000 during fiscal 2004 as comparedto fiscal 2003 as a result of Correlant’s assetsbeing impaired and written off as of June 30, 2003.  The decrease in D&Awas somewhat offset by the inclusion of GoVideo forthe entire year as compared to fiscal 2003, which only included GoVideo from April 18, 2003 through June 30,2003.

 

Researchand development (“R&D”).  R&D expense consistsprimarily of personnel costs, including amortization of deferred stockcompensation of employees engaged in research, design and developmentactivities and, to a lesser extent, design prototype material expenditures andexpensed equipment and supplies required to develop new products and enhanceexisting products.  The majority ofR&D expenses during fiscal 2004 and 2003 were attributable to Correlant. Therefore, the decrease in R&D expense for fiscal 2004 as comparedto fiscal 2003 was directly related to the shut down of Correlant’shistorical operations.  The decrease wassomewhat offset by the inclusion of GoVideo for theentire year in fiscal 2004 as compared to fiscal 2003, which only included GoVideo from April 18, 2003 through June 30,2003.

 

Impairmentof assets.  The impairment of assets duringfiscal 2004 was mainly attributable to the $1,795,000 write off of GoVideo’s goodwill. As part of our annual review of financial results, we noted indicatorsthat the carrying value of GoVideo’s goodwill may notbe recoverable.  Based on the annualtesting performed, we wrote off the entire balance of GoVideo’sgoodwill.  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 mainactivities 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

•                  $1,166,000 interest expense related to GoVideo’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 included GoVideo’s revenues from April 18, 2003 through June 30,2003, GoVideo accounted for 48% of our consolidatedrevenues.    The majority of GoVideo’s

 

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revenues during fiscal 2003 were generated fromsales of DVD Recorders, DVD players, portable DVDs, DVD-VCR Combos and to alesser extent, sales from the Dual-Deck VCRs and LCD TVs.  We expect GoVideorevenue as a relative percentage of revenue to grow as current managementcontinues to rebuild the Company’s business based on GoVideoand concentrate future business in the related industries of consumerelectronics and telecommunications.

 

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

 

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

•      The average selling price of DOCSIS cablemodems decreased approximately 37%;

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

•      Average sales price of MAC+Software decreasedapproximately 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’s revenues from the date of purchase through June 30,2003 were all generated from sales to domestic customers.  We expect international sales as a relativepercentage of total revenues to decrease as GoVideo’srevenues as a percentage 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 andsevere price competition.  This decreasewas somewhat offset by the increase in gross profit dollars attributed to GoVideo.

 

Although the gross profitdollars decreased, the overall gross profit percentage dramatically increasedas a result of the purchase of GoVideo and a higherportion of overall revenues generated from the sale of Correlant’sMAC+software.  GoVideo’s products and the MAC+Softwareboth had higher gross profit percentages in fiscal 2003 than cable modemsduring fiscal 2002.

 

*OperatingExpenses*

 

Selling,general and administrative (“SG&A”).  SG&A expense consists primarily of personnel costs,including amortization of deferred stock compensation for our administrativeand support personnel, allowance for doubtful accounts, and legal andaccounting fees.  The increase in SG&A expense for fiscal 2003 as compared to fiscal 2002was 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 2003 allowance related to Correlant’smain customer TurboComm.  On April 14, 2004, Correlantfiled a lawsuit against TurboComm in the DistrictCourt of Taiwan seeking to collect TurboComm’soutstanding debt as a result of TurboComm’sunwillingness to pay.  On July 30,2004, Correlant reached a settlement agreement with TurboComm.  Under theagreement, Correlant dismissed its lawsuit against TurboComm in exchange for the transfer of 700,000 Series Aand 300,000 Series C shares of Correlant preferredstock owned by TurboComm. Both parties mutuallyagreed to release and discharge any and all claims that each may have againstthe other party.  The remaining $30,000allowance for doubtful accounts in fiscal 2003 related to GoVideo’sslow paying customers.  Fiscal 2002allowance related to Correlant’s smaller customersnot being able to pay due to the significant economic slowdown in the downturnin the cable modem industry.

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

•                  $400,000 increased legal and accountingfees resulting from the previously discussed takeover of Optaby TCL and the subsequent replacement of prior Opta management, and the subsequent reauditand restatement of previously reported financial results; and

 

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•      $500,000 settlement of a legal dispute with a Correlantvendor.

 

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 AccountingStandards Board (“FASB”) Interpretation (“FIN”) 44, *Accounting for Certain Transactions Involving Stock Compensation – AnInterpretation of APB Opinion No. 25*.

 

Depreciationand amortization (“D&A”).  D&A expense consists of depreciation of property andequipment and goodwill amortization related to the purchase of Correlant.  Thedecrease in D&A expense was due to no goodwillamortization during fiscal 2003 as compared to goodwill amortization of$11,453,000 during fiscal 2002.  Goodwillwas deemed impaired at June 30, 2002 and fully written off.  The remaining decrease was a result of thenon-renewal of research and development software maintenance due to theshutdown of Correlant’s historical operations.

 

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

 

•      $811,000 decrease in amortization of deferred stock compensation;

•      $533,000 decrease in DOCSIS certificationfees associated with Correlant’s decreased productofferings; and

•      Decreased salary expense associated with natural attrition withoutreplacing 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 assetsduring fiscal 2003 related to the cessation of Correlant’shistorical operations.  As such, $477,000of Correlant’s fixed assets weredeemed impaired and written off. Impairment of assets during fiscal 2002 related to the goodwillassociated with the purchase of Correlant.  As of June 30, 2002, we deemed thegoodwill impaired due to the competitive nature of Correlant’sindustry and its significant reduction in revenues.  As a result, the $20,071,000 of remaininggoodwill was fully written off.

 

*Total otherincome (expense)*

 

Total other income (expense)consists of interest income, interest expense foreign exchange gain (loss) andother non-operating items.  Weexperienced net other income during fiscal 2003 due to a $3,500,000 disputesettlement with prior auditors. Additionally, we received 3,000,896 shares of our common stock as partof the settlement with USS Online, TravelwayInternational Ltd. and Huaya Lu Tung.  See “Item 3. LegalProceedings.” 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 remainingother income during fiscal 2003 was a result of interest income earned on ourcash account and investments, slightly offset 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.

 

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*Provision(benefit) for income taxes*

 

Werecord an asset or liability for tax assessments based on our estimate of thepotential assessments.  Among otherreasons, new laws and new interpretations of laws and rulings may affect theliability for potential tax assessments by tax authorities.  Due to the subjectivity and complex nature ofthe underlying issues, actual payments or refunds or assessments may differfrom our estimates.  To the extent ourestimates differ from actual payments or refunds or assessments, income taxexpense is adjusted.  In June 2003,we were notified by the Internal Revenue Service (“IRS”) that it would bereviewing our tax returns for the years ended June 30, 2001, 2000 and1999.    Subsequently, we filed amendedreturns for the years ended June 30, 2001, 2000 and 1999.  The amendments relate to the restatement ofour financial statements as well as the deconsolidation of consolidated taxreturns and subsequent filing of separate returns by us and each of oursubsidiaries.  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 weexperienced losses in subsequent years these losses were available to carryback against these gains.

 

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**Comparisonof Fiscal 2002 to Fiscal 2001**

 

The following table summarizescertain aspects of our results of operations for fiscal 2002 compared to fiscal2001 (*in thousands):*

 

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

 

 

*Revenues*

 

The significant decrease in overall revenues for fiscal 2002 ascompared to fiscal 2001 was primarily attributable to the following factors:

 

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

•      An industry-wide downturn in broadband equipment purchaseas cable operators, and in turn our customers, worked through their excessinventory;

•      Average sales price of our DOCSIS cablemodems sold by Correlant declined approximately 9%due to heavy price competition; and

•      The aforementioned change in Correlant’sbusiness model.

 

Revenues generated byinternational sales as a percentage of total revenues increased to 91% from 70%during fiscal 2002 as compared to fiscal 2001. The large increase was primarily attributable to the loss of Correlant’s significant US customers, as a result ofcustomers developing their own DOCSIS cable modems,and to a lesser extent the aforementioned change in Correlant’sbusiness model.

 

Due to the significant economicslowdown in the cable modem industry, both domestic and international, weexperienced a slowdown in customer orders during fiscal 2002.  Subsequent to fiscal 2002, revenues continuedto be negatively impacted.  Additionally,the average sales price of cable modems continued to decline, which in turnplaced price pressure on the cable modem components.  Ultimately, this significant slowdown andcontinued pricing pressure resulted in the cessation of Correlant’shistorical operations in the cable modem industry December, 2003.

 

*GrossProfit*

 

The decrease in gross profitdollars for fiscal 2002 compared to fiscal 2001 was a direct result of reducedrevenue from declining cable modem unit sales and severe pricecompetition.  Cable modem selling pricesdecreased faster than the associated product cost reductions, which resulted inselling cable modems at negative gross profit in order to keep market share.

 

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

 

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*OperatingExpenses*

 

Selling,general and administrative (“SG&A”). The decrease in SG&A expense for fiscal2002 as compared to fiscal 2001 was due to the following factors:

 

•                  $4,433,000 decrease in allowance fordoubtful accounts to $44,000 in fiscal 2002 from $4,477,000 in fiscal 2001.  For 2002 details, see “**Comparison of Fiscal 2003 to Fiscal 2002.**”  Fiscal 2001 allowance related to theforgiveness of $4,098,000 due from our subsidiary, Regent, in connection withthe spin off of Regent.  The remainingallowance for doubtful accounts in fiscal 2001 was due to a $300,000 cashadvance to our former subsidiary PMB, whosubsequently defaulted, and $79,000 accrued interest on our loans to USS Onlineand PMB.

•                  Decrease of $1,696,000 in amortizationof deferred stock compensation;

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

•                  Closure of Correlant’sTaiwan branch office; and

•                  Decreased salary expense associated witha reduction in force.

 

The above decreases wereslightly offset by an increase in legal and accounting fees resulting from thepreviously discussed takeover Opta by TCL and the subsequent replacement of prior Opta management.

 

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

 

Researchand development (“R&D”).  The decrease in R&D expensefor fiscal 2002 as compared to fiscal 2001 was primarily attributable to thefollowing factors:

 

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

•      Decreased salary expense associated with natural attrition withoutreplacing vacant positions.

 

The above decreases were partially offset by increased fees related tothe DOCSIS cable modem certification process.

 

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

 

*Total otherincome (expense)*

 

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

 

•                  In January 2001, prior managementagreed to refund, in exchange for stock, $7,100,000 to several investors whohad purchased a total of 355,000 shares of Correlantcommon stock during fiscal 2000.  Priormanagement gave $7,100,000 to Hywin InvestmentsLimited (“Hywin”), a shareholder of the Company, whowas to return the funds to the individual investors and return the stock to Opta.  However, theshares were never returned to the Company.  In connection with the refund, Hywin refundedto us $1,065,000 of commissions relating to the shares to be returned. TheCompany investigated the transaction and was unable to recover the funds.  As a result, the net amount of $6,035,000 wasexpensed.

•                  In December 2000, prior managementagreed to refund, in exchange for stock, $1,500,000 received in connection withOpta’s previous sale of shares of Arescomstock.  Optagave the refund amount to WilliamHu, the Company’s attorney at that time, toprocess the refund.   However, the refundwas never returned to the investors and the shares were never returned tous.  We investigated the transaction andhave been unable to recover the funds. See “Item 3. Legal Proceedings.”  As a

 

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result, the $1,500,000 was expensed.

•                  In October 2000, prior managementsold shares of Correlant common stock owned by theCompany to various unrelated parties. Although the Correlant shares were transferredto the parties, the Company did not receive any of the proceeds. Weinvestigated the transaction and have been unable to recover the funds, and asa result we expensed $2,266,000.

 

Theabove fiscal 2001 expenses were offset by the $3,886,000 gain on the spin offof Regent and interest income earned on our cash and investments.

 

**Liquidityand Capital Resources**

 

TheCompany incurred net losses of $7,722,000, $6,366,000 and $18,975,000 duringfiscal 2004, 2003 and 2002, respectively. Additionally, cash used by operating activities was $27,934,000,$10,597,000, and $5,799,000 during fiscal 2004, 2003 and 2002,respectively.  At June 30, 2004, theCompany had an accumulated deficit of $105,611,000 and the Company’s soleoperating subsidiary, GoVideo, was, and still is, indefault under certain debt covenant provisions of its line of credit, discussedin detail below.  Subsequent to June 30,2004, GoVideo entered into a forbearance agreementwith its lender which is due to expire on February 28, 2005.  GoVideo iscurrently under negotiations with the lender to extend the forbearanceagreement through August, 2005.  However,there can be no assurance that GoVideo will besuccessful in this negotiation.

 

In June2003, GoVideo borrowed substantial funds from TCL Industries and Asia Focus Industrial Ltd., entitiesaffiliated with TCL, to fund inventory purchases andoperating expenses.  These advances,which are subordinate to GoVideo’s line of credit,were originally due at various dates during 2004.  GoVideo was unableto pay off the loans and extended each of the loan’s due dates threetimes.  The current due date for the loanwith TCL Industries is July 24, 2005.  The current due date for the loan with AsiaFocus Industrial Ltd. is August 11, 2005. Both loans are collateralized by 100% of the Common and Preferred SeriesD stock of Correlant Communications owned by Opta.  There can beno assurance that GoVideo will be able to pay theloans when they mature or that another extension can be successfullynegotiated.

 

During fiscal 2004, Opta entered into a financing agreement with TCL Industries.  Opta ultimately loaned the funds to GoVideoto fund inventory purchases and operating expenses.  The financing agreement has been extendedthree times with a new maturity date of July 21, 2005. The loan iscollateralized by 100% of Opta’s Common and PreferredSeries D stock of Correlant Communications.  See “**Item 13.  Certain Relationships andRelated Transactions.”**

 

AlthoughOpta expects to incur additional losses in fiscal2005, the Company believes that it will have sufficient resources to continuenormal operations.  The Company has takensteps to reorganize certain aspects of its business.  GoVideo replacedits Chief Executive Officer with the Chief Operating Officer of Opta on an interim basis to further evaluate the ongoingoperations of GoVideo.  Additionally, GoVideohas undertaken cost reduction efforts, including reducing staff, realigning theroles and responsibilities of management and reducing other operating expensesin an attempt to return to profitability. If the Company is unable to return to profitability as a result of thisrealignment, additional steps including, but not limited to, further costreductions and eliminating some of its current activities, may be necessary.

 

The following table summarizesour liquidity position and cash flows as of and for the year ended June 30,2004 (*in thousands*):

 
| Cash and cash equivalents             |   | $       | 3,037  |   |
|---------------------------------------|--------|---------|--------|--------|
| Short-term investments                |   | 17,643  |   |
| Working Capital                       |   | 25,047  |   |
| Cash used by operating activities     |   | (27,934 | )      |
| Cash used by investing activities     |   | (851    | )      |
| Cash provided by financing activities |   | 19,778  |   |

 

As of June 30, 2004, ourprincipal source of liquidity included cash and cash equivalents and short-terminvestments of $20,680,000. We used $27,934,000to fund operating activities during fiscal 2004.  Cash used in operating activities was due toan increase in both GoVideo’s inventory and accountsreceivable.  These increases were aresult of a substantial increase in GoVideo’srevenues and GoVideo coming out of bankruptcy, withliquidated assets and liabilities, moving toward a company with growingoperations.  Cash used in operations wasslightly offset by the increase in accounts payable as a result of GoVideo’s expanded operations.    We expect future cash provided (used) byoperating activities to fluctuate, primarily as a result of fluctuations in

 

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our operating results, the timing ofproduct shipments, accounts receivable collections, inventory management andthe timing of vendor payments.

 

During fiscal 2004, ourprincipal investing activities included an increased investment in our jointventure, TCL Digital and net purchases of short-terminvestments.  Cash used by investingactivities was partially offset by the sale of our joint venture, TCL Digital.

 

Duringfiscal 2004, our financing activities included borrowings on GoVideo’s line of credit and net proceeds from notespayable from related parties as discussed below.  Cash provided by financing activities wasslightly offset by the purchase of treasury stock.

 

*Cash andWorking Capital Requirements*

 

At June 30, 2004, we hadworking capital of $25,047,000 compared to $31,445,000 at June 30,2003.  The decrease in working capitalwas attributable to GoVideo’s increased borrowings,discussed in detail below, to fund operations, the wind down of Correlant’s historical operations and to a lesser extent tofund our consolidated net loss.

 

In July 2003, GoVideo entered into a financing agreement last amended andrestated in May 2004.  The originalmaximum line of credit available was $40,000,000 (reduced to $30,000,000 on July 15,2004) limited by a borrowing base determined by specific inventory andreceivable balances, and provides for cash loans, letters of credit andacceptances.  Thefinancing agreement, as amended, states that the line of credit will mature July 21,2007.  Interest was originallycharged at prime plus 1/2 percent subject to a minimum of not less than $15,000per calendar month.  GoVideopays a monthly fee on the unused balance of the line of credit of 0.25 percentper year.  The line of credit iscollateralized by all of GoVideo’s assets and up to$5,000,000 of the credit facility is guaranteed by Opta.  Under the current credit facility, GoVideo is required to comply with certain financial covenantsand conditions including minimum levels of net income.  During April and June, 2004 GoVideo did not comply with the financial covenants by notearning the required minimum net income. GoVideo received a waiver letter from thelender for the April 2004 noncompliance. However, the lender will not waive the June 2004noncompliance.  As a result, on June 1,2004, interest began accruing at the default rate of prime plus 3 1/2%.  Subsequent to June 30, 2004, GoVideo entered a forbearance agreement with the lender.

 

On November 1, 2004, GoVideo entered aforbearance agreement (“Agreement”) with its line of credit lender as a resultof the noncompliance with the financial covenants as discussed above.  Subsequent to fiscal 2004, GoVideo did not comply with the financial covenants as therequired minimum net income was not achieved during the months ended July 31,2004 and August 31, 2004.  In theAgreement, GoVideo agreed to the followingsignificant conditions:

 

•                  To pay all the lender’s costs andexpenses associated with existing default;

•                  To pay $15,000 by January 15, 2005as consideration of forbearance and other accommodations provided by the lenderunder the Agreement, which has since been paid;

•                  To pay the lender all the accruedinterest at the default rate for the period between June 1, 2004 and September 1,2004 in the amount of $122,000;

•                  To not pay any subordinate indebtednessor interest; and

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

 

The Agreement 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 permonth requirement for the period of October 1, 2004 through December 31,2004.  GoVideohas not met all the amended monthly financial requirements.

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

•                  A reduction in the Borrowing Base.

 

 

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If the Company is successfulextending its forbearance agreement, the current forecast shows the Companywill have enough working capital to continue as a going concern for the 12months following the date of this filing. However, if the Company is not successful extending its current forbearanceagreement with its lender then the Company will have to take steps towardsliquidating significant assets in order to repay its lender.  This would likely lead to significant losseson the liquidation of these assets. Additionally, should our capital requirements exceed cash available fromoperations we cannot assure that additional sources of financing would beavailable to us on commercially favorable terms, if at all.

 

*ContractualObligations*

 

The following table summarizesour contractual obligations at June 30, 2004, and the effect suchobligations are expected to have on our liquidity and cash flows in futureperiods (*in thousands*):

 
| ** **                         | ** ** | **Payments  Due by Period** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **Total**                   | ** ** | **Less  Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More  Than  5 Years** | ** ** |
|                               |       |                        |       |   |   |   |   |   |   |   |   |
| Operating lease obligations        |       | $                           | 1,718      |   | $ | 859 |   | $ | 859 |   | $ | — |   | $ | — |   |
| Capital lease obligations          |       | —                      |       | — |   | — |   | — |   | — |   |
| Inventory purchase obligations     |       | 32,575                      |       | 32,575 |   | — |   | — |   | — |   |
| Total contractual cash obligations |       | $                           | 34,293     |   | $ | 33,434 |   | $ | 859 |   | $ | — |   | $ | — |   |

 

All our operating leaseobligations are building leases.

 

*Off-BalanceSheet Arrangements*

 

At June 30, 2004, 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.

 

***Significant Trends***

 

Thefollowing is a description of the most significant recent trends in ourconsumer electronic business segment:

 

Traditionalconsumer electronics continue to be exposed to downward price pressure. We have responded, and will continue to respond to this negative trend throughthe introduction of new value-added products and models in home entertainmentincluding MP3 players, DVD-related products and LCD displays and by increasingthe number of unit sales.   The difficulty of this trend is managingthrough price decreases as we outsource all manufacturing.  Generally, weare able to obtain competitive pricing in all product categories. However, managing the timing of future price decreases and obtainingforward pricing to protect our inventory as well as our customer’s inventoryhas been challenging.

 

GoVideo, as wellas the consumer electronics industry in general, has been subject tosubstantial price competition.  Inaddition, consumer electronics companies in Asia, particularly those from Koreaand China, pose a severe threat through price competition.  We anticipate this trend to continue.  And as a result, the Company realignedmanagement’s roles and responsibilities to have better control and more closelymanage GoVideo’s products which should allow for moreefficient responses to market opportunities and threats.

 

*DVD players and recorders.***As a result of the dramatic expansion of the DVD market, DVD playershave become commodity products and suffer from significant pricecompetition.  The DVD Recorder + VCR was one of our fastest growingproduct areas during fiscal 2004 and 2003, and we believe we arewell-positioned to face the competition because of our strategic relationshipswith manufacturers, our expected reduction of manufacturing costs and ourefforts to introduce new innovative, high-end and value-added products.

 

*LCD displays.*The large-screen display market for LCDdisplays has been expanding in recent years.    As the markethas increased so has the number of companies that compete with our products.Each company is

 

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increasing investmentand expanding production. As the number of companies entering this marketincreases, it is expected that the unit price will continue to decrease due tointensifying competition.  As a result of this trend, we have taken acautious approach to this market and have limited our activity to only a fewmodels until such time as we believe the volatility in this market can besafely managed.

 

*MP3 Players*.  Wecontinue to capitalize on the increased demand for digital consumer electronicsby introducing our Rave MP3 players both domestically and internationally.

 

Wewill continue to invest in product development and the manufacturing process aswe believe these are both critical to facilitate innovation of new and improvedproducts and technologies.  We will also continue the expansion of ourdistribution network to effectively reach more of our targeted customers.

 

***BusinessOutlook***

 

Following the takeover of theBoard of Directors of the Company on June 29, 2001, new management of theCompany began a thorough review of all aspects of the business operations ofthe Company and its subsidiaries.  Sincethe takeover, we have engaged in numerous transactions to restructure andrefocus our business.

 

Since the takeover, our primarystrategy for business operations has been to restructure our unprofitablebusinesses, acquire undervalued companies (such as GoVideo) and focus onprofitable growth.  We aggressively sold,restructured or shutdown our businesses which were either not consistentlygenerating cash from operations or which could have required future significantcash investments to become consistently cashflowpositive.  As a result of this effort, wecurrently have one subsidiary with operations (GoVideo) and one subsidiarywith no operations (Correlant)but with significant cash and other assets. We seek to identify market opportunities that complement currentoperations, create and accelerate the growth and success of GoVideoand to implement new business plans to improve the returns on these businesses.

 

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

 

•                  Significant experience of currentmanagement in the consumer electronics and communications industry;

•                  Business opportunities in China and Asiathrough the strength of our relationships with significant shareholders,including TCL who is our majority shareholder.  TCL is anaffiliated company of TCL International (HKSE: 1070), a leading multimedia consumer electronics productmanufacturer, with a strong brand presence in China and Asia.  TCL International’score products include televisions, mobile handsets, personal computers,audio-visual equipment as well as information technology services.  Under its highly recognized andwell-established TCL brand, it is one of thestrongest players in the TV and mobile handset marketplace in China.Headquartered in China, it operates a number of highly efficient manufacturingbases in Asia.  On November 3, 2003,TCL International and Thomson (EuronextParis: 18453; NYSE: TMS) signed a memorandum of understanding to form a jointventure company named TCL-Thomson Electronics for thedevelopment, manufacturing and distribution of television sets and relatedproducts and services.   The jointventure’s operations commenced August 1, 2004.  Its objectives are to consolidate its globalTV leader position, offer a complete and high-quality product range from basicto high-end innovative products, address all key markets competitively by leveragingan efficient cost structure, and seize development opportunities in thefast-growing Chinese market.

•                  GoVideo brand recognition; and

•                  The ability to increase market share byintroducing TCL products into the U.S. using oursubsidiary – GoVideo’s – existing distributionchannels.

 

As we look to the future, weare planning for growth in annual revenues as a result of revenues generatedfrom GoVideo. And although consumer electronics historically have alower gross margins than our past gross margins realized from MAC+software and cable modem-related products, we expectgross margin dollars to continue to increase as a result of increasedrevenue.  Our strategy will remain withinour core competency of consumer electronics and telecommunications as we attemptto gain strength, momentum and market share in the U.S. and abroad.

 

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***CertainFactors That May Affect Future Results***

 

*Forward Looking Statements.** *This AnnualReport on Form 10-K contains certain statements that are forward looking withinthe meaning of Section 27A of the Securities and Exchange Act of 1933, asamended, and Section 21E of the Securities and Exchange Act of 1934, asamended, that involve risks and uncertainties. Any statements contained herein (including, without limitation,statements to the effect that the Company or management “estimates,” “expects,”“anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” or “will”or statements concerning “potential” or “opportunity” or variations thereof orcomparable terminology or the negative thereof), that are not statements ofhistorical fact should be construed as forward looking statements.   All statements that address operatingperformance, events or developments that our management expects or anticipatesto incur in the future, including statements relating to sales and earningsgrowth or statements expressing general optimism about future operatingresults, are forward-looking statements. These forward-looking statements are based on our management’s currentviews and assumptions regarding future events and operating performance.  Many factors could cause actual results todiffer materially from estimates contained in our management’s forward-lookingstatements including the factors listed at pages 33 - 35.   The differences may be caused by a varietyof factors, including but not limited to adverse economic conditions,competitive pressures, inadequate capital, unexpected costs, lower revenues,net income and forecasts, the possibility of fluctuation and volatility of ouroperating results and financial condition, inability to carry out marketing andsales plans and loss of key executives, among other things.  Because of these and other factors that mayaffect our operating results, past performance should not be considered anindicator of future performance and investors should not use historical resultsto anticipate results or trends in future periods.

 

*GoVideo**may need additional capital resources*. We believe GoVideo’s cash flow fromoperations, borrowings under its credit facility and related party debt aresufficient to fund existing operations for the foreseeable future.  See “**Liquidityand Capital Resources.”**** **However, GoVideomay need additional capital to operate if:

 

•                  Market conditions change;

•                  Business plans or assumptions change;

•                  Acquisitions are pursued;

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

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

 

*TheCompany has experienced a history of recurring operating losses and may nothave liquidity necessary to execute its strategy and return toprofitability. *GoVideo is under a forbearance agreement withits lender on its line of credit due to financial covenant violations withrespect to net losses incurred by GoVideo.  The Company is negotiating an extension ofthe forbearance period from the current expiration date of February 28,2005 to August 31, 2005.  This sixmonth extension, if granted, will allow the Company to execute its strategy ofreturning the Company to profitability. Should the Company be unable to execute both the negotiation ofextending its forbearance agreement and the execution of its strategies toreturn to profitability, the Company may not have the liquidity to continue asa going concern.

 

*Therestatement and reaudit of our financial statementsand the potential for review of our financial disclosure could materiallyimpact our business and results of operations. *Followingthe replacement of prior management, the new management began reviewing varioustransactions undertaken by old management prior to June 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 preliminaryresults, the Company dismissed the then existing independent accountants, hirednew independent accountants and reaudited all periodsunder investigation.  The Companycompleted the restatement of previously reported financial statement in its Form10-K for fiscal 2002 filed April 16, 2004.

 

As a result of the restatement and reaudit ofour financial statements for fiscal 2001, 2000 and 1999 and the resulting delayin filing SEC reports, the SEC or other governmental authorities may choose toreview our SEC filings.  If we arerequired to respond to the SEC or other governmental authorities or otherwisetake actions in response to, arising out of, or relating to the restatement andreaudit of our financial statements, such actions mayrequire significant attention and resources of management and, regardless ofthe outcome, could materially impact our business and results of operations.

 

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If we become subject to such heightened scrutiny, this could adverselyaffect investor confidence, our ability to access the capital markets and causethe trading price for our securities to decline. In addition, we cannot assureyou that we will not have to further restate earnings or further revise ourreports for prior periods as a result of any SEC review.  Any such restatement could further impactinvestor confidence, our ability to access the capital markets and the tradingprice of our securities.

 

*We and ourindependent auditors have identified a number of material weaknesses related toour internal control over financial reporting, which could continue to impactour ability to report our results of operations and financial conditionaccurately 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.   As a result, on January 19, 2005, the Company’s external auditorsinformed the board of a “reportable condition” that constituted a “material weakness”in our internal control over financial reporting.   While we are implementing steps to ensurethe effectiveness of our internal control over financial reporting, failure torestore the effectiveness of our internal control over financial reporting couldcontinue to negatively impact our ability to report our financial condition andresults of operations accurately and could have a material adverse effect onour business, results of operations, financial condition and liquidity.

 

*If theCompany is unable to take the necessary corrective action to strengthen itsdisclosure controls, its ability to report its financial results on a timelyand accurate basis may be adversely affected*. Based upon the evaluation of our control weaknesses as discussed above,we concluded that our disclosure controls and procedures need to bestrengthened and 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, materialweaknesses in our internal controls over financial reporting could furtheradversely impact our current inability to report timely financialinformation.  If the current inability toreport timely is exacerbated by weak disclosure controls, this could result infurther accounting restatements or other accounting related problems and we couldface greater scrutiny from the SEC.

 

*Additionaldelays in reporting.*  Since the restatement and reaudit of our financial statements discussed above, wehave been unable to become current with respect to all SEC requiredfilings.  This compounds the potentialproblems associated with the original reaudit of ourfinancial statements for the fiscal years ended June 30, 2001, 2000 and1999 and the resulting delay in filing our Form 10-K for fiscal 2002, 2003 and2004.

 

*The Companyfaces tough competition.*The Company’s only operating subsidiary GoVideoplays a unique niche in a highly competitive industry: consumerelectronics.  GoVideocompetes against many well established companies including many originalequipment manufacturers (“OEM”) who have substantially greater financial andother resources than the Company. Additionally, the consumer electronics industry is empirically facing atrend of declining gross margin resulted from emerging global market andcompetition.  Although GoVideo was profitable in fiscal 2003, it was notprofitable during fiscal 2004.  Thecompetitive nature of the industry may further negatively affect the Company’searnings if GoVideo is unable to quickly adapt to thetechnological and market changes of the industry.

 

*GoVideo’s**customers have the ability to go straight to thecontract manufacturer. *GoVideo has no manufacturing capabilities.  All products are purchased from contractmanufacturers.  Because of this, there isnothing stopping GoVideo’s customers from purchasingproducts direct 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 on these sources to meet ourproduction requirements.  We do not haveany long term supply contracts.  Althoughwe do not presently anticipate a disruption in this source of supply, if it isnecessary for us to obtain these key components from an alternative supplier,it could take several months before receiving adequate supplies, and duringthis time we would be unable to satisfy our customers’ demands.  In such event, prolonged delays could resultin the cancellation of orders and the loss of customers*.*

 

*GoVideo**purchases products from countries in Asia,including China, South Korea and Taiwan, where there are risks associated withthe potential change in social, political and regulatory and economicconditions. *Significant changes in the social,political and regulatory and economic conditions could adversely affect

 

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GoVideo through increased costs, unavailabilityof goods or increased tariffs.  As a result of trade disputes,the US has occasionally imposed tariffs, regulatory procedures and importationbans on certain products.  Tradesanctions or regulatory procedures involving a country in which we conduct asubstantial amount of business could have a material adverse effect on ouroperations.

 

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

 

*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 a substantialinvestment in product inventory, the introduction of new products may force usto charge less for our existing inventory and cause such existing inventory tobecome obsolete.  Such declining pricesand inventory obsolescence could have a material adverse effect on our businessand financial results.

 

*We areexposed to the risks associated with the recent decision to cease cablemodem-related business by Correlant, our subsidiary.*The Company is actively seeking a viablebusiness model for Correlant to maximize ourstockholders’ interest.  Even if a viablebusiness model is found that will correspond with Correlant’savailable cash size, there is still no guarantee the model will succeed. * *We successfullyreduced Correlant’s cash burn rate by winding down Correlant’s historical operations in the cable modemindustry.  However, since shutting downthe operations, which was substantially completed March 2004, we have beenunable to identify and secure a viable business plan that will utilize Correlant’s assets.

 

*Our stockprice may not come back. *The Company’s stock was removed from OTCBulletin Board as a result of the Company’s failure to timely submit the Form10-K for fiscal 2002. Although Opta filed its Form10-K for fiscal 2002 on April 16, 2004, Opta isnot eligible to trade on the OTC Bulletin Board until Optabecomes current in all its required filings or files a Form 10 and clears allcomments with the SEC.  The currenttrading 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 pricemay adversely affect our ability to retain key employees.

 

*Ourexecutive officers and key personnel are critical to our business and the lossof their services could disrupt our operations and our customerrelationships. *Our success depends to a significantdegree upon the continuing contributions of our key management, technical,marketing and sales employees.  There canbe no assurance that we will be successful in retaining our key employees orthat we can attract and retain additional skilled personnel as required. Theloss of the services of key personnel could significantly harm our results ofoperations and business.

 

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.

 

***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 US. The preparation of these financial statements requires estimates andassumptions that affect the reported amounts and disclosures.

 

We believe the following, amongothers, to be critical accounting policies. That is, they are both important to the

 

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portrayal of our financial condition and resultsof operations, and they require critical management judgments and estimatesabout matters that are inherently uncertain. Although we believe our judgments and estimates are appropriate andcorrect, actual future results may differ from our estimates.

 

•                  *Revenue recognition.* We recognize revenue upon passage of title of our product in accordancewith the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin101*, Revenue Recognition in Financial Statements*(“SAB 101”), as amended by SAB101A and 101B.  At the time revenue isrecognized, GoVideo records an allowance forestimated sales returns based on estimates derived from historical trends.  Sales returns are recorded with netrevenues.  GoVideoalso establishes an allowance for estimated payment term discounts expected tobe taken by customers based on analysis of historical trends.  Payment term discounts granted are recordedin other expense.

 

•                  *Warranty Reserves*. Go Video provides limited labor and parts warranties on certain of itsproducts for a maximum of one year.  GoVideo records a warranty reserve based upon historical experience and an estimateof total exposure associated with products sold to consumers through retailoutlets.  Correlantdid not provide a product warranty.  Thewarranty liability for defective cable modems was the responsibility of the third-partymanufacturer*.*

 

•                  *Bad debt reserves*. We conduct business and extend credit based on an evaluation of ourcustomers’ financial condition generally without requiring collateral. Exposureto losses on trade receivables is expected to vary by customer due to thefinancial condition of each customer. We monitor exposure to credit losses andmaintain allowances for anticipated losses considered necessary under thecircumstances. Delinquent notes and trade accounts receivable are chargedagainst the allowance for doubtful accounts once 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.  We evaluate the past-due status of our notesand related parties and trade receivables based on contractual terms of sale.If the financial condition of our customers were to deteriorate, this couldresult in an impairment of ability to make payments, and additional allowancesmay be required.

 

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

 

•                  *Inventories.* GoVideo’sinventory consists of mostly finished goods, some of which are in transit fromits contract manufacturer.  Correlant’s inventory consisted primarily of integratedcircuits and other components to be used in the manufacture of cablemodems.  Inventories are stated at thelower of cost or market with cost being determined on a first-in, first-out basis.  We write down our inventory for estimatedobsolescence or unmarketable inventory equal to the difference between the costof the inventory and the estimated market value based upon assumptions aboutfuture demand and market conditions.  Dueto the aforementioned change in Correlant’s businessmodel and the timing of Correlant’s product lifecycle, the inventory was fully reserved at June 30, 2003. It remainedfully reserved until the shutdown of Correlant’shistorical operations in the cable modem and cable modem-related market.

 

•                  *Investments.* Our investments consist primarily of debt securities.  Investments are stated at fair value based onquoted market prices obtained from an independent banker.  Investments are classified asavailable-for-sale based on management’s intended use.  As of June 30, 2004 the cost of ourinvestments approximated fair value. Currently we do not have any equity investments in publicly tradedcompanies.  During the period covered bythis Annual Report, we held noncontrolling interestsin private companies with no active market, which required fair values to beestimated.  We recorded an investmentimpairment charge when we believe an investment has experienced a decline invalue that is other than temporary.

 

•                  *Valuation of goodwill and otheridentifiable intangible assets. * We actively pursued the acquisition ofbusinesses, which resulted in significant goodwill and other identifiableintangible assets.  We assess theimpairment of goodwill and other identifiable intangible assets whenever eventsor changes in

 

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circumstances indicate the carrying value may not be recoverable.  Factors which trigger an impairment reviewinclude, but are not limited to, the following: (1) significant negativeindustry or economic trends; (2) current, historical or projected losses thatindicate continuing losses; and (3) a significant decline in our marketcapitalization relative to net book value. When we determine there is an indicator the carrying value of thegoodwill or other identifiable intangible assets may not be recoverable, wemeasure impairment based on estimates of future cash flow.  These estimates include assumptions aboutfuture conditions within the Company as well as the entire industry.

 

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

 

***RecentlyIssued Accounting Standards***

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation (“FIN”) FIN 46, *Consolidation of Variable Interest Entities*(“FIN 46”). FIN46 was revised in December 2003. FIN 46 establishes accounting guidance for consolidation of a variableinterest entity (“VIE”), formerly referred to as special purpose entities. FIN46 applies to any business enterprise, both public and private, that has acontrolling interest, contractual relationship or other business relationshipwith a VIE. FIN 46 provides guidance for determining when an entity (“PrimaryBeneficiary”) should consolidate a VIE that functions to support the activitiesof the Primary Beneficiary. The application of FIN 46 is required for periodsending after December 15, 2003.   Weadopted FIN 46 during fiscal 2004. We has no contractual relationship or otherbusiness relationship with a VIE, and therefore the adoption of FIN46 had no effect on our financial position, results ofoperations, or cash flows as of or for the year ended June 30, 2004.

 

In January 2003, the Emerging Issues Task Force (“EITF”) published EITF Issue00-21, *Revenue Arrangements with Multiple Deliverables*(“EITF 00-21”), which requires companies to determinewhether an arrangement involving multiple deliverables contains more than oneunit of accounting. In applying EITF 00-21, revenuearrangements with multiple deliverables should be divided into separate unitsof accounting, if the deliverables in the arrangement meet certain criteria.Arrangement consideration should be allocated among the separate units ofaccounting based on their relative fair values. This issue is effective forrevenue arrangements entered into in fiscal periods beginning after June 15,2003.  We adopted EITF00-21 during fiscal 2004. 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, 2004.

 

In April 2003, the FASB issued Statementof Financial Accounting Standards (“SFAS”) 149, *Amendment of Statement 133 on Derivative Instruments and HedgingActivities*(“SFAS 149”).  SFAS 149 amends and clarifies financial accounting andreporting for derivative instruments and hedging activities.  SFAS 149 is effective for contracts entered into ormodified after June 30, 2003.  Weadopted SFAS 149 during fiscal 2004. The adoption didnot have a material effect on our financial position, results of operations, orcash flows as of or for the year ended June 30, 2004.

 

In May 2003, the FASB issued SFAS 150, *Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*(“SFAS 150”).  SFAS 150represents the first phase of the FASB’s project toclarify the accounting treatment of certain instruments that possesscharacteristics of both liabilities and equity.  SFAS150 generally requires that freestanding financial instruments that obligatethe issuer to redeem the holders’ shares, or are indexed to such an obligation,and are settled in cash or settled with shares meeting certain conditions betreated as liabilities.  The provisions of SFAS150 are effective immediately for instruments entered into or modified afterMay 31, 2003 and to all other instruments that exist as of the beginning of thefirst interim financial reporting period beginning after June 15, 2003,with the exception of mandatorily redeemableinstruments of non-public companies, which become subject to SFAS 150 for fiscal periods beginning after December 15,2003.  We do not expect SFAS 150 to impact theclassification of its outstanding preferred stock instruments upon our adoptioneffective July 1, 2004.

 

In November 2004, the FASB issued SFAS 151, Inventory Costs, which revised ARB No. 43, relating to

 

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inventory costs.This revision is to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs and wasted material (spoilage). This Statementrequires that these items be recognized as a current period charge regardlessof whether they meet the criterion specified in ARB43. In addition, this Statement requires the allocation of fixed productionoverheads to the costs of conversion be based on normal capacity of theproduction facilities. SFAS 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005.  We do not believe the adoption of SFAS 151 will have a material impact on our financialstatements.

 

In December 2004, the FASB issued SFAS 123R, *Share-Based Payment*(“SFAS 123R”) is a revision of SFAS123 and supersedes APB 25. Among other items, SFAS123R eliminates the use of APB 25 and the intrinsic value method of accounting,and requires companies to recognize the cost of employee services received inexchange for awards of equity instruments, based on the grant date fair valueof those awards, in the financial statements. The effective date of SFAS 123R is the first reporting period beginning after June 15,2005.  SFAS123R permits companies to adopt its requirements using either a “modifiedprospective” method, or a “modified retrospective” method. Under the “modifiedprospective” method, compensation cost is recognized in the financial statementsbeginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after thatdate, and based on the requirements of SFAS 123 forall unvested awards granted prior to the effective date of SFAS123R. Under the “modified retrospective” method, the requirements are the sameas under the “modified prospective” method, but also permits entities torestate financial statements of previous periods based on proformadisclosures made in accordance with SFAS 123.

 

The Company currently utilizes a standard option pricing model (i.e.,Black-Scholes) to measure the fair value of stockoptions granted to Employees. While SFAS 123R permitsentities to continue to use such a model, the standard also permits the use ofa “lattice” model. The Company has not yet determined which model it will useto measure the fair value of employee stock options upon the adoption of SFAS 123R.

 

The Company currently expects to adopt SFAS123R effective July 1, 2005.  However, because the Company has not yet determined which of theaforementioned adoption methods it will use, the Company has not yet determinedthe impact of adopting SFAS 123R.  

 

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

 

*Interest Risk*.   Our exposure to market risk for changes ininterest rates relates primarily to our investment portfolio. We do not usederivative financial instruments in our investment portfolio.  We place our investments with high creditquality issuers and, by policy, limit the amount of credit exposure to any oneissuer.  We are averse to principal lossand ensure the safety and preservation of invested funds by limiting defaultrisk, market risk, and reinvestment risk. We minimize our risk by investing in only the safest and highest creditquality securities and by constantly positioning our portfolio to respondappropriately to a significant reduction in a credit rating of any investmentissuer or guarantor.  Our portfolioincludes only corporate debt and government securities.

 

*Foreign Currency Risk*.   Until January 31, 2002 a large portionof Correlant’s business was transacted inTaiwan.  However, the functional currencyof our Taiwan branch was the U.S. dollar. Only a small number of transactions were denominated in the Taiwandollar and exposed to foreign currency exchange rate risk.  Subsequent to January 31, 2002, as partof the change in Correlant’s business model, weclosed our Taiwan branch.  Alltransactions, with the exception of Beijing Lotus, which has no material independentoperations, are now denominated in the U.S. dollar.  Therefore, we do not have any hedging orsimilar foreign currency contracts.  Todate, we have not experienced any material foreign currency exchange rate gainsor losses associated with transactions denominated in the Taiwan dollar or theChinese RMB and do not expect any significant changesin foreign currency exposure in the near future.

 

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

 

The information required byItem 8 is included on pages F-1 to F-36.

 

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

 

There were no changes in ordisagreements with accountants on accounting and financial disclosure duringfiscal 2004.

 

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**Item 9A.****  Controlsand Procedures**

 

***InternalControl over Financial Reporting***

 

In connection with the audit ofour financial statements for the year ended June 30, 2004, Hein &Associates LLP (“Hein”), our independent auditors,informed the Board of Directors on January 19, 2005 of a “reportablecondition” that constituted a “material weakness” in our internal control overfinancial reporting under standards established by the American Institute ofCertified Public Accountants, or AICPA. A materialweakness was defined for the applicable periods as a reportable condition inwhich the design or operation of one or more of the internal control componentsdoes not reduce to a relatively low level the risk that misstatements caused byerror or fraud in amounts that would be material in relation to the financialstatements being audited may occur and not be detected within a timely periodby employees in the normal course of performing their assigned functions. Areportable condition was defined for the applicable periods as a matter thatrelates to significant deficiencies in the design or operation of internalcontrols that could adversely affect an organization’s ability to record,process, summarize and report financial data consistent with the assertions ofmanagement in the financial statements. The following material weaknessesand/or reportable conditions in our internal controls during the fiscal yearended June 30, 2004 were identified:

 

•                  The currentorganization of the accounting department does not provide Optawith the adequate skills to accurately account for and disclose significanttransactions or disclosures.

•                  Certain keymanagers in the accounting department do not appear to have the knowledge andexperience required for their responsibilities.

•                  Substantivematters are not being addressed appropriately by the Board and Audit Committeeresulting in inadequate oversight from the Board and Audit Committee.

•                  The processthat Opta is currently using to monitor the ongoingquality of internal controls performance, identify deficiencies and triggertimely corrective action is not working effectively.

•                  There is noadequate means of accurately capturing and recording certain significant andcomplex business transactions.

 

Basedupon the Company’s evaluation, which considered the above findings of Hein, theCompany’s management, including the Chief Executive Officer, Chief FinancialOfficer and the Chief Operating Officer concluded that, as of June 30,2004, the Company’s internal controls over financial reporting were noteffective.

 

***Changes in Internal Control***

 

Weare in the process of taking a number of steps to improve the effectiveness ofthe Company’s internal control, including the following:

 

•                  Locating andhiring an employee, a certified public accountant (“CPA”), with the appropriatelevel of experience and expertise to take over our financial reportingprocess.  Until such time as a permanentemployee can be located and hired, we have engaged an independent consultant,and may increase these resources, to supplement the Company’s finance andaccounting functions and to support the preparation of the consolidatedfinancial statements and related information included in this report.

•                  Once we hirean internal CPA dedicated to the financial reporting process, we plan toreorganize and restructure our accounting department to ensure that accountingissues are addressed, documented, approved and resolved.

 

Atthe same time as we continue our efforts to improve our internal control,management of the Company has implemented a number of additional procedures andcontrols, including testing, review and evaluation, to mitigate recognizeddeficiencies specifically for the preparation of the financial statements forthe periods covered by this Annual Report on Form 10-K. Managementbelieves that these procedures and controls were effective in ensuring theproper collection, evaluation and disclosure of the financial information forthe periods covered by this report and that the financial statements includedin this report are fairly stated in all material respects.

 

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Theeffectiveness of the Company’s or any system of disclosure controls andprocedures and internal control over financial reporting is subject to certainlimitations, including the exercise of judgment in designing, implementing andevaluating the controls and procedures, the assumptions used in identifying thelikelihood of future events, and the inability to eliminate misconductcompletely. As a result, the Company’s disclosure controls and procedures andinternal control over financial reporting may not prevent all errors orimproper acts or ensure that all material information will be made known toappropriate management in a timely fashion.

 

We will continue efforts toimprove our internal controls and will complete our process of documentationand testing requirements under Section 404 of the Sarbanes-Oxley Act of2002. Opta will be required by theSarbanes-Oxley Act to include an assessment of its internal control overfinancial reporting and attestation from an independent registered publicaccounting firm in its Annual Report on Form 10-K beginning with itsfiling for its fiscal year ended June 30, 2006.

 

***DisclosureControls and Procedures***

 

Thedefinition of disclosure control is whether or not material information isrecorded, processed, summarized and reported in a timely manner.  Although the communication from ourindependent auditors on January 19, 2005 as discussed above did not specificallymention a weakness with respect to “disclosure controls and procedures,”management, including the Chief Executive Officer, Chief Financial Officer andChief Operating Officer concluded, that as of June 30, 2004, the materialweakness conditions noted above also relate to adequate disclosure controls andprocedures.  The interim and longer termsteps listed above under *Changes in InternalControl* are applicable to improving the effectiveness of ourdisclosure controls and procedures.  Inaddition to the steps noted above, we created a Disclosure Committee to ensurecompliance with the disclosure controls and procedures and to evaluate theeffectiveness of those controls and procedures on a regular basis.  The goal of the newly formed Disclosure Committeeis to strengthen the Company’s disclosure controls and procedures.  As part of the Disclosure Committee’s policy,we plan to advise employees that if they become aware that our publicdisclosures are not accurate, complete and timely, or become aware of atransaction or development they believe may require disclosure, employeesshould report the matter immediately to a member of the DisclosureCommittee.  Our Disclosure Committeeincludes our Chief Executive Officer, Chief Financial Officer, Chief OperatingOfficer and Controller.

 

 

**Item 9B.****  OtherMatters**

 

None.

 

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**PART III**

** **

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

 

*(A) Opta Corporation Directors*

 

The Company has five Directorselected in three separate classes. One Director serves as a Class I Director, and will serve fora term which was scheduled to expire at the 2002 Annual Meeting ofstockholders, or until their successors are duly elected and qualified or untiltheir death, resignation or removal. One director serves as a Class IIDirector, and will serve for a term which was scheduled to expire at the 2003Annual Meeting of stockholders, or until their successors are duly elected andqualified or until their death, resignation or removal. Three Directors serveas Class III Directors, and each will serve for a term which was scheduledto expire at the 2004 Annual Meeting of stockholders, or until their successorsare duly elected and qualified or until their death, resignation or removal.The following table sets forth certain information with respect to thedirectors and executive officers of the Company as of January 31, 2005:

 
| **Name**          | ** ** | **Age** | ** ** | **Office**                                             | ** ** |
|-------------------|------------|---------|------------|--------------------------------------------------------|------------|
| LI, Dongsheng     |       | 47      |       | 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      |       | 41      |       | Class I Director                                       |       |
| LIN, Jih-Ming     |       | 52      |       | Class III Director                                     |       |

 

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

 

Mr. Vincent Yong Yan was elected as a Class II Director of the Company on June 29,2001. Mr. Yan has been the President, CEO andSecretary of the Company since June 29, 2001. Mr. Yanwas the CFO of the Company from June 29, 2001 until November 2002.  Mr. Yan also hasserved as a Vice President, director and member of the Executive Committee ofthe board of directors of Correlant since February 2003.  Mr. Yan has beenExecutive Director and Chief Financial Officer of TCLInternational Holdings, Ltd., a publicly traded consumer electronics andinformation technology company since 1999. Mr. Yan was appointed CFO of TTE Corp., a joint venture between TCLand Thomsom  S.A. in2004.  Additionally, he was electedchairman of the board of TTE Corp in 2004 andChairman of the Board of TCL-Alcatel in December,2004.  Prior to joining TCL, Mr. Yan served as PRC Country Manager of Tulip Computers (Asia) Ltd., asubsidiary of a European computer manufacturer. Mr. Yanhas over ten years of experience in the computer and consumer goods industries.Mr. Yan holds an MBA from Stanford University and aMasters degree in Computer Science from Peking University.

 

Mr. James Jian Liu was appointed as a Class III Director of theCompany on August 6, 2001. Mr. Liu also has served as a director of Correlant since February 2003. Mr. Liu served asPresident of JBL International Inc., an apparelagent in New York, New York, from January 1996 to the present.  He earned his BA degree from Nanjing University, China.

 

Professor ZuoquanLin was appointed as a Class I Director on March 25, 2002. Professor Linalso has served as a director of Correlant since February 2003.He is currently the Dean of the Department of Information Science, a positionhe has held since 1998, and is the Director of the Networking Research andDevelopment Center at Peking University, China, having held the position since1999. His main areas of research include computer software, artificialintelligence, network economy and management information system. Professor Linalso is currently an independent consultant in enterprise strategy andinformation technology. From 1995 to 1997, he was the Director of the Instituteof Computer Sciences at Shantou University,China.  Professor Lin holds a Ph.D. incomputer science from Bei Hang Univerityin Beijing, China.

 

Mr. Jih-MingLin was elected a Class III Director of the Company on June 29, 2001.Mr. Lin has been Vice

 

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President of Techlab Tech Inc., a Taiwanese semiconductormanufacturer, since 1998. From 1992 to 1998, Mr. Lin served as VicePresident of National Advantages Computer, Inc., a computer productsmanufacturer. Mr. Lin has 16 years of experience in the semiconductorindustry. Mr. Lin is a graduate of Defense Medical Industry inTaiwan.  Mr. Lin did not attend any Opta board meetings during fiscal 2004, nor has he attendedany meetings subsequent to fiscal 2004.

 

There were no changes inprocedures for nominating Opta directors during thefiscal year ended June 30, 2004.

 

After the filing of this Form10-K, the Company plans to hold an election for all the members of the Board ofDirectors by written consent.

 

*(B) Opta Corporation Executive Officers*

 
| **Name**            | ** ** | **Age** | ** ** | **Office**                                             | ** ** |
|---------------------|------------|---------|------------|--------------------------------------------------------|------------|
| YAN, Vincent Yong   |       | 42      |       | President, Chief Executive  Officer, Class II Director |       |
| DAVIS, Steve        |       | 36      |       | Chief Financial Officer                                |       |
| WANG, Sean Shaojian |       | 41      |       | Chief Operating Officer                                |       |

 

See discussion related to Mr. Yan above.

 

Mr. Davis was appointed as theCompany’s Chief Financial Officer in March 2004 and will serve until his successoris appointed and approved.  Mr. Davispreviously served as the Company’s Controller since October 2002.  Mr. Davis also has served as Vice Presidentof Correlant since March 2003 and ChiefFinancial Officer of the Company’s subsidiary OptaSystems, LLC, dba  GoVideo,since July 2003.  Prior to joiningthe Company, Mr. Davis served as Controller and Chief Financial Officer for anumber of start-up or financially distressed companies including BuyGolf.com, iWear Corp andAviation Distributors, Inc. from July 1998 until October 2002.   Prior to this Mr. Davis was with Ernst &Young LLP for eight years, from September 1990to July 1998, mostrecently as Senior Manager.

 

Sean ShaojianWang was appointed as the Company’s Chief Operating Officer in June 2004.  Mr. Wang served as the Chief FinancialOfficer, from 2002 to 2004, of PacificNet, Inc., acompany in Minneapolis, Minnesota whose shares are traded on NASDAQ (Symbol: PACT).  PacificNet, Inc.,through its subsidiaries, invests, operates and provides value-added telecomservices (“VAS”) and products solutions in China. From 1993 to 2002, Mr. Wangserved as a managing director of Thian BingInvestments PTE, Ltd. in Singapore, an investmentcompany in oil seeds planting, edible oil processing, packing materials and theother related industries. Mr. Wang graduated from HamlineUniversity in St. Paul, Minnesota with a Bachelor of Science in 1986 and fromthe University of Minnesota with a Masters of Business Administration in 1989.

 

None of the members of theBoard of Directors or executive officers of the Company arerelated to one another.

 

(C)  *Section 16(a)Beneficial Ownership Reporting Compliance*

 

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

 

The following four directorsdid not tender their Form 4 when their association with the Company wasterminated: Robert Lo, Chris Ching, Chung-I Chiang,and William Hu.

 

(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.  The Company will provide a copy of our codeof ethics to any person, free of charge, upon written request sent to ourprincipal executive office.

 

(E)  *Audit Committee*

 

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. Jian Liu

 

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and Zuoquan Linare the members of our Audit Committee. The Audit Committee represents the Board of Directors in discharging itsresponsibility relating to the accounting, reporting and financial practices ofthe Company and its subsidiaries and shall have general responsibility forsurveillance of the systems of internal controls, which management and theBoard of Directors have established, the performance and selection ofindependent auditors, and our audit and financial reporting processes.   Opta has no “auditcommittee financial expert” as defined in Item 401(h) ofRegulation S-K and iscurrently considering whether to retain a financial expert.

 

**Item 11.****  ExecutiveCompensation**

 

The following table sets forthfor the periods presented the compensation for services in all capacities tothe Company of the persons who were the (i) thechief executive officer of the Company, and (ii) the four most highlycompensated executives officers, other than the chief executive officer, whoreceived over $100,000 in compensation during the fiscal year (collectively,the “Named Officers”).

 

**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)                |       | 2004                     |       | $                           | 180,000    |      | $          | 150,000 |   | — |   | — |   | — |   |   |   | $ | 39,000 |   |
| President, Chief                 |       | 2003                     |       | 120,000                     |       | —    |       | — |   | — |   | — |   | — |   | 39,000 |   |
| Executive Officer                |       | 2002                     |       | 120,000                     |       | —    |       | — |   | — |   | — |   | — |   | 22,000 |   |
| CFO                              |       |                     |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |
|                             |       |                     |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Steve Davis (2)                  |       | 2004                     |       | $                           | 124,000    |      | $          | 34,000 |   | — |   | — |   | — |   | — |   | — |   |
| CFO                              |       | 2003                     |       | 120,000                     |       | —    |       | — |   | — |   | — |   | — |   | — |   |
|                             |       | 2002                     |       | N/A                         |       | —    |       | — |   | — |   | — |   | — |   | — |   |
|                             |       |                     |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Sean Wang (3)                    |       | 2004                     |       | $                           | 160,000    |      | —     |   | — |   | — |   | — |   | — |   | — |   |
| COO                              |       | 2003                     |       | N/A                         |       | —    |       | — |   | — |   | — |   | — |   | — |   |
|                             |       | 2002                     |       | N/A                         |       | —    |       | — |   | — |   | — |   | — |   | — |   |
|                             |       | 2001                     |       | N/A                         |       | —    |       | — |   | — |   | — |   | — |   | — |   |
|                                  |            |                          |            |                             |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Mr. Yanhas an employment contract with the Company signed on June 29, 2001. Thecontract was automatically extended for a year on June 30, 2004.

 

(2) Mr. Davis’s salary is paidby both Opta and GoVideo.  During fiscal 2003, GoVideopaid $80,000 and Opta paid $40,000.  During fiscal 2004, GoVideopaid $84,000 and Opta paid $40,000.  Opta paid Mr. Davisa bonus of $10,000 and GoVideo paid Mr. Davis a$24,000 bonus in fiscal 2004.

 

(3) Reflects Mr. Wang’s annualsalary at the time he was appointed Chief Operating Officer in June 2004.

 

**StockOptions**

 

No current executive officer ordirector of the Company holds any stock options. No stock option grants weremade during fiscal 2004. No stock appreciation rights were granted duringfiscal 2004.

 

**OptionExercises and Holdings**

 

No current executive officer ordirector of the Company holds any option, and no options were exercised duringfiscal 2004.

 

**DirectorCompensation**

 

During fiscal 2004,non-employee directors of the Company were each offered $20,000 per year toserve on Opta’s Board of Directors, plus actualout-of-pocket expenses for attendance at each board meeting.  During fiscal 2004, only one board memberaccepted the $20,000 payment.  Although non-employeedirectors were eligible to receive an option to purchase 5,000 shares of theCompany’s common stock for each fiscal year that they serve as Directors, noDirector received such options during fiscal 2004.

 

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

 

43

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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 severanceagreement with the Company and their employment may be terminated at any timeat the discretion of the Board of Directors.

 

On June 29, 2001, theCompany entered into a one-year employment agreement with Mr. Yan for the positions of President, Chief ExecutiveOfficer, Chief Financial Officer and Secretary of the Company. This agreementmay be extended for successive one-year periods by the Company and Mr. Yan. For his services, Mr. Yanis paid an annual salary of $120,000, increased to $180,000 in fiscal 2004, andan annual bonus to be determined in the discretion of the CompensationCommittee of the Board of Directors of the Company. A copy of the employmentcontract with Vincent Yan was attached in the Company’sForm 10-K filed on October 12, 2001. During fiscal 2004, the employment agreement entered into between theCompany and Vincent Yan, CEO and President of theCompany, was extended for one year without any changes.

 

**CompensationCommittee Interlocks and Insider Participation**

 

The compensation for executive officers of the Company is reviewed anddetermined on an annual basis by the Compensation Committee of the Company’s Board; the CompensationCommittee was approved by the Board in March 2004.  The members of the Compensation Committee, Jian Liu and ZuoquanLin, are independent directors and are not employees of the Company. Neither of them are or were officers oremployees of Opta or any of its subsidiaries.

 

Before the Compensation Committee was created, compensation wasdetermined by three members of the Board of Directors, JianLiu and Zuoquan Lin who are independent directors andare not employees of the Company, and Li Dongsheng,Chairman of the Board.

 

Compensation Committee Reporton Executive Compensation

 

The role of the Compensation Committee is to oversee our compensationplans and policies, review and set compensation for the Company’s ExecutiveOfficers and perform other duties as assigned fromtime to time by the Board of Directors of the Company.

 

Base salaries are evaluated annually for all executive officers, and inparticular the Chief Executive Officer. In awarding the fiscal 2004 salary increase to the Chief ExecutiveOfficer, the Compensation Committee considered a number of differentindividual, Company and market factors. Specific factors included:

 

•                  The Chief Executive Officer’s 2003 base salary was well below marketfor similar companies.  The CompensationCommittee felt it is in the best interest of the Company to ensure the ChiefExecutive Officer’s retention by paying a base salary that is competitive withthe market.

•                  The Chief Executive Officer’s compensation had not been adjusted sincethe time he was hired.

•                  The Company, under the direction of the Chief Executive Officer, metstrategic goals set by the Board of Directors.

 

During fiscal 2004, the Company’s President and Chief Executive Officerreceived a $150,000 bonus as approved by the Compensation Committee.  The Compensation Committee based the ChiefExecutive Officer’s bonus on the following qualitative performanceachievements:

 

•                  Reviewing prior management’stransactions, which led to the restatement of Opta’sconsolidated financial statements for fiscal 2001, 2000 and 1999;

•                  Successfully arbitrating a financialsettlement with Opta’s previous auditors resultingfrom the restatement discussed above;

•                  Restructuring and shutting down Opta’s unprofitable subsidiaries; and

•                  Identifying and implementing a strategicshift in Opta’s focus to consumer electronics.

 

Now that the Company’sstrategic shift has been completed, the determination of the Chief Executive Officer’sfuture bonuses will place more emphasis on the financial performance of Opta and more qualitative measures including revenue,profitability and cash flow.

 

44

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RespectfullySubmitted:

 

CompensationCommittee

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

 

**Stock Price Performance Graph**

 

Theline graph below compares the cumulative total shareholder return on our Optacommon stock with the cumulative total return for the Standard & Poor’sSmallCap 600 Index from June 30, 2000 through June 30, 2004 and a peer group ofconsumer electronic-related companies beginning June 30, 2003.  Due to the dramatic shift in business focusfrom cable modems and cable-modem related equipment to consumer electronicsduring fiscal 2003, we are unable to present any meaningful comparisons topeers prior to June 30, 2003.  The graphassumes the value of the investment in our Opta common stock and the SmallCap600 Index was $100 at June 30, 2000 and $100 investment in consumerelectronic-related peer group at June 30, 2003. It also assumes that all dividends paid by those companies included inthe indexes were reinvested.  No cashdividends have been declared on our Opta common stock.

 

45

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Comparison of 5 Year CumulativeTotal Return*

 

Opta Corporation and Standard& Poor’s SmallCap 600 Index

 

 

*$100 invested on June 30, 2000 in stock or index – including reinvestment ofdividends.  Fiscal year ending June 30.

 

 
| ** **                      | ** ** | **June 30,** | ** ** |
|---------------------------------|------------|--------------|------------|
| ** **                      | ** ** | **2000**     | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| Opta Corporation                |       | $            | 100.00     |   | $ | 9.62 |   | $ | 0.61 |   | $ | 0.41 |   | $ | 0.81 |   |
|                            |       |         |       |   |   |   |   |   |   |   |   |
| S&P SmallCap 600            |       | 100.00       |       | 109.95 |   | 109.81 |   | 104.88 |   | 140.65 |   |
|                            |       |         |       |   |   |   |   |   |   |   |   |
| Consumer Electronic Peer  Group |       |         |       |   |   |   |   | 100.00 |   | 120.43 |   |
|                                 |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

The consumer electronic peer group iscomposed of the publicly-traded common stock of several consumerelectronic-related companies.   Webelieve the consumer electronic peer group is representative of the industry inwhich we have operated since fiscal 2003.

 

Stockholderreturns over the indicated period should not be considered indicative of futurestockholder returns.

 

46

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

 

Thefollowing table sets forth information with respect to the number of shares ofCommon Stock beneficially owned as of January 31, 2005 by (i) all personswho are beneficial owners of five percent or more of the Company’s CommonStock, (ii) the Company’s executive officers named in the SummaryCompensation Table above, (iii) each director and nominee for director ofthe Company, and (iv) all current executive officers and directors as agroup as of January 31, 2005:

 
| ** **                                                                                                                                     | ** ** | **Shares of Stock  Beneficially  Owned (1)** | ** ** | **Percentage of  Class (1)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|
| Lotus International  Holdings Ltd.(2) Suite 13 First Fl., Oliaji Trade Center Francis Rachel  Street Victoria, Mahe Republic Of Seychelle |       | 16,000,000                                   |       | 32.0                         | %          |
| TCL Industries Holdings  (HK) Ltd.(3) 13/F TCL Tower 8 Tai Chung Road Tsuen Wan, Hong Kong                                                |       | 9,606,671                                    |       | 19.2                         | %          |
| LI, Dongsheng                                                                                                                                  |       | —                                       |       | —                       |       |
| YAN, Vincent Yong                                                                                                                              |       | —                                       |       | —                       |       |
| LIU, James Jiam                                                                                                                                |       | —                                       |       | —                       |       |
| LIN, Zuoquan                                                                                                                                   |       | —                                       |       | —                       |       |
| LIN, Jih-Ming                                                                                                                                  |       | —                                       |       | —                       |       |
| DAVIS, Steve                                                                                                                                   |       | —                                       |       | —                       |       |
| WANG, Sean                                                                                                                                     |       | —                                       |       | —                       |       |
| All directors and executive  officers as a group (consisting of 7 persons)                                                                     |       | —                                       |       | —                       |       |

 

----

(1)All information is as of January 31, 2005 and determined in accordance withRule 13d-3 under the Securities Exchange Act of 1934, as amended, basedsolely upon information furnished by the persons listed or contained in filingsmade by them with the Securities and Exchange Commission.

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

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

 

InMay 1997, Opta granted 1,090,000 options to certain officers and key employeeswith an exercise price of $6.00 per share, which was the market price of Opta’scommon stock at the time of grant. Options were 100% vested when granted and expired five years from grantdate.   All such options expired duringfiscal 2002 and no such options have been granted since that time.

 

Theshareholders approved the 2000 Equity Incentive Plan (“Incentive Plan”) onApril 28, 2000. The Board of Directors administers the Incentive Plan.Employees, directors, and consultants of the Company and its affiliates, who inthe judgment of the Board render significant service to the Company, areeligible to participate. The Incentive Plan provides for the award of a broadvariety of stock-based compensation alternatives such as nonstatutory stockoptions, incentive stock options, restricted stock, performance awards andstock appreciation 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.

 

Aspart of the 1999 acquisitions of Correlant and Arescom, Opta entered intoshare exchange agreements with both Correlant and Arescom.  As stipulated by the agreements, Opta setaside a total of 1,708,000 of contingently issuable shares of Opta common stock.  The contingent shares were to be issued asCorrelant and Arescom stock options, specified in the purchase agreements, wereexercised.  For each option exercised bya Correlant stock option holder, 81% of such shares were to be transferred toOpta in exchange for 0.5364 shares of Opta common stock for each share ofCorrelant stock transferred.  For eachoption exercised by an Arescom stock option holder, 81% of such shares were tobe transferred to Opta in exchange for 0.02915 shares of Opta common stock foreach share of Arescom stock transferred. There were a total of 3,000, 1,017,000 and 1,134,000 Opta sharescontingently issuable in connection with both share exchange agreements as ofJune 30, 2004, 2003 and 2002,

 

47

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respectively.  Due to the sale of Arescom, there have beenno contingently issuable shares with respect to Arescom options since the dateof the sale in December 2001.  Due to thewind down of Correlant’s historical operations, Opta shares are no longercontingently issuable.

 

**Item 13. Certain Relationships and Related Transactions**

 

Inaddition to employment agreements discussed in Item 11, Opta entered into thefollowing transactions during fiscal 2004 required to be reported under Item 404of Regulation S-K:

 

OnSeptember 30, 2003, Opta sold its entire equity interest in TCL Digital to TCLInformation for a cash price of approximately $5,600,000 US dollars.   The Company invested $5,280,000 US dollarsto acquire the sold equity in TCL Digital. TCL Information is an affiliate ofTCL, a stockholder of the Company.  LiDongsheng and Vincent Yan, directors of the Company, are directors and officersof TCL International, a publicly traded company on the Hong Kong Stock Exchange(HKSE: 1070.HK), an affiliate of TCL.

 

OnFebruary 17, 2004, the Opta Board of Directors approved the repurchase ofapproximately 623,000 shares of Opta common stock at $0.30 per share fromGordon Lum.  Mr. Lum was appointed as aClass II Director of the Company on August 6, 2001.  In connection with the stock repurchase, Mr.Lum resigned from the Board of Directors.

 

In June 2003, GoVideo borrowed substantial funds from TCL Industriesand Asia Focus Industrial Ltd., entities affiliated with TCL, to fund inventorypurchases and operating expenses.  Theseadvances, which are subordinate to GoVideo’s line of credit, were originallydue at various dates during 2004. Principal and interest payments of $282,000 were made by GoVideo duringfiscal 2004.  Interest on these loans accruedduring fiscal 2004 totaled $240,000.  Asof June 30, 2004, the balance due on these loans totaled $6,241,000.  GoVideo was unable to pay off the loans andextended each of the loan’s due dates three times.  The current due date for the loan with TCL Industriesis July 24, 2005.  The current due datefor the loan with Asia Focus Industrial Ltd. is August 11, 2005.  Both loans are collateralized by 100% of theCommon and Preferred Series D stock of Correlant Communications owned byOpta.  There can be no assurance thatGoVideo will be able to pay the loans when they mature or that anotherextension can be successfully negotiated.

 

On October 22, 2003 Opta entered an additional agreement with TCLIndustries to borrow $4,500,000 with a maturity date of January 22, 2004 and aninterest rate of approximately 3%.  Optaultimately loaned the funds to GoVideo to fund inventory purchases andoperating expenses.  When the originalagreement matured in January 2004, Opta paid the accrued interest of $35,000and extended the principal six months until August, 2004.  As of June 30, 2004 the principal andinterest balance due on the note totaled $4,554,000.  The original loan agreement has been extendedfor two additional six month terms.  Thenew maturity date is July 21, 2005.  Theloan is secured by all of the Common and Series D Preferred Stock of Correlantheld by Opta.

 

Subsequentto fiscal 2004, Opta entered into the following transactions required to bereported under Item 404 of Regulation S-K:

 

OnJuly 7, 2004, the Company’s Board of Directors approved the commencement of anew wholly-owned subsidiary, GoVideo DigiTech (Huizhou) Co., Ltd. (“DigiTech”),which will be located in Guangdong, China. DigiTech will market GoVideo’s MP3 players.  The Company plans to invest approximately$500,000 in the new subsidiary.  TCLMultimedia Electronics R&D Center (“TCL Multimedia”), an affiliate companyof TCL, is currently expending some resources during the start up phase ofDigiTech.  On July 7, 2004, the Company’sBoard of Directors approved the closure of Beijing Lotus.  All assets of Beijing Lotus were transferredto DigiTech during September, 2004.

 

**Item 14 — Principal Accounting Feesand Services**

 

Thefollowing table is a summary of the fees that Opta paid or accrued for theaudit and other services provided by Hein from the date Hein was engagedthrough the date of this filing.

 

| **Fee  Category**  | ** ** | **Year ended  June 30,  2004** | ** ** | **Year ended  June 30,  2003** | ** ** |
|--------------------|------------|--------------------------------|------------|--------------------------------|------------|
|               |       |                           |       |                           |       |
| Audit fees         |       | $                              | 221,000    |                           | $          | 175,000 |   |
|               |       |                           |       |                           |       |
| Audit-related fees |       | 7,000                          |       | 15,000                         |       |
|               |       |                           |       |                           |       |
| Tax fees           |       | 125,000                        |       | 93,000                         |       |
|                    |            |                                |            |                                |            |  |  |

 

48

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***Audit Fees***. Consists of fees billed for professional services rendered for theaudit and restatement of our consolidated financial statements and review ofour interim consolidated financial statements included in quarterly reports andservices that are normally provided by Hein in connection with statutory andregulatory filings or engagements.

 

***Audit-Related Fees.*** Consists of fees billed for assurance and related services that arereasonably related to the performance of the audit or review of ourconsolidated financial statements and are not reported under “Audit fees.”These services include employee benefit plan audits, accounting consultationsin connection with acquisitions, attest services that are not required bystatute or regulation, and consultations concerning financial accounting andreporting standards.

 

***Tax Fees***. Consists of fees billed for professional services for tax compliance,tax advice, and tax planning. These services include assistance regardingfederal, state and international tax compliance, tax audit defense, mergers andacquisitions, and international tax planning.

 

***Other.***  No other fees have been billedfor products and services billed by our accountants.

 

***Policy Related to Audit Committee Pre-Approval of Audit and PermissibleNon-Audit Services of Independent Auditors.*** Our Audit Committee’s has a policy of pre-approving all audit andpermissible non-audit services provided by the independent auditors. Theseservices may include audit services, audit-related services, tax services, andother services. Pre-approval is generally provided for up to one year and anypre-approval is detailed as to the particular service or category of servicesand is generally subject to a specific budget. The independent auditors andmanagement are required to periodically report to the Audit Committeeregarding the extent of services provided by the independent auditors inaccordance with this pre-approval, and the fees for the services performed todate. The Audit Committee may also pre-approve particular services on acase-by-case basis.

 

49

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**PART IV**

 

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

** **
|   | (a) | Documents filed as part of this report. |
|--------|-----|-----------------------------------------|

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

 
| (i)    | Report of Hein & Associates LLP,  Independent Auditors |   |
|--------|------------------------------------------------------------|--------|
|   |                                                       |   |
| (ii)   | Consolidated Balance Sheets                                |   |
|   |                                                       |   |
| (iii)  | Consolidated Statements of Operations                      |   |
|   |                                                       |   |
| (iv)   | Consolidated Statements of Stockholders’  Equity      |   |
|   |                                                       |   |
| (v)    | Consolidated Statements of Cash Flows                      |   |
|   |                                                       |   |
| (vi)   | Notes to Consolidated Financial Statements                 |   |

** **

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

 

All schedules are omitted because they are not applicable or therequired information 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                                                                       |       | Filed herewith                                                                                 |
| 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                |       | Opta Systems, LLC dba GoVideo Executive  Employment Agreement                                                  |       | Incorporated by reference to Exhibit 10.4  to Form 10-K, filed April 16, 2004                  |
| 10.4                |       | Acquisition Agreement of TCL Digital dated  January 18, 2003                                                   |       | Incorporated by reference to Exhibit 10.7  to Form 10-K, filed April 16, 2004                  |
| 10.5                |       | Opta LLC Interest Purchase Agreement  between Registrant and Carmco Investment, LLC, dated April 17, 2003      |       | Incorporated by reference to Exhibit 10.8  to Form 10-K, filed April 16, 2004                  |
| 10.6                |       | Sale agreement of TCL Digital dated  December 20, 2003                                                         |       | Incorporated by reference to Exhibit 10.9  to Form 10-K, filed April 16, 2004                  |
| 10.7                |       | Current Lease – GoVideo Office Lease                                                                      |       | Incorporated by reference to Exhibit 10.10  to Form 10-K, filed April 16, 2004                 |
| 10.8                |       | Current Lease – Go Video Lease for  Commercial Space                                                      |       | Incorporated by reference to Exhibit 10.11  to Form 10-K, filed April 16, 2004                 |
| 10.9                |       | Current Lease – Opta Corporation Executive  Office Lease                                                  |       | Filed herewith                                                                                 |
| 10.10               |       | Debt agreement between GoVideo and T.C.L.  Industries Holdings (H.K.) Limited, dated June 28, 2003, as amended |       | Filed herewith                                                                                 |
| 10.11               |       | Debt agreement between GoVideo and  Asia Focus Industrial  Ltd., dated June 12, 2003, as amended               |       | Filed herewith                                                                                 |

 

50

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| 10.12 |   | Debt agreement between Opta and T.C.L.  Industries Holdings (H.K.) Limited, dated October 21, 2003, as amended                          |   | 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 Chief Executive Officer  Pursuant to Section 1350 Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |   | Filed herewith |
| 32.2  |   | Certification of Chief Financial Officer  Pursuant to Section 1350 Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |   | Filed herewith |

 

51

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**Signatures**

 

Pursuantto the requirements of Section 13 and 15(d) of the Securities Exchange Actof 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
| **Signature**                  | ** ** | **Title** | ** **                                              | **Date** |
|--------------------------------|------------|-----------|---------------------------------------------------------|----------|
|                           |       |      |                                                    |     |
| */s/* *YAN, Vincent Yong* |       |      | President, Chief Executive Officer,  Director           |     | February 14, 2005 |
| YAN, Vincent Yong              |       |      |                                                    |     |
|                           |       |      |                                                    |     |
| */s/* *DAVIS, Steve*      |       |      | Chief Financial Officer (Principal  Accounting Officer) |     | February 14, 2005 |
| DAVIS, Steve                   |       |      |                                                    |     |
|                                |            |           |                                                         |          |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons in the capacities and on the datesindicated.

 
| **Signature**                  | ** ** | **Title** | ** **                                    | **Date** |
|--------------------------------|------------|-----------|-----------------------------------------------|----------|
| * *                       |       |      |                                          |     |
| */s/* *LI, Dongsheng*     |       |      | Chairman of the Board                         |     | February 14, 2005 |
| LI Dongsheng                   |       |      |                                          |     |
| * *                       |       |      |                                          |     |
| */s/* *YAN, Vincent Yong* |       |      | President, Chief Executive Officer,  Director |     | February 14, 2005 |
| YAN, Vincent Yong              |       |      |                                          |     |
| * *                       |       |      |                                          |     |
| */s/* *LIU, Jian*         |       |      | Director                                      |     | February 14, 2005 |
| LIU, Jian                      |       |      |                                          |     |
| * *                       |       |      |                                          |     |
| */s/* *LIN, Zouquan*      |       |      | Director                                      |     | February 14, 2005 |
| LIN, Zouquan                   |       |      |                                          |     |

 

52

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

 

 

Index to Consolidated Financial Statements

 

 

Financial Statements:

 

 
| Report of Independent Registered Public  Accounting Firm.                                                                         |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                              |   |
| Consolidated Balance Sheets as of June 30,  2004 and 2003                                                                         |   |
|                                                                                                                              |   |
| Consolidated Statements of Operations for  the years ended June 30, 2004, 2003 and 2002                                           |   |
|                                                                                                                              |   |
| Consolidated Statements of Stockholders’  Equity and Comprehensive Income for the years ended June 30, 2004, 2003 and  2002. |   |
|                                                                                                                              |   |
| Consolidated Statements of Cash Flows for  the years ended June 30, 2004, 2003 and 2002.                                          |   |
|                                                                                                                              |   |
| Notes to Consolidated Financial Statements                                                                                        |   |

 

 

Financial Statement Schedules:

 

All schedules are omitted because they are not required or the requiredinformation is included in the consolidated financial statements or notesthereto.

 

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

 

Tothe Board of Directors and Stockholders of

OptaCorporation

 

We have audited the accompanyingconsolidated balance sheets of Opta Corporation and subsidiaries as of June 30,2004 and 2003, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the three years in the periodended June 30, 2004. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor 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 2003, and the results of theiroperations and their cash flows for each of the three years in the period endedJune 30, 2004, in conformity with accounting principles generally accepted inthe United States of America.

 

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financialstatements, the Company incurred net losses of $7,722,000, $6,366,000 and$18,975,000 during fiscal 2004, 2003 and 2002, respectively, resulting in anaccumulated deficit of $105,611,000 at June 30, 2004 and the Company’s soleoperating subsidiary, GoVideo, was, and still is, in default under certain debtcovenant provisions of its line of credit. This raises substantial doubt about the Company’s ability to continue asa going concern.  Management’s plans inregard to these matters are also described in Note 2.  The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

 

HEIN& ASSOCIATES LLP

Orange,California

 

September24, 2004, except for Notes 2 and 20 which are as of February 9, 2005

 

F-2

----

 

**OPTA CORPORATIONCONSOLIDATED BALANCE SHEETS**(in thousands)

 
| ** **                                                                                                                                                                                 | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **2004**     | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                 | ** ** | ** **   | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                                 |       |         | ** ** |   |   |
|                                                                                                                                                                                       |       |         | ** ** |   |   |
| Current assets:                                                                                                                                                                            | ** ** | ** **   | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                                  | ** ** | **$**        | **3,037**  | ** ** | $ | 12,044 |   |
| Short-term investments                                                                                                                                                                     | ** ** | **17,643**   | ** ** | 13,964 |   |
| Accounts receivable, net                                                                                                                                                                   | ** ** | **25,528**   | ** ** | 6,847 |   |
| Accounts receivable from  related parties, net                                                                                                                                             | ** ** | **—**   | ** ** | 39 |   |
| Inventories, net                                                                                                                                                                           | ** ** | **18,004**   | ** ** | 6,438 |   |
| Notes and interest receivable  from related parties, net                                                                                                                                   | ** ** | **—**   | ** ** | 1,592 |   |
| Income tax receivable                                                                                                                                                                      | ** ** | **909**      | ** ** | 2,475 |   |
| Prepaid expenses and other  current assets                                                                                                                                                 | ** ** | **2,270**    | ** ** | 876 |   |
| Total current assets                                                                                                                                                                       | ** ** | **67,391**   | ** ** | 44,275 |   |
|                                                                                                                                                                                       |       |         | ** ** |   |   |
| Property and equipment, net                                                                                                                                                                | ** ** | **1,083**    | ** ** | 1,068 |   |
| Tradename                                                                                                                                                                                  | ** ** | **2,420**    | ** ** | 2,420 |   |
| Goodwill                                                                                                                                                                                   | ** ** | **—**   | ** ** | 1,795 |   |
| Investment in joint venture                                                                                                                                                                | ** ** | **—**   | ** ** | 3,378 |   |
| Other assets                                                                                                                                                                               | ** ** | **226**      | ** ** | 51 |   |
| ** **                                                                                                                                                                                 |       | **$**        | **71,120** | ** ** | $ | 52,987 |   |
|                                                                                                                                                                                       |       |         | ** ** |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                              |       |         | ** ** |   |   |
|                                                                                                                                                                                       |       |         | ** ** |   |   |
| Current liabilities:                                                                                                                                                                       |       |         | ** ** |   |   |
| Line of credit                                                                                                                                                                             | ** ** | **$**        | **15,833** | ** ** | $ | — |   |
| Notes and interest payable to  related parties                                                                                                                                             | ** ** | **10,795**   | ** ** | 6,283 |   |
| Accounts payable                                                                                                                                                                           | ** ** | **12,496**   | ** ** | 2,903 |   |
| Accounts payable to related  parties                                                                                                                                                       | ** ** | **170**      | ** ** | 73 |   |
| Accrued restructuring charges                                                                                                                                                              | ** ** | **796**      | ** ** | — |   |
| Accrued expenses                                                                                                                                                                           | ** ** | **1,739**    | ** ** | 2,792 |   |
| Warranty reserve                                                                                                                                                                           | ** ** | **490**      | ** ** | 688 |   |
| Income tax payable                                                                                                                                                                         | ** ** | **27**       | ** ** | 91 |   |
| Total current liabilities                                                                                                                                                                  | ** ** | **42,346**   | ** ** | 12,830 |   |
|                                                                                                                                                                                       |       |         | ** ** |   |   |
| Commitments and contingencies  (Notes 2 and 16)                                                                                                                                            |       |         | ** ** |   |   |
|                                                                                                                                                                                       |       |         | ** ** |   |   |
| Non-controlling interest in  subsidiaries                                                                                                                                                  | ** ** | **8,425**    | ** ** | 9,592 |   |
|                                                                                                                                                                                       |       |         | ** ** |   |   |
| Stockholders’ equity:                                                                                                                                                                 |       |         | ** ** |   |   |
| Preferred stock Series A, $.001  par value: 100 shares authorized, 4 shares issued and outstanding at June 30,  2004 and 2003; $10 per share liquidation preference                        | ** ** | **—**   | ** ** | — |   |
| Common stock, $.001 par value:  100,000 shares authorized; 64,241 shares issued and 50,724 outstanding at  June 30, 2004 and 64,236 shares issued and 61,233 outstanding at June 30,  2003 | ** ** | **64**       | ** ** | 64 |   |
| Additional paid-in capital                                                                                                                                                                 | ** ** | **128,431**  | ** ** | 128,469 |   |
| Less: treasury stock at cost,  13,517 shares at June 30, 2004 and 3,003 shares at June 30, 2003                                                                                            | ** ** | **(2,410**   | **)**      | (150 | ) |
| Accumulated deficit                                                                                                                                                                        | ** ** | **(105,611** | **)**      | (97,889 | ) |
| Accumulated other comprehensive  income                                                                                                                                                    | ** ** | **(125**     | **)**      | 71 |   |
| Total stockholders’ equity                                                                                                                                                            | ** ** | **20,349**   | ** ** | 30,565 |   |
| ** **                                                                                                                                                                                 |       | **$**        | **71,120** | ** ** | $ | 52,987 |   |

** **

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-3

----

**OPTA CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS**(in thousands, except per share amounts)

 
| ** **                                                                                        | ** ** | **Year Ended June 30,** | ** **  |
|---------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|
| ** **                                                                                        | ** ** | **2004**                | ** **  | **2003** | ** ** | **2002** | ** ** |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Net revenues:                                                                                     |       |                    | ** **  |   |   |   |   |
| Products                                                                                          | ** ** | **$**                   | **125,161** | ** ** | $ | 10,000 |   | $ | 5,090 |   |
| Products – related party                                                                     | ** ** | **163**                 | ** **  | 9,454 |   | 50,416 |   |
| Other – related party                                                                        | ** ** | **—**              | ** **  | — |   | 374 |   |
| Total net revenues                                                                                | ** ** | **125,324**             | ** **  | 19,454 |   | 55,880 |   |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Cost of net revenues:                                                                             |       |                    | ** **  |   |   |   |   |
| Products                                                                                          | ** ** | **114,597**             | ** **  | 7,936 |   | 5,395 |   |
| Products – related party                                                                     | ** ** | **92**                  | ** **  | 7,258 |   | 44,546 |   |
| Write down of inventory to lower of cost or  market                                               | ** ** | **510**                 | ** **  | 238 |   | — |   |
| Total cost of net revenues                                                                        | ** ** | **115,199**             | ** **  | 15,432 |   | 49,941 |   |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Gross profit                                                                                      | ** ** | **10,125**              | ** **  | 4,022 |   | 5,939 |   |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Operating expenses:                                                                               |       |                    | ** **  |   |   |   |   |
| General and administrative (includes  amounts to related parties of $0, $0 and $46, respectively) | ** ** | **8,199**               | ** **  | 7,838 |   | 5,661 |   |
| Sales and marketing                                                                               | ** ** | **4,604**               | ** **  | 652 |   | 358 |   |
| Restructuring charges                                                                             | ** ** | **1,845**               | ** **  | — |   | — |   |
| Research and development                                                                          | ** ** | **2,637**               | ** **  | 7,513 |   | 9,392 |   |
| Depreciation and amortization                                                                     | ** ** | **215**                 | ** **  | 486 |   | 12,048 |   |
| Impairment of assets                                                                              | ** ** | **1,831**               | ** **  | 498 |   | 20,071 |   |
| Total operating expenses                                                                          | ** ** | **19,331**              | ** **  | 16,987 |   | 47,530 |   |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Loss from operations                                                                              | ** ** | **(9,206**              | **)**       | (12,965 | ) | (41,591 | ) |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Other income (expense):                                                                           |       |                    | ** **  |   |   |   |   |
| Gain on sale of investments                                                                       | ** ** | **1,053**               | ** **  | — |   | — |   |
| Interest income                                                                                   | ** ** | **552**                 | ** **  | 545 |   | 851 |   |
| Interest expense                                                                                  | ** ** | **(1,166**              | **)**       | (16 | ) | (65 | ) |
| Equity in loss of joint venture                                                                   | ** ** | **(647**                | **)**       | (62 | ) | — |   |
| Other                                                                                             | ** ** | **130**                 | ** **  | 3,650 |   | (148 | ) |
| Total other income (expense), net                                                                 | ** ** | **(78**                 | **)**       | 4,117 |   | 638 |   |
| Loss from continuing operations before  income taxes and non-controlling interest                 |       | **(9,284**              | **)**       | (8,848 | ) | (40,953 | ) |
| Benefit for income taxes                                                                          | ** ** | **(498**                | **)**       | (109 | ) | (3,181 | ) |
| Loss from continuing operations before  non-controlling interest                                  | ** ** | **(8,786**              | **)**       | (8,739 | ) | (37,772 | ) |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Non-controlling interest in loss of  consolidated subsidiaries                                    | ** ** | **1,064**               | ** **  | 2,373 |   | 1,243 |   |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Loss from continuing operations                                                                   | ** ** | **(7,722**              | **)**       | (6,366 | ) | (36,529 | ) |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Discontinued operations, net of tax:                                                              |       |                    | ** **  |   |   |   |   |
| Gain from sale of discontinued operations,  including applicable tax benefit of $1,802            | ** ** | **—**              | ** **  | — |   | 16,765 |   |
| Gain from discontinued operations, less  applicable tax                                           | ** ** | **—**              | ** **  | — |   | 789 |   |
| Total gain from discontinued operations,  net of tax                                              | ** ** | **—**              | ** **  | — |   | 17,554 |   |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Net loss                                                                                          | ** ** | **$**                   | **(7,722**  | **)** | $ | (6,366 | ) | $ | (18,975 | ) |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Net loss per common share – basic and  diluted:                                              |       |                    | ** **  |   |   |   |   |
| Loss from continuing operations                                                                   | ** ** | **$**                   | **(0.14**   | **)** | $ | (0.10 | ) | $ | (0.57 | ) |
| Gain from discontinued operations                                                                 | ** ** | **—**              | ** **  | — |   | 0.27 |   |
| Net loss                                                                                          | ** ** | **$**                   | **(0.14**   | **)** | $ | (0.10 | ) | $ | (0.30 | ) |
|                                                                                              |       |                    | ** **  |   |   |   |   |
| Weighted average common shares outstanding –  basic and diluted                              | ** ** | **53,994**              | ** **  | 63,144 |   | 64,233 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-4

----

 

**OPTA CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOMEFOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002**(in thousands)

 

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

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-5

----

 

**OPTA CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS**(in thousands)

 

 
| ** **                                                              | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                              | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                    |       |                    | ** ** |   |   |   |   |
| **Operating activities**                                                |       |                    | ** ** |   |   |   |   |
| Loss from continuing operations                                         | ** ** | **$**                   | **(7,722** | **)** | $ | (6,366 | ) | $ | (36,529 | ) |
| Income from discontinued operations                                     | ** ** | **—**              | ** ** | — |   | 17,554 |   |
| Adjustments to reconcile net loss to cash  used in operating activities |       |                    | ** ** |   |   |   |   |
| Depreciation and amortization–continuing  operations               | ** ** | **432**                 | ** ** | 656 |   | 12,782 |   |
| Depreciation and amortization–discontinued  operations             | ** ** | **—**              | ** ** | — |   | 2,702 |   |
| Reserve for uncollectible receivables                                   | ** ** | **481**                 | ** ** | 1,979 |   | 44 |   |
| Reserve for obsolete and excess inventories                             | ** ** | **510**                 | ** ** | 238 |   | — |   |
| Stock compensation expense (recovery)  recorded by subsidiary           | ** ** | **(103**                | **)**      | 592 |   | 1,657 |   |
| Gain on sale of property and equipment                                  | ** ** | **(12**                 | **)**      | — |   | — |   |
| Gain on sale of investments                                             | ** ** | **(1,053**              | **)**      | — |   | (14,963 | ) |
| Gain on acquisition of treasury stock                                   | ** ** | **(179**                | **)**      | (150 | ) | — |   |
| Equity in loss of unconsolidated entity                                 | ** ** | **647**                 | ** ** | 62 |   | — |   |
| Impairment of assets                                                    | ** ** | **1,831**               | ** ** | 498 |   | 20,071 |   |
| Non-controlling interest in loss of  subsidiaries                       | ** ** | **(1,064**              | **)**      | (2,373 | ) | (1,243 | ) |
| Change in deferred tax assets                                           | ** ** | **—**              | ** ** | — |   | 1,997 |   |
| Interest expense accrued on notes payable                               | ** ** | **329**                 | ** ** | — |   | — |   |
| Changes in operating assets and  liabilities:                           |       |                    | ** ** |   |   |   |   |
| Accounts receivable                                                     | ** ** | **(19,162**             | **)**      | (3,641 | ) | 5,180 |   |
| Accounts receivable from related parties                                | ** ** | **39**                  | ** ** | 5,090 |   | 7,747 |   |
| Inventories                                                             | ** ** | **(12,076**             | **)**      | (7,672 | ) | 6,483 |   |
| Notes receivable                                                        | ** ** | **—**              | ** ** | — |   | 2,784 |   |
| Income tax receivable                                                   | ** ** | **1,566**               | ** ** | 726 |   | (1,520 | ) |
| Prepaid expenses and other assets                                       | ** ** | **(1,394**              | **)**      | (593 | ) | (117 | ) |
| Assets of discontinued operations                                       | ** ** | **—**              | ** ** | — |   | 3,307 |   |
| Other non current assets                                                | ** ** | **(175**                | **)**      | — |   | (51 | ) |
| Accounts payable to related parties                                     | ** ** | **97**                  | ** ** | (174 | ) | (25,825 | ) |
| Accounts payable                                                        | ** ** | **9,593**               | ** ** | (1,142 | ) | 1,145 |   |
| Accrued expenses                                                        | ** ** | **(1,053**              | **)**      | 1,626 |   | (1,847 | ) |
| Accrued restructuring charges                                           | ** ** | **796**                 | ** ** | — |   | — |   |
| Income tax payable                                                      | ** ** | **(64**                 | **)**      | 91 |   | (366 | ) |
| Warranty reserve                                                        | ** ** | **(198**                | **)**      | (44 | ) | — |   |
| Liabilities of discontinued operations                                  | ** ** | **—**              | ** ** | — |   | (6,791 | ) |
| Cash used by operating activities                                       | ** ** | **(27,934**             | **)**      | (10,597 | ) | (5,799 | ) |
|                                                                    |       |                    | ** ** |   |   |   |   |
| **Investing activities**                                                |       |                    | ** ** |   |   |   |   |
| Advances to related parties                                             | ** ** | **—**              | ** ** | — |   | (10 | ) |
| Payments received on notes receivable from  related parties             | ** ** | **1,592**               | ** ** | 1,930 |   | 1,980 |   |
| Purchase of property and equipment                                      | ** ** | **(591**                | **)**      | (64 | ) | (502 | ) |
| Proceeds from sale of property and  equipment                           | ** ** | **156**                 | ** ** | — |   | — |   |
| Proceeds from sale of joint venture                                     | ** ** | **3,762**               | ** ** | — |   | — |   |
| Investment in joint venture                                             | ** ** | **(1,820**              | **)**      | (3,440 | ) | — |   |
| Purchase of subsidiary                                                  | ** ** | **—**              | ** ** | (5,808 | ) | — |   |
| Proceeds from sale of investments                                       | ** ** | **—**              | ** ** | — |   | 10,000 |   |
| Payment of non-controlling interest on  dissolution of subsidiary       | ** ** | **—**              | ** ** | — |   | (11 | ) |
| Purchase of short-term investments                                      | ** ** | **(10,450**             | **)**      | (16,552 | ) | (26,723 | ) |
| Proceeds from sale of short-term  investments                           | ** ** | **6,500**               | ** ** | 7,645 |   | 31,483 |   |
| Cash provided (used) by investing  activities                           | ** ** | **(851**                | **)**      | (16,289 | ) | 16,217 |   |
|                                                                    |       |                    | ** ** |   |   |   |   |
| **Financing activities**                                                |       |                    | ** ** |   |   |   |   |
| Proceeds from advances on line of credit                                | ** ** | **110,191**             | ** ** | — |   | — |   |
| Payments on line of credit                                              | ** ** | **(94,358**             | **)**      | — |   | — |   |
| Proceeds from advances from related parties                             | ** ** | **10,842**              | ** ** | 6,283 |   | — |   |
| Payments on advances from related parties                               | ** ** | **(4,817**              | **)**      | — |   | — |   |
| Purchase of treasury stock                                              | ** ** | **(2,081**              | **)**      | — |   | — |   |
| Proceeds from issuance of stock by  subsidiaries                        | ** ** | **1**                   | ** ** | — |   | 9 |   |
| Cash provided by financing activities                                   | ** ** | **19,778**              | ** ** | 6,283 |   | 9 |   |
|                                                                    |       |                    | ** ** |   |   |   |   |
| Increase (decrease) in cash and cash  equivalents                       | ** ** | **(9,007**              | **)**      | (20,603 | ) | 10,427 |   |
|                                                                    |       |                    | ** ** |   |   |   |   |
| Cash and cash equivalents at beginning of  year                         | ** ** | **12,044**              | ** ** | 32,647 |   | 22,220 |   |
|                                                                    |       |                    | ** ** |   |   |   |   |
| Cash and cash equivalents at end of year                                | ** ** | **$**                   | **3,037**  | ** ** | $ | 12,044 |   | $ | 32,647 |   |

 

F-6

----

 
| ** **                                              | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Supplemental disclosures of cash flow  information**  |       |                    |       |   |   |   |   |
| Cash paid during the year for:                          |       |                    |       |   |   |   |   |
| Interest                                                | ** ** | **$**                   | **1,071**  |   | $ | — |   | $ | 89 |   |
| Income taxes                                            | ** ** | **$**                   | **247**    |   | $ | — |   | $ | 614 |   |
| Non-cash investing and financing activities             |       |                    |       |   |   |   |   |
| Acquisition of subsidiary stock with  issuance of stock | ** ** | **$**                   | **36**     |   | $ | 21 |   | $ | — |   |
| Transfer of restricted cash to short-term  investment   | ** ** | **$**                   | **—** |   | $ | — |   | $ | 5,500 |   |
| Unrealized gain (loss) on short term  investments       | ** ** | **$**                   | **271**    |   | $ | 98 |   | $ | — |   |
| Application of proceeds to note payable                 | ** ** | **$**                   | **1,842**  |   | $ | — |   | $ | — |   |

** **

The accompanying notes are an integral partof these consolidated financial statements.

 

F-7

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**OPTA CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

** **

**Note 1 – Business and Background**

 

***Description of Business***

 

Opta Corporation (formerly Lotus Pacific,Inc) (“Opta” or “Company”), a Delaware corporation, is a holding company whoseoperations are conducted through its subsidiaries. Opta develops, manages, andoperates emerging consumer electronics and communications companies, focusingon developing next generation consumer electronics and communicationproducts.  Opta provides its subsidiarieswith capital and strategic infrastructure services.

 

In March 1999, the Company acquired 94.5% of the issued and outstandingcommon shares of Correlant Communications, Inc. (formerly TurboNetCommunications, Inc.) (“Correlant”), 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 United States and Asiancountries. See Note 4.

 

In March 1999, the Company acquired 77% of the issued and outstandingcommon shares 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 soldapproximately 92% of its investment in Arescom, representing 65% of the outstandingsecurities of Arescom, to an unrelated third party.  In September 2003, the Company divested itsremaining 6% ownership in Arescom by settling all legal claims againstArescom.  See Note 4.

 

In April 1999, the Company organized Lotus World, Inc. (“Lotus World”)to offer Auction Live, an online auction service, to internationalclients.  In May 2002, the Companydissolved Lotus World.  See Note 4.

 

In November 2000, the Company established a wholly-ownedsubsidiary, Acumen Technology, Inc. (“Acumen”), incorporated in the stateof Delaware and in December 2000, the Company transferred all of thecapital stock it held in Correlant and Arescom to Acumen. Other than itsholdings of the Correlant and Arescom stock, Acumen had no material independentoperations.  In December 2001, Acumen wasmerged into Opta and all the assets and liabilities of Acumen were absorbed bythe Company.

 

In June 2001, Acumen formed Lotus Pacific Communications Technology(Beijing) Co., Ltd. (“Beijing Lotus”), a wholly-owned subsidiary, to supportbusiness activity in Beijing.  BeijingLotus has no material independent operations.  See Note 20.

 

On June 29, 2001, a majority of the Company’s stockholders, led byT.C.L. Industries Holdings (H.K.) Limited (“TCL Industries”), were successfulin their solicitation to gain control of the Company and to replace priormanagement and Board of Directors of the Company.   On June 29, 2001, new directors and officerswere appointed and the then existing directors and officers were immediatelyterminated.

 

Following the takeover of the Board of Directors of the Company on June29, 2001, new management of the Company began a thorough review of all aspectsof the business operations of the Company and its subsidiaries and has engagedin numerous transactions to reorganize the Company’s business.  Under new management, the Company’s primarystrategy for business operations has been to reorganize its unprofitablebusinesses, acquire undervalued or underutilized companies and focus onprofitable growth.  The Company has movedaggressively to sell, reorganize or shutdown its businesses which were eithernot operating profitably or may have required significant future cashinvestment.

 

In February 2003, Opta, as majoritystockholder of Correlant, appointed four new members to the Board of Directorsof Correlant, effectively taking control of Correlant’s Board of Directors.Prior to this, Opta had only one representative on Correlant’s Board ofDirectors and did not control Correlant’s Board or its operations.  Immediately thereafter, the Board ofDirectors created a new Executive Committee of the Board, comprised of twomembers who are also Opta employees, to act on behalf of the Board of Directorsand oversee Correlant’s management and operations.  In July 2003, Correlant’s President, ChiefExecutive Officer and co-founder resigned

 

F-8

----

 

as a director of Correlant.  From that date forward he no longer served asPresident and CEO of Correlant.  In July2003 the Vice President of Engineering, Secretary, and co-founder of Correlantresigned as director and secretary of Correlant.  From that date forward, he no longer servedas VP of Engineering. In connection with their resignations, the Companyentered into Employment Separation and Consulting Agreements with both formeremployees. See Note 16. Upon recommendation of its consultants, following thetwo co-founder’s resignations, Correlant began a substantial reduction in itsworkforce and operations to reduce operating expenses, reducing the number ofCorrelant employees from 34 as of August 1, 2003 to 18 employees as of December23, 2003.  As a result of decliningmargins and demand for its products, Correlant’s Board of Directors approvedthe wind down and cessation of Correlant’s historical operations in the cablemodem business effective December 23, 2003. As part of the wind down, Correlantlicensed part of its technology, and could potentially license othertechnology.  Correlant’s wind down wassubstantially completed by March 31, 2004. See Note 11.  As of June 30, 2004,Correlant has one employee to maintain corporate records and to comply withstatutory reporting requirements. Correlant, together with Opta, will continue to explore either acquiringor investing in other businesses to utilize its assets.

 

In April 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 digital video disc (“DVD”) players, portableDVDs, DVD-Video Cassette Recorder (“VCR”) Combos, Dual-Deck VCRs, DVDRecorders, DVD Recorder + VCRs, and LCD TVs. GoVideo holds various patentscovering Dual-Deck technology as well as other electronics products andsystems. GoVideo was purchased as part of the Company’s strategic direction ofinvesting in companies which will benefit from the Company’s strategicrelationships with Asian consumer electronic manufacturers.  GoVideo’s potential for growth under theCompany’s ownership and established brand name were the primary reasons for thepurchase of GoVideo at a price resulting in goodwill being recognized.  As of December 31, 2003, GoVideo was, andstill is, the sole operating subsidiary of the Company.  See Note 4.

 

In January 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 an agreementwith TCL Information Technology Industrial (Group) Ltd, an affiliate of TCLIndustries whereby the Company sold its entire 50% interest in TCL Digital  See Note 5.

 

As of June 30, 2004 and 2003, the only significant subsidiaries wereGoVideo and Correlant.

 

The Company will continue to identify marketopportunities that will create and accelerate the growth and success of itssubsidiary companies and to implement new business plans to improve the returnson these businesses.

 

Unless the context indicates otherwise,reference to the Company shall include all of its wholly-owned andmajority-owned subsidiaries.

 

***Delays in Reporting***

 

Following the replacement of prior management discussed above, the newmanagement began reviewing various transactions undertaken by old managementprior 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 to the preliminary results, the Companydismissed its then existing independent accountants, engaged new independentaccountants and re-audited all periods under investigation.  The Company completed such restatements inits Form 10-K for fiscal 2002 filed on April 16, 2004. The subsequent Form 10-K for fiscal 2003was filed on August 24, 2004.

 

On January 30, 2003, the Company and TCL Industries, a stockholderof the Company with holdings of greater than

 

F-9

----

 

10% of the Company’s outstanding shares, settled all disputes with theprior auditors concerning their audits of the Company for fiscal 2001 andprior. The prior auditors deny that they are liable for any damages to Opta,but consented to the settlement to avoid the costs of litigation.  Pursuant to an agreement dated March 24, 2003between the Company and TCL Industries, the Company and TCL Industries agreedon the allocation of the settlement funds, whereby TCL Industries received$6,500,000 in cash, the Company received $3,500,000 cash, which is included inOther income (expense) on the fiscal 2003 consolidated statement ofoperations.  Additionally, the Companymay be entitled to receive up to $3,500,000 in cash held in an escrow account,plus interest accrued therein.  In connection with the agreement, Opta andTCL agreed to forbear from bringing claims against each other with respect tothe allocation of funds or otherwise.

 

**Note 2 – Liquidity and Going Concern**

 

The Company incurred net losses of$7,722,000, $6,366,000 and $18,975,000 during fiscal 2004, 2003 and 2002,respectively.  Additionally, cash used byoperating activities was $27,934,000, $10,597,000, and $5,799,000 during fiscal2004, 2003 and 2002, respectively.  AtJune 30, 2004, the Company had an accumulated deficit of $105,611,000 and theCompany’s sole operating subsidiary, GoVideo, was, and still is, in defaultunder certain debt covenant provisions of its line of credit.  See note 9. Subsequent to June 30, 2005, GoVideo entered into a forbearanceagreement with its lender which is due to expire on February 28, 2005.  See note 20. GoVideo is currently under negotiations with the lender to extend theforbearance agreement through August, 2005.   However, there can be no assurance that GoVideo will be successful inthis negotiation.

 

Additionally, in June 2003 GoVideo borrowedsubstantial funds from TCL Industries and Asia Focus Industrial Ltd., entitiesaffiliated with TCL, to fund inventory purchases and operating expenses.  See note 10. Both loans, which are subordinate to GoVideo’s line of credit, becamedue during fiscal year 2004.  GoVideo wasunable to pay off the loans and extended the due date three times.  The current due date for the loan with TCLIndustries is July 24, 2005.  The currentdue date for the loan with Asia Focus Industrial Ltd. is August 11, 2005.  Both loans are collateralized by 100% of theCommon and Preferred Series D stock of Correlant Communications owned by Opta.  There can be no assurance that GoVideo willbe able to pay the loans when they mature or that another extension can besuccessfully negotiated.

 

During fiscal 2004, Opta entered into afinancing agreement with TCL Industries. See Note 10.  Opta ultimatelyloaned the funds to GoVideo to fund inventory purchases and operatingexpenses.  The financing agreement hasbeen extended three times with a new maturity date of July 21, 2005. The loanis collateralized by 100% of Opta’s Common and Preferred Series D stock ofCorrelant Communications.

 

The above matters raise substantial doubtabout the Company’s ability to continue as a going concern. Although Optaexpects to incur additional losses in fiscal 2005, the Company believes that itwill have sufficient resources to continue normal operations.  The Company has taken steps to reorganizecertain aspects of its business.  GoVideoreplaced its Chief Executive Officer with the Chief Operating Officer of Optaon an interim basis to further evaluate the ongoing operations of GoVideo.  Additionally, 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.  Ifthe Company is unable to return to profitability as a result of thisrealignment, additional steps including, but not limited to, further costreductions and eliminating some of its current activities, may be necessary.

 

The consolidated financial statements do notinclude any adjustments relating to the recoverability and classification ofrecorded asset amounts or the amount and classification of liabilities or anyother adjustment that might be necessary should the Company be unable to continueas a going concern.

 

**Note 3 – Significant Accounting Policies**

 

***Principles of Consolidation***

 

Theconsolidated financial statements include the accounts of Opta and itssubsidiaries.  All significantintercompany transactions and balances have been eliminated.  Subsidiaries in which Opta owns at least 50%are consolidated, except for investments in which control is deemed to betemporary, in which case the equity method of accounting is used.  Equity investments in which Opta owns atleast 20% of the voting securities are accounted for using the equity

 

F-10

----

 

method, exceptfor investments in which the Company is not able to exercise significantinfluence over the investee, in which case, the cost method of accounting isused.  The cost method of accounting isused for all investments in 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 outcomes may differ frommanagement’s estimates and assumptions.

 

***Foreign Operations***

 

The functional currency of the Company is the U.S. dollar.  Any accounts denominated in a currency otherthan the U.S. dollar, mainly the Taiwan dollar and the Chinese RMB, arere-measured and resultant gains and losses are recorded in the Company’sconsolidated statement of operations. Foreign currency transaction gains (losses) are also included in theCompany’s consolidated statement of operations. Transaction gains (losses) were not material in fiscal 2004 or 2003.  In fiscal 2002, the Company recorded nettransaction gains (losses) of $(161,000) included with Other income (expense)on the consolidated statement of operations.

 

***Cash and Cash Equivalents***

 

Cash and cash equivalents consist of cash and highly liquid investments,which include debt securities with remaining maturities when acquired of threemonths or less and are stated at cost, which approximates market value.

 

***Short-Term Investments***

 

The Company accounts for short-term investments in accordance with Statementof Financial 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-salesecurities are carried at fair market value. Unrealized gains and losses, net of tax, are reported in stockholders’equity.  Realized gains and losses anddeclines in value judged to be other-than-temporary, if any, onavailable-for-sale securities are included in investment income.  The cost of securities sold is based on thespecific-identification method.  As ofJune 30, 2004 and 2003, short-term investments, and any difference between the fairmarket value and the underlying cost of such investments, consisted of thefollowing (*in thousands*):

 

 

| ** **            | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair**

**Market  Value** | ** ** |
|-----------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **June 30, 2004**     |       |                |       |                        |       |                        |       |                        |       |
| Government Securities | ** ** | **$**               | **11,042** | ** **                  | **$**      | **—**                  | ** ** | **$**                       | **(132**   | **)** | **$** | **10,910** | ** ** |
| Corporate Bonds       | ** ** | **6,774**           | ** ** | **—**                  | ** ** | **(41**                     | **)**      | **6,733**                   | ** ** |
| ** **            | ** ** | **$**               | **17,816** | ** **                  | **$**      | **—**                  | ** ** | **$**                       | **(173**   | **)** | **$** | **17,643** | ** ** |
| **June 30, 2003**     |       |                |       |                        |       |                        |       |                        |       |
| Government Securities |       | $                   | 9,751      |                        | $          | 39                          |       | $                           | (1         | ) | $ | 9,789 |   |
| Corporate Bonds       |       | 4,115               |       | 60                          |       | —                      |       | 4,175                       |       |
|                  |       | $                   | 13,866     |                        | $          | 99                          |       | $                           | (1         | ) | $ | 13,964 |   |

 

F-11

----

 

Theabove unrealized gain (loss) relates to Correlant.  Therefore, only Opta’s portion of theunrealized gain (loss), ($196,000) and $71,000 as of June 30, 2004 and 2003,respectively, is included as Other comprehensive income.  The remaining ($75,000) and $27,000 as ofJune 30, 2004 and 2003, respectively is included as Non-controlling interest insubsidiaries on the balance sheet.

 

Asof June 30, 2004 and 2003, short-term investments consisted of government andcorporate debt securities with the following maturities (*in thousands*):

 

| ** **                  | ** ** | **Market value as of June 30,** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| One year or less            | ** ** | **$**                           | **2,512**  |   | $ | — |   |
| Between one and three years | ** ** | **15,131**                      |       | 13,412 |   |
| Greater than three years    | ** ** | **—**                      |       | 552 |   |
| ** **                  |       | **$**                           | **17,643** |   | $ | 13,964 |   |

 

***Fair Value of Financial Instruments***

 

The estimated fair values of all financial instruments on the Company’sbalance sheets were determined by using available market information andappropriate valuation methodologies. Fair value is described as the amount at which the instrument could beexchanged in a current transaction between informed willing parties, other thana forced liquidation.  However,considerable judgment is required in interpreting market data to develop theestimates of fair value.  Accordingly,the estimates presented herein are not necessarily indicative of the amountsthe Company could realize in a current market exchange.  The use of different market assumptionsand/or estimation methodologies may have a material effect on the estimatedfair value amounts.  The Company does nothave any off balance sheet financial instruments.

 

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

 

The fair value of the Company’s debt is estimated based on currentrates offered to the Company for similar debt and approximates carrying value.

 

***Concentration of Credit Risk, SignificantCustomers and Significant Vendors***

 

Credit risk represents the accounting loss that would be recognized atthe reporting date if counterparties failed completely to perform ascontracted. Concentrations of credit risk (whether on or off balance sheet) thatarise from financial instruments exist for groups of customers orcounterparties when they have similar economic characteristics that would causetheir ability to meet contractual obligations to be similarly affected bychanges in economic or other conditions described below.

 

**Financial instruments that subject the Company to creditrisk are cash balances maintained in excess of federal depository insurancelimits and accounts receivable with no collateral or security.  As of June 30, 2004 and 2003, the Company hadconsolidated balances of $2,621,000 and $11,263,000, respectively, which werenot guaranteed by Federal Deposit Insurance Corporation (“FDIC”). The Companyhas not experienced any losses in such accounts and believes the exposure isminimal.  As of June 30, 2004 and 2003,all the Company’s receivables were unsecured.**

** **

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

 

F-12

----

 

| ** **                             | ** ** | **Year ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                   |       |                    |       |   |   |   |   |
| Costco                                 | ** ** | **41**                  | %          | 31 | % | — | % |
| QVC                                    | ** ** | **14**                  |       | — |   | — |   |
| Toshiba (Related party, see Note 13)   | ** ** | **—**              |       | — |   | 54 |   |
| TurboComm (Related party, see Note 13) | ** ** | **—**              |       | 48 |   | 37 |   |
| Terayon                                | ** ** | **—**              |       | — |   | 8 |   |

 

Grossaccounts receivable from these customers totaled $14,900,000 and $8,944,000 atJune 30, 2004 and 2003, respectively. See Note 20.

 

TheCompany purchases products from a relatively small number of vendors.  During the years ended June 30, 2004, 2003and 2002 the Company purchased approximately $101,103,000, $8,297,000 and$20,439,000 of product from these vendors.  Payables to these vendors totaled $11,643,000, $73,000 and $238,000 atJune 30, 2004 and 2003, respectively.

 

***Allowance for Doubtful Accounts***

 

The following are recorded at net realizable value:

 

•                    Accounts receivable, net;

•                    Accounts receivable from relatedparties, net; and

•                    Notes and interest receivable fromrelated parties, net.

 

The Company does business and extends credit based on an evaluation ofthe customers’ financial condition generally without requiring collateral.Exposure to losses on trade receivables is expected to vary by customer due tothe financial condition of each customer. The Company monitors exposure tocredit losses and maintains allowances for anticipated losses considerednecessary under the circumstances.

 

The Company records interest income from interest-bearing loans usingan appropriate 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 income recognition does not resumeuntil the note is deemed collectible.

 

Delinquent notes and trade accounts 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 that are based onhistorical trends and an evaluation of the impact of current and 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:                                 |       |                   |       |                     |       |                     |       |                |       |
| **2004**                                                              | ** ** | **$**                  | **39**     | ** **               | **$**      | **481**                  | ** ** | **$**               | **(3**     | **)** | **$** | **517** | ** ** |
| 2003                                                                  |       | 44                     |       | 33                       |       | (38                      | )          | 39                  |       |
| 2002                                                                  |       | —                 |       | 44                       |       | —                   |       | 44                  |       |
| Allowance –  Accounts receivable from related parties:           |       |                   |       |                     |       |                     |       |
| **2004**                                                              | ** ** | **$**                  | **1,946**  | ** **               | **$**      | **—**               | ** ** | **$**               | **—** | ** ** | **$** | **1,946** | ** ** |
| 2003                                                                  |       | —                 |       | 1,946                    |       | —                   |       | 1,946               |       |
| 2002                                                                  |       | —                 |       | —                   |       | —                   |       | —              |       |
| Allowance –  Notes and interest receivable from related parties: |       |                   |       |                     |       |                     |       |
| **2004**                                                              | ** ** | **$**                  | **—** | ** **               | **$**      | **—**               | ** ** | **$**               | **—** | ** ** | **$** | **—** | ** ** |
| 2003                                                                  |       | 1,734                  |       | —                   |       | (1,734                   | )          | —              |       |
| 2002                                                                  |       | 1,734                  |       | —                   |       | —                   |       | 1,734               |       |

 

F-13

----

 

***Inventories***

 

Inventories are stated at the lower of cost(first-in, first-out) or market value. As of June 30, 2004, inventories are mostly comprised of consumerelectronics in transit from the manufacturer, which are generally purchased FOBshipping point.  When Correlant hadinventory, it was comprised of raw materials, primarily integrated circuits andother electronic components, to be used in the manufacture of cable modems andCMTS units.  Correlant had no inventoryat June 30, 2004 and 2003, and it was completely reserved at June 30, 2002.

 

The Company provides inventory reserves forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated realizable value based uponassumptions about future demand and market conditions.  The activity in the allowance for obsoleteand excess inventory is shown below (*inthousands*):

 

 
| **Year ended June 30,** | ** ** | **Beginning  Balance** | ** ** | **Expense/  (Recovery)** | ** ** | **Write off  and other** | ** ** | **Ending  Balance** | ** ** |
|-------------------------|------------|------------------------|------------|--------------------------|------------|--------------------------|------------|---------------------|------------|
| **2004**                | ** ** | **$**                  | **—** | ** **               | **$**      | **510**                  | ** ** | **$**               | **—** | ** ** | **$** | **510** | ** ** |
| 2003                    |       | 600                    |       | 238                      |       | (838                     | )          | —              |       |
| 2002                    |       | 3,811                  |       | —                   |       | 3,211                    |       | 600                 |       |
|                         |            |                        |            |                          |            |                          |            |                     |            |  |  |  |  |

 

***Shipping and Handling Charges***

 

The Company includes costs ofshipping and handling billed to customers in revenue and the related expense ofshipping and handling costs is included in cost of sales.

 

***Property and Equipment***

 

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

 

Totaldepreciation and amortization expense was $432,000, $656,000 and $1,329,000 forfiscal 2004, 2003, and 2002, respectively. Included in this total was amortization of purchased software anddepreciation of tooling equipment, both of which are cost of sales components,of $217,000, $170,000 and $734,000 for fiscal 2004, 2003 and 2002 respectively.  As part of the shut down of the Correlant’shistorical operations, all property and equipment was sold during fiscal 2004.

 

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

 

The Company accounts for anyimpairment of long-lived assets in accordance with SFAS 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(“SFAS 144”). SFAS 144 supersedes SFAS 121, *Accounting for theImpairment of Long-Lived Assets and for Assets to Be Disposed Of* (“SFAS121”), and the accounting and reporting provisions of the Accounting PrinciplesBoard (“APB”) Opinion 30, *Reporting the Results ofOperations Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions*(“APB 30”), for the disposal of a segment of a business (as previously definedin that opinion). SFAS 144 provides a single accounting model for disposal oflong-lived assets. SFAS 144 also changed the criteria for classifying an assetas held for sale and broadens the scope of businesses to be disposed of thatqualify for reporting as discontinued operations and changes the timing ofrecognizing losses on such operations. The broadened definition of discontinuedoperations with SFAS 144 affected the presentation and disclosure of theCompany’s results of operations for the year ended 2002 and prior yearspresented for comparison. In accordance with SFAS 144, long-lived assets, suchas property, plant, and equipment, and purchased intangibles subject toamortization, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset

 

F-14

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may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset. If thecarrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset. Assets to be disposed of wouldbe separately presented in the balance sheet and reported at the lower of thecarrying amount or fair value less costs to sell, and are no longerdepreciated. The assets and liabilities of a disposal group classified as heldfor sale would be presented separately in the appropriate asset and liabilitysections of the balance sheet.

 

During fiscal 2003, the Company recordeda charge of $477,000 relating to the impairment of Correlant’s property andequipment resulting from the wind down and cessation of Correlant’s historicaloperations (see Note 1) in the cable modem industry.  The fair value of the property and equipmentsold was based on market value as determined by the sales proceeds received.

 

***Tradename***

 

***The Company’sTradename relates to the***acquisitioncost of the GoVideo Tradename used to market GoVideo products.  ***TheGoVideo Tradename is not amortized in accordance with***SFAS142, *Goodwill and Other Intangible Assets*(“SFAS142”) as its life is deemed indefinite***.***

 

***Goodwill***

 

The Company accounts for goodwill in accordance with SFAS 141*, Business Combinations*(“SFAS 141”), and SFAS 142. As part of its annual review offinancial results, the Company noted indicators that the carrying value of itsgoodwill 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 onthe annual testing performed, the Company recorded a goodwill impairment chargeof $1,831,000, $21,000 and $21,051,000 in fiscal 2004, 2003 and 2002,respectively.

 

The following tablesummarizes the activity in the Company’s goodwill account associated with allacquisitions and dispositions (*in thousands*):

 
| ** **                                         | ** ** | **Correlant** | ** ** | **Arescom** | ** ** | **GoVideo** | ** ** | **Total**  | ** ** |
|----------------------------------------------------|------------|---------------|------------|-------------|------------|-------------|------------|------------|------------|
| Balance at June 30,  2001                     |       | $             | 31,524     |        | $          | 14,862      |       | $          | —     |   | $ | 46,386 |   |
| Sale of  investment                                |       | —        |       | (11,180     | )          | —      |       | (11,180    | )          |
| Amortization  fiscal 2002                          |       | (11,453       | )          | (2,702      | )          | —      |       | (14,155    | )          |
| Impairment  charge                                 |       | (20,071       | )          | (980        | )          | —      |       | (21,051    | )          |
| Balance at June 30,  2002                     |       | —        |       | —      |       | —      |       | —     |       |
| Acquisition  of additional stock of subsidiary     |       | 21            |       | —      |       | —      |       | 21         |       |
| Acquisition  of subsidiary                         |       |          |       |        |       | 1,795       |       | 1,795      |       |
| Impairment  charge                                 |       | (21           | )          | —      |       | —      |       | (21        | )          |
| Balance at June 30,  2003                     |       | —        |       | —      |       | 1,795       |       | 1,795      |       |
| **Acquisition  of additional stock of subsidiary** | ** ** | **36**        | ** ** | **—**  | ** ** | **—**  | ** ** | **36**     | ** ** |
| **Impairment  charge**                             | ** ** | **(36**       | **)**      | **—**  | ** ** | **(1,795**  | **)**      | **(1,831** | **)**      |
| **Balance  at June 30, 2004**                 | ** ** | **$**         | **—** | ** **  | **$**      | **—**  | ** ** | **$**      | **—** | ** ** | **$** | **—** | ** ** |

 

Correlant amortization and impairment charge and GoVideo impairmentcharge are included in loss from continuing operations.  Arescom amortization and impairment charge isincluded with gain from discontinued operations and gain from sale ofdiscontinued operations, respectively.

 

***Treasury Stock***

 

Treasury stock is recorded at cost. In the event of subsequent reissue,the treasury stock account will be reduced by the cost of such stock on theaverage cost basis with any excess proceeds credited to additional paid-incapital.

 

F-15

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***Comprehensive Income(Loss)***

 

Comprehensive income consists of net income and other gains (losses)affecting shareholders’ equity that, under generally accepted accountingprinciples are excluded from net income (loss) in accordance with SFAS 130, *Reporting Comprehensive Income* (“SFAS 130”).  Other comprehensive income (loss) includesunrealized gains (losses) on marketable securities and foreign currencytranslation adjustments.  During fiscal2004 and 2003, the Company’s other comprehensive income (loss) was comprised ofOpta’s portion, $(196,000) and $71,000, respectively, of the unrealized gainson Correlant’s short term investments categorized as available-for-sale.  The Company did not have any othercomprehensive income during fiscal 2002.

 

***Revenue Recognition***

 

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

 

GoVideo provides limited labor and partswarranties on certain of its products for a maximum of one year.  GoVideo records a warranty reserve based uponhistorical experience and an estimate of total exposure associated withproducts sold to consumers through retail outlets.

 

Correlant sold cable modems, CMTS and, incertain instances, the Media Access Controller (“MAC”), a key component of thecable modem.  The Company developed andowns the proprietary technology used in the MAC.  However, the manufacturing of both the MACand the cable modem is outsourced to manufacturers.  Cable modem and CMTS revenue is recognizedupon shipment of the completed unit to the customer.  In addition to supplying the MAC to the cablemodem manufacturer for use in Correlant cable modems, the Company also sellsthe MAC for use by the cable modem manufacturer in non-Correlant products.  MAC revenue is recognized upon passage oftitle of the MAC for use by the cable modem manufacturer in its ownproduct.  Correlant, while in the cablemodem and cable modem termination system (“CMTS”) business, did not provide awarranty for its products, primarily the cable modem and CMTS.  The warranty liability for defective productswas the responsibility of the third-party manufacturer.

 

During fiscal 2002 Correlant licensed itsproprietary software.  Software licenserevenue was recognized over the life of the license.

 

***Stock-Based Compensation***

 

SFAS 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”) encourages, but does notrequire, companies to record compensation cost for stock-based employeecompensation plans at fair value. The Company elected to continue to accountfor stock-based compensation using the intrinsic value method prescribed in APB25, *Accounting for Stock Issued to Employees*(“APB 25”) and related Interpretations. Under APB 25 and the intrinsic valuemethod, the exercise price of the Company’s employee stock options equals themarket price of the underlying stock on the date of grant or, in the case ofthe Company’s employee stock purchase plans since the plans arenon-compensatory, no compensation expense is recognized. In December 2002,the Financial Accounting Statements Board (“FASB”) issued SFAS 148, *Accounting for Stock-Based Compensation—Transition and Disclosure*(“SFAS148”).  FAS 148 amends thedisclosure requirements of FAS 123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.

 

In accordance with SFAS 148, the followingtable illustrates the effect on the Company’s net loss and loss per share as ifthe Company had applied the fair value recognition provisions of SFAS 123 toits stock-based employee compensation awards, and recognized expense over theapplicable award vesting period (*inthousands, except per share amounts*):

 

F-16

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| ** **                                                                                                                                       | ** ** | **Year  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                       | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss, as  reported                                                                                                                           |       | **$**                         | **(7,722** | **)** | $ | (6,366 | ) | $ | (18,975 | ) |
| Add:  Stock-based employee compensation expense (reversal) included in reported net  loss                                                        |       | **(75**                       | **)**      | 429 |   | 1,203 |   |
| Less:  Stock-based employee compensation (expense) reversal determined under fair  value based method for all awards, net of related tax effects |       | **147**                       | ** ** | (1,169 | ) | (2,519 | ) |
| Pro-forma  net loss                                                                                                                              |       | $                             | (7,650     | ) | $ | (7,106 | ) | $ | (20,291 | ) |
|                                                                                                                                             |       |                          |       |   |   |   |   |
| Basic and  diluted net loss per share, as reported                                                                                               |       | $                             | (0.14      | ) | $ | (0.10 | ) | $ | (0.30 | ) |
|                                                                                                                                             |       |                          |       |   |   |   |   |
| Pro-forma  basic and diluted net loss per share                                                                                                  |       | $                             | (0.14      | ) | $ | (0.11 | ) | $ | (0.32 | ) |

 

Fiscal 2002 numbers do not include Arescom asthis detail was unavailable.  Thepro-forma effect for the years presented is not likely to be representative ofthe pro-forma effect on reported net income or loss in future years becausethese amounts reflect less than four years of vesting.

 

The Company’s assumptions made for purposesof estimating the fair value of its stock options, as well as a summary of theactivity under the Company’s stock option plan are included in Note 14.

 

***Research and Development Costs***

 

Research and development costs are charged to operations as incurred.

 

***Advertising Costs***

 

Advertising costs include payroll, employeebenefits, and other headcount-related costs as well as expenses related toadvertising, promotions and tradeshows, and are expensed as incurred.Advertising expense included in continuing operations was $770,000, $87,000 and$9,000, in fiscal 2004, 2003 and 2002, respectively.

 

***Income Taxes***

 

Current income tax expense or benefit is theamount of income taxes expected to be payable or refundable for the currentyear.  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 arereduced by a valuation allowance when, in the opinion of management, it is morelikely than not that some portion or all of the deferred tax assets will not berealized.

 

***Net Income (Loss) per Share***

 

Basic net income (loss) per share is computedby dividing net income (loss) by the weighted average number of shares ofcommon stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income(loss) by the weighted average number of shares of common stock and commonstock equivalents outstanding during the period.  There were no employee stock options orcommon stock warrants outstanding as of June 30, 2004, 2003 or 2002.  There were 3,000, 1,017,000 and 1,134,000shares contingently issuable in connection with share exchange agreements (SeeNote 4), as of June 30, 2004, 2003 and 2002, respectively, which were notconsidered in calculating diluted net loss per common share as their effectwould be anti-dilutive. As a result, for all periods presented, the Company’sbasic and diluted net loss per share are the same.

 

The following table computes basic anddiluted net loss per share (*in**thousands, except per share amounts*):

 

F-17

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| ** **                                           | ** ** | **Year  Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                 |       |                          |       |   |   |   |   |
| Numerator:                                           |       |                          |       |   |   |   |   |
| Loss from  continuing operations                     |       | **$**                         | **(7,722** | **)** | $ | (6,366 | ) | $ | (36,529 | ) |
| Total gain  (loss) from discontinued operations      |       | **—**                    | ** ** | — |   | 17,554 |   |
| Net loss                                             |       | **$**                         | **(7,722** | **)** | $ | (6,366 | ) | $ | (18,975 | ) |
|                                                 |       | ** **                    | ** ** |   |   |   |   |
| Net loss per  common share – basic and diluted: |       | ** **                    | ** ** |   |   |   |   |
| Loss from  continuing operations                     |       | **$**                         | **(0.14**  | **)** | $ | (0.10 | ) | $ | (0.57 | ) |
| Gain (loss)  on discontinued operations              |       | **—**                    | ** ** | — |   | 0.27 |   |
| Net loss                                             |       | **$**                         | **(0.14**  | **)** | $ | (0.10 | ) | $ | (0.30 | ) |
|                                                 |       | ** **                    | ** ** |   |   |   |   |
| Denominator:                                         |       | ** **                    | ** ** |   |   |   |   |
| Common  shares outstanding – basic and diluted  |       | **53,994**                    | ** ** | 63,144 |   | 64,233 |   |

 

***Reclassifications and Adjustments***

 

Certain prior period amounts have been reclassified to conform to thecurrent period presentation.  Suchreclassifications had no effect on net loss.

 

***Recently IssuedAccounting Standards***

 

In January 2003, the FASB issued FIN 46, *Consolidationof Variable Interest Entities*(“FIN 46”). FIN 46 was revised in December 2003.  FIN 46 establishes accounting guidance forconsolidation of a variable interest entity (“VIE”), formerly referred to asspecial purpose entities. FIN 46 applies to any business enterprise, bothpublic and private, that has a controlling interest, contractual relationshipor other business relationship with a VIE. FIN 46 provides guidance for determiningwhen an entity (“Primary Beneficiary”) should consolidate a VIE that functionsto support the activities of the Primary Beneficiary. The application of FIN 46is required for periods ending after December 15, 2003.   The Company adopted FIN 46 during fiscal2004. The Company has no contractual relationship or other businessrelationship with a VIE, and therefore the adoption of FIN46 had no effect onthe financial position, results of operations, or cash flows as of or for theyear ended June 30, 2004.

 

In January 2003, the EITF published EITF Issue 00-21, *Revenue Arrangements with Multiple Deliverables* (“EITF 00-21”),which requires companies to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting. In applying EITF 00-21,revenue arrangements with multiple deliverables should be divided into separateunits of accounting, if the deliverables in the arrangement meet certaincriteria. Arrangement consideration should be allocated among the separateunits of accounting based on their relative fair values. This issue iseffective for revenue arrangements entered into in fiscal periods beginningafter June 15, 2003.  The Companyadopted EITF 00-21 during fiscal 2004. The adoption did not have a materialeffect on the Company’s financial position, results of operations, or cashflows as of or for the year ended June 30, 2004.

 

In April 2003, the FASB issued SFAS 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*(“SFAS149”).  SFAS 149 amends and clarifies financial accounting and reportingfor derivative instruments and hedging activities.  SFAS 149 is effectivefor contracts entered into or modified after June 30, 2003.  The Company adopted SFAS 149 during fiscal2004. The adoption did not have a material effect on the Company’s financialposition, results of operations, or cash flows as of or for the year ended June 30,2004.

 

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 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, 2003 and toall other instruments that exist as of the beginning of the first interimfinancial reporting period

 

F-18

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beginning after June 15, 2003, with the exception of mandatorilyredeemable instruments of non-public companies, which become subject to SFAS150 for fiscal periods beginning after December 15, 2003.  TheCompany does not expect SFAS 150 to impact the classification of itsoutstanding preferred stock instruments upon the Company’s adoption effectivefor fiscal 2005.

 

In November 2004, the FASB issued SFAS 151, Inventory Costs, whichrevised ARB 43, relating to inventory costs. This revision is to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts and wasted material (spoilage). This Statement requires that these itemsbe recognized as a current period charge regardless of whether they meet thecriterion specified in ARB 43. In addition, this Statement requires theallocation of fixed production overheads to the costs of conversion be based onnormal capacity of the production facilities. SFAS 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005. The Company does not believe the adoption of SFAS 151 will have amaterial impact on the Company’s financial statements.

 

In December 2004, the FASB issued SFAS 123R, *Share-BasedPayment* (“SFAS 123R”) is a revision of SFAS 123 and supersedes APB25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsicvalue method of accounting, and requires companies to recognize the cost ofemployee services received in exchange for awards of equity instruments, basedon the grant date fair value of those awards, in the financial statements. Theeffective date of SFAS 123R is the first reporting period beginning after June 15,2005.  SFAS 123R permits companies toadopt its 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.

 

The Company currently utilizes a standard option pricing model (i.e.,Black-Scholes) to measure the fair value of stock options granted to Employees.While SFAS 123R permits entities to continue to use such a model, the standardalso permits the use of a “lattice” model. The Company has not yet determinedwhich model it will use to measure the fair value of employee stock optionsupon the adoption of SFAS 123R.

 

The Company currently expects to adopt SFAS 123R effective July 1,2005.   However, because the Company hasnot yet determined which of the aforementioned adoption methods it will use,the Company has not yet determined the impact of adopting SFAS 123R.

 

**Note 4 – Acquisitions and Dispositions –Majority Owned Subsidiaries**

 

***Correlant Communications, Inc.***

 

On March 31, 1999, the Company entered into a share exchangeagreement which provided for the acquisition of 94.5% of the issued andoutstanding common shares of Correlant, representing an 81% ownership interestin Correlant.  Consideration paid for thepurchase was 9,657,000 Opta common shares valued at $7.21 per share plus contingentlyissuable shares of up to 1,435,000.  Thecontingent shares were issuable as Correlant options specified in the agreementwere exercised.  For each optionexercised, 81% of such shares were to be transferred to Opta in exchange for0.5364 shares of Opta common stock for each share of Correlant stocktransferred.  Due to the nature of thecontingent consideration, the Company could not at the time reasonablydetermine whether the additional shares would be issued. Accordingly, pursuantto the provisions of APB 16, *Business Combinations*(“APB 16”), the contingent consideration is not recorded until suchdetermination can be reasonably made.  Atthe acquisition date, the excess of the purchase price and related costs overthe value assigned to the net tangible assets acquired was $74,545,000 and wasassigned to goodwill.  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.  There were nocontingently issuable shares issued during fiscal 2002.

 

In April 2000, as partof the Correlant acquisition agreement, Opta provided Correlant with$10,000,000 of non-

 

F-19

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interest bearing convertibledebt financing.  The debt was convertedinto 10,000 shares of Series D preferred stock on September 30, 2000.  Correlant has Series A, B, C and Dconvertible preferred stock with total liquidation preferences over the commonstockholders of $3,450,000, $1,000,000, $4,000,000 and $10,000,000,respectively.   In the event the proceedsavailable for distribution are insufficient to pay all Correlant preferredshareholders the full amount of the liquidation preference, the availableproceeds shall be distributed ratably among Correlant’s preferred shareholders.

 

From December 1999through October 2000, the Company sold a total of 4,313,000 of its sharesin Correlant to various third parties. The sales reduced the Company’s ownership in Correlant to 73% of theoutstanding common stock, representing a 62% ownership interest.

 

***Arescom, Inc.***

 

On March 31, 1999, the Company entered into a share exchangeagreement which provided for the acquisition of 81% of the issued andoutstanding common shares of Arescom. Consideration for the purchase was 3,886,000 Opta common shares.  At the acquisition date, the excess of thepurchase price and related costs over the value assigned to the net tangibleassets acquired was $27,330,000 and was assigned to goodwill.

 

During July 2000, Optasold 300,000 shares of its Arescom stock, to an unrelated party, which had minimalimpact on its ownership percentage.

 

Effective December 18, 2001, Opta sold, to an unrelated partyapproximately 92% of its investment in Arescom, representing 65% of theoutstanding securities of Arescom for $10,000,000.  In connection with this agreement, allrelated purchase agreements from March 1999 were terminated and theCompany was released from all liability as a guarantor of Arescom’sindebtedness to an unrelated third party. In addition, the Company and Arescom entered into an exchange agreement,whereby the Company forgave $13,235,000 due from Arescom in exchange for a newpromissory note (“New Note”) for the principal sum of $2,192,000 and 11,000shares of subordinated preferred stock of Arescom.  The Company determined that there was novalue associated with the 11,000 shares of subordinated preferred stock ofArescom.  Immediately following the saleof its majority interest in Arescom, the Company determined that the value ofits remaining 6% interest in Arescom was impaired.

 

The New Note became due November 3, 2002 and accrued interest at arate of 4% per annum.  The payment ofprincipal under the New Note and interest thereon, was secured by the grants toOpta of a security interest in all of the Company’s right, title and interestin all amounts owing to the Company from Microsoft Corporation under the ModemPurchase Agreement, dated February 7, 2000 among Arescom and MicrosoftCorporation pursuant to the Loan and Security Agreement.  Arescom was unable to make payments inaccordance with the terms of the agreement and became delinquent on thenote.  In May 2003, the Company filed anaction against Arescom seeking to recover from Arescom $1,704,000, representingamounts previously due on the promissory note and damages resulting fromArescom’s failure to cooperate with the Company in its efforts to restate andreaudit the Company’s consolidated financial statements for prior periods.  In September 2003, the Company sold itsremaining 6% interest in Arescom.  On thesale date, the 6% ownership interest in Arescom had no value. In September 2003,the Company settled all claims against Arescom, including all amountspreviously due on the promissory note dated December 14, 2001.  The balance due on the New Note at June 30,2003 of $1,592,000 was received in full during fiscal 2004.

 

In addition, as part of the settlement, the Company also exchanged withcertain shareholders of Arescom all of the shares of Arescom common stock andSeries B Preferred Stock held by the Company for all of the shares of theCompany’s common stock held by such shareholders.  Pursuant to the stock swap agreement, theCompany was to acquire up to 3,886,000 shares of its stock.  To date, the Company has received 3,578,000shares of its stock, which has beenaccounted for as treasury stock and valued at $179,000 based on the adjustedclosing sales price of $0.05 per share as reported by the National QuotationBureau’s “Pink Sheets” and was recorded inOther income (expense) on the consolidated statement of operations duringfiscal 2004. Arescom agreed to hold in escrow all of the Arescom sharespreviously held by Opta for a period of one year.  At the end of such period, if any additionalshareholders have not then tendered their Opta shares and as a result, Arescomhas not distributed the escrowed Arescom shares,

 

F-20

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Arescom will retain the escrowed Arescom shares and indemnify Opta forany claims by shareholders who have not then tendered their Opta shares.  There was no value on the Company’s books forthe Arescom shares at the date of the transactions.

 

During fiscal2002, the Company recognized a net gain of $16,765,000, which includes a taxbenefit of $1,802,000, on the sale, exchange of the debt and impairment of theremaining value of its investment. Additionally, the sale of Arescom and its related operating results havebeen excluded from the results from continuing operations and classified as adiscontinued operation during fiscal 2002 in accordance with the requirementsof SFAS 144.

 

The followingis a summary of the results of discontinued operations (unaudited) relating toArescom for the year ended June 30, 2002 (*in thousands*):

 
| Net revenues                       |   | $      | 38,200 |   |
|------------------------------------|--------|--------|--------|--------|
| Cost of net  revenues              |   | 27,295 |   |
| Gross profit                       |   | 10,905 |   |
|                               |   |   |   |
| Operating  expenses                |   |   |   |
| General and  administrative        |   | 7,342  |   |
| Amortization                       |   | 2,702  |   |
|                               |   |   |   |
| Loss from  operations              |   | 861    |   |
| Other  expense                     |   | (72    | )      |
| Gain from  discontinued operations |   | $      | 789    |   |

 

***Lotus World***

 

On April 22, 1999, Opta organized Lotus World, Inc (“LotusWorld”) and invested $1,000,000.  On March 12,2002, the Company and Lotus World entered into an Asset Purchase and Assignmentand Assumption Agreement with Avtech Technology, whereby the Company assignedits rights to certain contracts and related intangible assets to Avtech inexchange for Avtech’s assumption of all of the Lotus World’s obligations underthe contracts assigned.  There was nogain or loss associated with the transaction with Avtech.  Subsequent to the completion of thetransaction, the Company dissolved Lotus World.

 

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

 

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

 

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 for$420,000, representing the return of the $250,000 deposit used in theacquisition of the GoVideo product line and $170,000 for related transactionfees and expenses. In addition, Opta Systems agreed to pay up to an additional$200,000 for legal fees incurred by Carmco and an additional $100,000 ifcertain significant vendors continued their relationship with Opta Systemsthrough October 2003.  Subsequent tothe closing, the Company paid an additional $294,000 in connection with theseitems.  In connection with this agreement,the $5,986,000 originally loaned to Opta Systems was converted to a capitalcontribution, resulting in a total purchase price, including actualout-of-pocket expenses of approximately $6,770,000.  In October 2003, the purchase price wasreduced by $962,000 based on a settlement with SONICblue concerning thepurchase price of certain assets acquired, resulting in an adjusted purchaseprice of $5,808,000. The $962,000 was refunded to GoVideo and is recorded as anote payable to the Company.  Thefollowing is a condensed balance sheet showing the fair values of the assetsacquired and the liabilities assumed on the date of acquisition (*in thousands*):

 

F-21

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

 

***The amount allocated to intangibles includes $2,420,000allocated to the GoVideo Tradename, for*** the acquisition cost of the tradenameused to market the GoVideo 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 Tradenameand goodwill are not amortized in accordance with***SFAS142, as the lives are deemed indefinite***. For income tax purposes, theentire amount of the goodwill is deductible.***

 

**Note 5 – Acquisitions and Dispositions –Equity Method Investess**

 

***TCL DigitalTechnologies, Ltd.***

 

As discussed in Note 1, in January 2003, the Company entered intoan agreement to form a joint venture with Youbang, TCL Computer, an affiliateof TCL Industries and all the equity holders of Youbang, pursuant to which theCompany acquired a 50% interest in a new joint venture to own substantially allof Youbang’s operations. Pursuant to the agreement, all of Youbang’s assets,other than real estate, were transferred to a newly formed Beijing, China jointventure named TCL Digital Technologies, Ltd. (“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 enteredinto an agreement with TCL Information Technology Industrial (Group) Ltd, anaffiliate of TCL Industries whereby the Company sold its 50% interest in TCLDigital for an aggregate amount of $5,604,000, of which $1,842,000 was appliedto repay the sum payable under the promissory note dated August 18, 2003issued by the Company in favor of TCL International Holdings Limited (“TCLHoldings”), TCL Industries parent company. The balance of $3,762,000 was paid to the Company resulting in a gain of$1,053,000 included with Gain on sale of investments in the Company’s statementof operations during fiscal 2004.

 

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

 

The following summarizes components ofaccounts receivable, net (*in thousands*):

 
| ** **                       | ** ** | **June 30,** | ** ** |
|----------------------------------|------------|-------------------|------------|
| ** **                       | ** ** | **2004**          | ** ** | **2003** | ** ** |
|                             |       |              |       |   |   |
| Accounts  receivable             |       | **$**             | **26,045** | ** ** | $ | 6,886 |   |
| Allowance  for doubtful accounts |       | **(517**          | **)**      | (39 | ) |
|                             |       | **$**             | **25,528** | ** ** | $ | 6,847 |   |

 

The following summarizes components ofaccounts receivable from related parties, net (*in thousands*):

 

F-22

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| ** **                                | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2004**          | ** ** | **2003** | ** ** |
|                                      |       |              |       |   |   |
| Accounts receivable  from related parties |       | **$**             | **1,946**  | ** ** | $ | 1,985 |   |
| Allowance  for doubtful accounts          |       | **(1,946**        | **)**      | (1,946 | ) |
|                                      |       | **$**             | **—** | ** ** | $ | 39 |   |

 

**Note 7 – Inventories**

 

The following summarizes components ofinventories (*in thousands*):

 
| ** **                        | ** ** | **June 30,** | ** ** |
|-----------------------------------|------------|-------------------|------------|
| ** **                        | ** ** | **2004**          | ** ** | **2003** | ** ** |
|                              |       |              |       |   |   |
| Raw materials                     |       | **$**             | **—** | ** ** | $ | — |   |
| Service replacement parts         |       | **1,494**         | ** ** | 2,558 |   |
| Finished  goods                   |       | **17,020**        | ** ** | 3,880 |   |
|                              |       | **18,514**        | ** ** | 6,438 |   |
| Allowance  for obsolete inventory |       | **(510**          | **)**      | — |   |
|                              |       | **$**             | **18,004** | ** ** | $ | 6,438 |   |

 

**Note 8 –Property and Equipment**

 

The followingsummarizes components of property and equipment (*in thousands*):

 
| ** **                                 | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2004**          | ** ** | **2003** | ** ** |
|                                       |       |              |       |   |   |
| Computer  hardware and purchased software  |       | **$**             | **255**    | ** ** | $ | 2,086 |   |
| Office  furniture and lab equipment        |       | **852**           | ** ** | 2,483 |   |
| Leasehold  improvements                    |       | **464**           | ** ** | 628 |   |
|                                       |       | **1,571**         | ** ** | 5,197 |   |
| Accumulated  depreciation and amortization |       | **(488**          | **)**      | (4,129 | ) |
|                                       |       | **$**             | **1,083**  | ** ** | $ | 1,068 |   |

 

**Note9 – Line of Credit**

 

In July 2003,GoVideo entered into a financing agreement last amended and restated in May2004.  The maximum line of creditavailable was $40,000,000 (reduced to $30,000,000 on July 15, 2004)limited by a borrowing base (“Borrowing Base”) determined by specific inventoryand receivable balances, and provides for cash loans, letters of credit andacceptances.  The agreement, as amended,matures July 21, 2007.  Interest ischarged at prime plus 1/2 percent subject to a minimum of not less than $15,000per calendar month.  GoVideo pays amonthly fee on the unused balance of the line of credit of 0.25 percent peryear.  Borrowings under GoVideo’s line ofcredit are collateralized by all of GoVideo’s assets and up to $5,000,000 ofthe credit facility is guaranteed by Opta. Under the current credit facility, GoVideo is required to comply withcertain financial covenants and conditions which include earning minimum levelsof net income.  During April andJune, 2004 GoVideo did not comply with the financial covenants as the requiredminimum net income was not achieved. GoVideo received a waiver letter from the lender for the April 2004noncompliance.    However, the lender didnot waive the June 2004 noncompliance. Therefore, interest began accruing at the default rate of prime plus 31/2% on June 1, 2004.  Subsequent toJune 30, 2004, GoVideo entered into a forbearance agreement with thelender.  See note 20.

 

**Note10 – Notes Payable to Related Parties**

 

InJune 2003, GoVideo borrowed $6,283,000 from TCL Industries and Asia FocusIndustrial Ltd., entities affiliated

 

F-23

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withTCL, to fund inventory purchases and operating expenses.  These advances, which accrue interest atannual rates of approximately 4% were due at various dates during 2004.  Principal and interest payments of $282,000were made by GoVideo during fiscal 2004. Interest on these loans accrued during fiscal year 2004 totaled$240,000.  As of June 30, 2004, thebalance due on these advances totaled $6,241,000.  Both advances are subordinate to GoVideo’sbank line of credit.  See note 9.  Both loans are collateralized by 100% of theCommon and Preferred Series D stock of Correlant Communications owned byOpta.  Subsequent to year end, thematurity dates of both loans were extended. See note 20.

 

Duringfiscal 2004, Opta entered into a financing agreement with TCL Industries.  On October 22, 2003 Opta entered thefirst agreement to borrow $4,500,000 with a maturity date of January 22,2004 and an interest rate of approximately 3%. Opta ultimately loaned the funds to GoVideo to fund inventory purchasesand operating expenses. See Note 13. When the original agreement matured in January 2004, Opta paid theaccrued interest of $35,000 and extended the principal six months until August,2004.  As of June 30, 2004 theprincipal and interest balance due on the note totaled $4,554,000.  Subsequent to year end, the maturity date ofthe loan was extended.  See note 20.  The loan is collateralized by 100% of Opta’sCommon and Preferred Series D stock of Correlant Communications.   See Notes 4 and 20.

 

**Note 11 – Restructuring Charges**

 

During thesecond quarter of fiscal 2004, Correlant’s board of directors approved the winddown and cessation of Correlant’s historical operations in the cable modem andCMTS business.  See Note 1.  In connection with the shut down, Correlantrecorded a restructuring charge of $1,845,000 during fiscal 2004.  The following table summarizes the activityin Correlant’s reserves associated with its shut down of historical operations(*in thousands*):

 
| ** **                             | ** ** | **Separation  costs for  terminated  employees and  contractors** | ** ** | **Facilities  closing (see  Note 20)** | ** ** | **Other (see  Note 13)** | ** ** | **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** | ** ** |

 

**Note 12 –Warranty Reserve**

 

The following table presents changes in the Company’s product warrantyreserve (*in thousands*):

 
| Balance at 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**   | ** ** |

 

#### **Note 13 – Related PartyTransactions**

#### ** **

***Opta***

 

During fiscal 2002, the Company incurred consulting expense in theamount of $46,000 to entities related to a significant shareholder of theCompany.  There were no such relatedparty transactions during fiscal 2004 or 2003. During fiscal years 2003 and 2002,the Company leased a portion of the building to a significant shareholder.  See Note 16. There were no such related party transactions during fiscal 2004 norwere there any related amounts due from this shareholder as of June 30,2004 or 2003.

 

F-24

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***GoVideo***

 

During fiscal2004 and 2003, Opta advanced $7,300,000 and $3,353,000, respectively, toGoVideo to fund GoVideo’s inventory purchases and fund operating expenses.  GoVideo paid back $2,000,000 on June 30,2004.  The remaining unpaid advances,which accrue interest at annual rates of 3% to 5%, were due at various datesthrough January 2004.  Go Video andthe Company are currently negotiating extensions for the due dates.  All such advances have been eliminated in theaccompanying financial statements.

 

BetweenNovember 2003 and June 2004, GoVideo obtained credit terms fromvarious suppliers totaling approximately $16,000,000 through corporateguarantee letters from TCL Industries and TCL International Holdings Limited,both of which are related parties.  Inaddition, GoVideo is able to obtain more advantageous terms from certainvendors in China by purchasing products from those vendors through TCL.

 

***Correlant***

 

**CooperativeResearch and Development Agreement**.  During the periods presented in this report,Correlant had significant transactions with two related partystockholders.  In 1997, Correlantestablished a relationship with Toshiba Corporation (“Toshiba”) by enteringinto a cooperative research and development agreement.  As part of this arrangement, Correlant agreedto pay Toshiba a percentage of the selling price of each developed product soldto customers, other than Toshiba, which utilized the technology developed underthe agreement.  Effective February 1,2002 as part of the aforementioned change in business model, Correlant nolonger sold completed cable modems.  As aresult, there were no royalties paid to Toshiba during fiscal 2004 and 2003.  Royalty expense to Toshiba was $52,000 forfiscal 2002.  Additionally, there were norevenues generated from sales to Toshiba during fiscal 2004.  During fiscal 2003 and 2002, Toshibaaccounted for less than 1% and 54% of the Company’s revenues, respectively. TheCompany had no amounts due from or to Toshiba at June 30, 2004 or June 30,2003.

 

As part of thecessation of Correlant’s historical operations in the cable modem and CMTSbusiness, Correlant and Toshiba entered into a settlement and release agreementdated February 5, 2004.  As part ofthe settlement agreement, Toshiba agreed to release Correlant from any and allliabilities associated with cable modems previously sold to Toshiba in exchangefor Correlant’s best efforts in submitting two Toshiba cable modem models forCablelabs’ DOSCIS 1.1 certification. During the third and forth quarters of fiscal 2004, Correlant incurredcosts totaling $372,000 associated with the certification process, which isincluded in Restructuring charges (see Note 11) on the Company’s statement ofoperations.  Correlant received theDOCSIS 1.1 certification for both cable modems submitted to Cablelabs on behalfof Toshiba.

 

**Manufacturing and Sales.**  During the periods presented in this report,Correlant also had an established relationship with TurboComm, a company locatedin Taiwan that manufactures high-speed data over cable technologyproducts.  Correlant purchased thecompleted cable modems and CMTS units from TurboComm.  During fiscal 2004, 2003 and 2002, purchasesfrom TurboComm were $97,000, $271,000 and $20,439,000, respectively.  As of June 30, 2004 and 2003 the Companywas liable to TurboComm for $170,000 and $73,000, respectively and is includedin Accounts payable to related parties in the consolidated balance sheet.

 

Additionally,during fiscal 2001, Correlant began selling the MAC to TurboComm for use bythem in their own products.  For fiscal2004, 2003 and 2002, MAC sales to TurboComm accounted for less than 1%, 42% and35% of total consolidated net revenues, respectively. The accounts receivablefrom TurboComm was fully reserved at June 30, 2004 due to a lawsuit (seeNotes 16 and 20).  As of June 30,2003 and 2002, TurboComm was liable to the Company for $39,000, net of relatedallowance for doubtful accounts of $1,946,000 and $7,070,000, respectively, andis included in Accounts receivable from related parties, net in theconsolidated balance sheet.

 

**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

 

F-25

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shareand 100,000 shares are authorized. Series A preferred stock has the same voting rights as common stock, aliquidation preference of $10 per share, is entitled to the right to receivedividends on the same per share basis as common shareholders and is redeemableby the Company, at its sole option in whole or in part, at any time at $10 pershare.  There are 4,000 shares issued andoutstanding at June 30, 2004, 2003, and 2002.

 

**Common Stock Transactions**

 

Duringfiscal 2004 and 2003, the Company issued 5,000 and 3,000 shares of common stockvalued at $36,000 and $21,000, respectively, to Correlant shareholders inconnection with the Share Exchange Agreement. See Note 4.  There were no sharesissued during fiscal 2002.

 

**Treasury Stock Transactions**

 

From September 2003 through June 2004, the Companyrepurchased 6,936,000 shares of its common stock at $0.30 per share for a totalcost of $2,081,000.   The Board ofDirectors plans to continue to review potential repurchases of its common stockand will continue to approve the repurchase transactions on a case by casebasis.

 

As discussed in Note 4, the Company has received3,578,000 shares of its stock as a result of the settlement with Arescom.

 

**Subsidiary Stock Transactions**

 

Duringfiscal 2004, 2003 and 2002, Correlant issued 12,000, 7,000, and 6,000 sharesupon the exercise of options for proceeds of $1,000, $250 and $9,000,respectively. For fiscal 2004, 2003 and 2002, the Company recorded $1,000, $0 and$4,000, respectively, in consolidated equity for the issuance of theseshares.  The remaining amount wasrecorded as Non-controlling interest in subsidiaries on the consolidatedbalance sheet. These transactions did not materially affect the Company’s ownershipof Correlant.

 

During fiscal 2004, 2003, and 2002,Correlant recognized compensation expense (reversal) of $(104,000), $592,000and $1,657,000, respectively for the difference between the exercise price andfair value of stock options issued to employees.  During fiscal 2004, 2003 and 2002, theCompany recorded $(75,000), $429,000 and $1,203,000 in consolidated equity forthe recognition of the compensation expense (reversal).  The remaining amount was recorded asNon-controlling interest in subsidiaries on the consolidated balance sheet.

 

At the date the Company acquired themajority interest in Correlant, Correlant had preferred stock outstanding thatOpta did not acquire.  In addition, in April andMay 1999, Correlant sold preferred stock to third parties for net proceeds of$1,463,000, which was recorded as Non-controlling interest in subsidiaries onthe consolidated balance sheet.  Thepreferred stock held by third parties has a liquidation preference over thecommon shareholders of $8,425,000, which was included in Non-controllinginterest in subsidiaries on the consolidated balance sheets for fiscal 2004 and2003.

 

**Stock Warrants**

 

In May 1997, the Companyissued 8,000,000 common stock warrants for $80,000.  Each warrant entitled the holder to purchaseone share of the Company’s common stock at $6 per share. All warrants expiredMay 5, 2002 and as such, the $80,000 proceeds received were reclassed fromwarrants to additional paid in capital at June 30, 2002.

 

**Stock Option Plans**

 

***Opta***

 

In May 1997, Opta granted 1,090,000options to certain officers and key employees with an exercise price of $6.00per share, which was the market price of Opta’s common stock at the time ofgrant.  Options were 100% vested whengranted and expire five years from grant date. All options expired during the year ended June 30, 2002 and as such

 

F-26

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there were no options outstanding as of June 30,2004, 2003 or 2002.

 

The shareholders approved the 2000 EquityIncentive Plan (“Incentive Plan”) on April 28, 2000. The Board ofDirectors administers the Incentive Plan. Employees, directors, and consultantsof the Company and its affiliates, who in the judgment of the Board rendersignificant service to the Company, are eligible to participate. The IncentivePlan provides for the award of a broad variety of stock-based compensationalternatives such as nonstatutory stock options, incentive stock options,restricted stock, performance awards and stock appreciation rights. The IncentivePlan provided 11,355,000 shares of common stock to be offered. The vestingprovisions of individual options may vary. The exercise price shall not be lessthan 100% of the fair market value of a common stock on the grant date. Nooptions have been granted since the Incentive Plan’s adoption.

 

***GoVideo***

 

Currently, GoVideo has no approved stockoption or stock issuance plan.

 

***Correlant***

 

In March 1998, Correlant’s Board ofDirectors approved the 1998 Stock Option/Stock Issuance Plan (“1998 Plan”)under which 8,500,000 shares of common stock are authorized for issuance, andreserved for purchase upon exercise of options granted.  The 1998 Plan provides for the grant ofincentive and non-statutory options and issuance of common stock under thestock issuance program (as defined) to employees, directors, and consultants.

 

The exercise price of incentive stockoptions must equal at least the fair value on the date of grant and theexercise price of non-statutory stock options and the issuance price of common stockunder the stock issuance program may be no less than 85% of the fair value onthe date of grant or issuance.  Theoptions are exercisable for a period of up to ten years after the date ofgrant.  Options granted prior to August 2001vest over four years at the rate of 25% on each anniversary of the vestingstart date.  Options granted subsequentto August 2001 vest over three years at the rate of 33% after the firstand second anniversaries and the remainder after the third anniversary.

 

Correlant reviewed its exercise pricesand arrived at the fair value for accounting purposes for each option grantsince July 1, 1999.  With respect tothe 597,000 options granted between July 1, 1999 and June 30, 2000,the Company recorded deferred stock compensation of $5,144,000 for thedifference between the exercise price per share determined by Correlant’s Boardof Directors and the fair value per share for accounting purposes at the grantdate.  The approximate weighted averagefair value per share for accounting purposes was $14.23.  Deferred stock compensation is recognized andamortized on an accelerated basis in accordance with FIN 28 over the vestingperiod of the related options, generally four years.

 

In connection with Opta’s acquisition ofCorrelant in March 1999, Opta obtained the right to acquire up to2,674,000 additional Correlant shares upon acquisition of such shares by theoption holders.  All options granted byCorrelant through December 21, 1999 are subject to an exchange agreement,whereby Opta acquires 81% of the shares exercised in exchange for 0.5364 sharesof Opta stock for each Correlant share exchanged.  The Opta shares into which the acquiredshares are exchangeable were restricted from sale until Correlant met certainfinancial milestones and the options were, at the time of grant, considered tobe contingent.  Effective August 31,2000, the restrictions were removed and, accordingly, the Company recordeddeferred stock compensation for 2,613,000 previously contingent options thatwere outstanding as of the date the restrictions were lifted.  The deferred stock compensation recordedrelated to these shares is being amortized over the vesting periods of therelated options on an accelerated basis in accordance with FASB Interpretation28, *Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans*(“FIN 28”).   The total deferred compensation relating tothe previously contingent options is $9,034,000 based on the value of theoptions on the date the contingency was removed.

 

The following table summarizes stockoption activity under the 1998 Stock Option Plan and related informationthrough June 30, 2004 (*in thousands*):

 

F-27

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

 

As of June 30, 2004, 2003 and 2002, there were 19,000, 2,868,000and 2,080,000 options exercisable, respectively, at the weighted average pricesof $1.09, $1.31 and $1.18 per share, respectively.  There are 8,228,000 shares available forfuture grant at June 30, 2004.

 

The following table summarizes alloptions outstanding by price range as of June 30, 2004 (*in thousands*):

 
| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                              | ** ** |
|-------------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $ 0.50 to  1.50          |       | 19,000                  |       | 5.94                                                 |       | $ | 1.01 |   | 19,000 |   | $ | 1.09 |   |
|                               |            |                         |            |                                                      |            |  |  |  |  |  |  |  |  |

 

As discussed in Note 3, the Company accounts for stock-based awardsusing the intrinsic 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 2004 or 2003.  Theweighted-average fair value of options granted during the year ended June 30,2002 was $1.14. There were no options granted in 2001. The calculations weremade using the Black-Scholes option-pricing model. The fair value of theCompany’s stock-based awards to employees was estimated assuming no expecteddividend and the 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 formadisclosures, the estimated fair value is amortized on an accelerated basis inaccordance with FIN 28 over the vesting period.

 

**Note 15 – Income Taxes**

 

The provision (benefit) for income taxesfor fiscal 2004, 2003 and 2002 is comprised of the following (*in thousands*):

 
| ** ** | ** ** | **Year Ended June 30,** | ** ** |
|------------|------------|------------------------------|------------|
| ** ** | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|       |       |                         |       |   |   |   |   |
| Current:   |       |                         |       |   |   |   |   |
| Federal    |       | **$**                        | **(500**   | **)** | $ | (111 | ) | $ | (5,016 | ) |
| State      |       | **2**                        | ** ** | 2 |   | 2 |   |
| Foreign    |       | **—**                   | ** ** | — |   | (164 | ) |
|       |       | **(498**                     | **)**      | (109 | ) | (5,178 | ) |
| Deferred:  |       | ** **                   | ** ** |   |   |   |   |
| Federal    |       | **—**                   | ** ** | — |   | 1,564 |   |
| State      |       | **—**                   | ** ** | — |   | 433 |   |
| Foreign    |       | **—**                   | ** ** | — |   | — |   |
|       |       | **—**                   | ** ** | — |   | 1,997 |   |
| Total      |       | **$**                        | **(498**   | **)** | $ | (109 | ) | $ | (3,181 | ) |

 

F-28

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The reported provision (benefit) forincome taxes for the year ended June 30, 2004, 2003 and 2002 differ fromthe amount computed by applying the statutory federal income tax rate of35 percent to the consolidated income (loss) before income taxes asfollows (*in thousands*):

 
| ** **                                       | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                             |       |                         |       |   |   |   |   |
| Provision  (benefit) computed at statutory rates |       | **$**                        | **(2,702** | **)** | $ | (2,266 | ) | $ | (13,899 | ) |
| Increase  (reduction) resulting from:            |       | ** **                   | ** ** |   |   |   |   |
| Non-deductible  goodwill                         |       | **—**                   | ** ** | — |   | 11,979 |   |
| Non-deductible  expenses                         |       | **18**                       | ** ** | 8 |   | 7 |   |
| State taxes,  net of federal benefit             |       | **2**                        | ** ** | 2 |   | 435 |   |
| Utilization  of NOLs                             |       | **—**                   | ** ** | (111 | ) | (4,425 | ) |
| Utilization  of tax credits                      |       | **(171**                     | **)**      | — |   | — |   |
| Valuation  allowance                             |       | **2,355**                    | ** ** | 2,258 |   | 2,722 |   |
| Total                                            |       | **$**                        | **(498**   | **)** | $ | (109 | ) | $ | (3,181 | ) |

 

The components of the Company’s netdeferred income tax assets are as follows (*in thousands*):

 
| ** **                                   | ** ** | **As of June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **2004**                | ** ** | **2003** | ** ** |
|                                         |       | ** **              | ** ** |   |   |
| Current  deferred tax assets:                |       | ** **              | ** ** |   |   |
| Accrued  expenses                            |       | **$**                   | **658**    | ** ** | $ | 836 |   |
| Deferred  compensation                       |       | **4,734**               | ** ** | 5,486 |   |
| Deferred  revenue                            |       | **97**                  | ** ** | 45 |   |
| Inventory  reserves                          |       | **676**                 | ** ** | 2,054 |   |
| Allowance  for bad debts                     |       | **1,123**               | ** ** | 3,170 |   |
| Total                                        |       | **7,288**               | ** ** | 11,591 |   |
| Valuation  allowance for deferred tax assets |       | **(7,288**              | **)**      | (11,591 | ) |
| Net deferred  tax assets                     |       | **$**                   | **—** | ** ** | $ | — |   |
|                                         |       | ** **              | ** ** |   |   |
| Non-current  deferred tax assets:            |       | ** **              | ** ** |   |   |
| Net  operating loss carryforwards            |       | **$**                   | **8,937**  | ** ** | $ | 4,247 |   |
| Tax credit  carryforwards                    |       | **1,883**               | ** ** | 1,539 |   |
| Basis  difference in joint venture           |       | **—**              | ** ** | 25 |   |
| Other                                        |       | **633**                 | ** ** | (32 | ) |
| Total                                        |       | **11,453**              | ** ** | 5,779 |   |
| Valuation  allowance for deferred tax assets |       | **(11,453**             | **)**      | (5,779 | ) |
| Net deferred  tax assets                     |       | **$**                   | **—** | ** ** | $ | — |   |

 

The net change in the total valuation allowance for fiscal 2004 and 2003 was an increase of $1,371,000 and $9,253,000, respectively.  In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical operating results and projections of taxable income for the future, the Company has determined that it is more likely than not that the deferred tax assets will not be realized through future taxable earnings. Accordingly, a valuation allowance was recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. There can be no assurance that the Company will ever be able to realize the benefit of some or all of the federal and state loss carryforwards either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards.

 

At June 30, 2004, the Company had aCalifornia net operating loss carryforward of $16,894,000 which will begin toexpire in 2013 unless previously utilized. At June 30, 2004, the Company had a Federal net operating losscarryforward of $18,445,000 which will begin to expire in 2023 unlesspreviously utilized.  The federal netoperating

 

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losses generated in fiscal 2002 and 2001were carried back to fiscal 2000 and are reflected as an income tax receivablein fiscal 2002.

 

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

 

At June 30, 2004, the Correlant hasfederal and California research and development credit carryforwards ofapproximately $739,000 and $971,000 respectively. The federal credit will beginto expire in 2023 unless previously utilized.

 

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

 

On September 11, 2002, the Governor of California signed into lawnew tax legislation that suspends the use of NOL carryforwards into tax yearsbeginning on or after January 1, 2002 and 2003.  Should the Company have taxable income forthe year ending June 30, 2004, it may not look to California net operatinglosses generated in prior years to offset taxable income.  This suspension will not apply to tax yearsbeginning in 2005 and beyond.

 

**Note 16 – Commitments and Contingencies**

 

***Leases***

 

The Companyleases its facilities and certain equipment under non-cancelable operatingleases, expiring at various dates through 2007. During fiscal 2003 and 2002, the Company leased a portion of thebuilding to a significant shareholder of the Company.  See Note 13. The sublease terminated August 1, 2003 when the Company moved to anew building.  Sublease income totaled$1,000 and $8,000 during fiscal 2003 and 2002, respectively.

 

GoVideo has anoperating lease for a 33,000 square foot facility that is used for both officespace and warehousing.  The lease expiresin January 2006.  Monthly rentalsare based on a fixed schedule that provides for periodic rentaladjustments during the lease term. Currently there is no option to extend the lease.

 

GoVideo alsoleases a 13,000 square foot facility under another operating lease that is usedfor warehousing.  The original term ofthe lease was five years beginning November 1999.  During fiscal 2004, the lease wasrenegotiated to expire January 2006 to coincide with GoVideo’s otherfacility lease.  Monthly rentals arebased on a fixed schedule that provides for periodic rental adjustmentsduring the lease term.  As part of therenegotiation, the original option to extend the lease term for an additionalfive years was removed from the agreement.

 

During thefiscal years covered by this report, Correlant leased approximately 26,000square feet of office space in San Diego, California, which expires November 2007.  All future lease obligations, net ofanticipated lease termination benefits, as of June 30, 2004 were accruedduring fiscal 2004 as part of the shut down of Correlant’s historicaloperations.  Such amounts are included inRestructuring charges (see Note 11) on the Company’s statement ofoperations.  Subsequent to June 30,2004, Correlant entered into a lease termination agreement.  See Note 20.

 

Future minimumannual lease payments under non-cancelable operating leases at June 30,2004 are as follows*(in thousands)*:

 
| **Year Ending June 30,** | ** ** | **Future  Minimum Lease  Payments** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|
| 2005                          |       | $                                   | 859        |   |
| 2006                          |       | 682                                 |       |
| 2007                          |       | 177                                 |       |
| 2008                          |       | —                              |       |
| 2009 and thereafter           |       | —                              |       |
|                          |       | $                                   | 1,718      |   |

 

F-30

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Rent expense totaled $856,000, $591,000and $496,000 during fiscal 2004, 2003 and 2002, respectively.

 

***PurchaseObligations***

 

As of June 30, 2004 and 2003,GoVideo had inventory purchase obligations totaling $32,575,000 and$10,738,000, respectively, which were part of the normal course of business.

 

***Litigation***

 

On April 11, 2003 Sharp Electronicsfiled suit against Correlant in the United States District Court for theDistrict of Delaware. The complaint alleged cancellation of a purchase orderoutside the allowable cancellation timeframe under the terms of the purchaseorder.  The complaint sought payment ofthe purchase order totaling $1,150,000. Correlant filed an answer on June 16, 2003, stating the componentsdelivered by Sharp Electronics did not meet product specification and wereunusable.  On that same date, Correlantfiled a counter suit for seeking recovery of components previously delivered bySharp, which also did not meet product specification.  Correlant sought to recover damages totaling$1,450,000.  On January 21, 2004Sharp agreed to settle all disputes with Correlant for $500,000, which wasaccrued as of June 30, 2003. Additionally, as part of the settlement, Correlant dropped itscountersuit.

 

On January 3,2001, Opta filed a lawsuit in the United District Court Eastern District of NewYork against William Hu, which complaint was subsequently amended July 30,2002.  In the amended complaint, Optabrought claims for breach of fiduciary duty, professional negligence,accounting and conversion relating to transfers in December 2000 ofapproximately $3,600,000 from Mr. Hu’s attorney trust account.  Mr. Hu was alleged to be the Company’scounsel from January 1998 until June 29, 2001 and CEO from January 2001to June 29, 2001.  As of June 30,2004 the case was pending.

 

In February 1999, the Company acquired 100% of Professional MarketBrokerage, Inc. (“PMB”), a Chicago-based financial trading firm that providesonline trading services and 100% of US Securities & Futures Corp. (“USSF”),a full service brokerage firm in New York, NY. In June 1999, the Companycreated USS 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 remaining 28% was deemed impaired duringfiscal 2000 and written off.  On January 16, 2002, Opta filed alawsuit in the Supreme Court of the State of New York, New York County againstUSS Online, Travelway, and Huaya Lu Tung, seeking to recover $1,800,000 inprincipal and interest due on loans made to USS Online, and seeking to piercethe corporate veil and recover such amounts from defendants Travelway and HuayaLu Tung.  The Company asserted that Ms.Tung was the Chairperson and sole owner of Travelway and Chairperson of USSOnline and the former Treasurer of the Company.

 

In February 2003, the Company enteredinto a settlement agreement with USS Online, Travelway, Mr. Hu, Ms. Tung, LotusInternational Holdings Corp (“LIH”), a shareholder of the Company and threeindividuals to settle all claims against the defendants in the two cases citedabove, subject to a number of conditions. In entering into the settlement agreement, none of the defendantsadmitted or conceded any liability in connection with the claims asserted inthe cases.  As conditions to thesettlement agreement, the Company was required to receive: (a) 3,000,000 sharesof the Company’s common stock; (b) a promissory note of LIH in the principalamount of $4,000,000, payable on February 19, 2008, with interest accruingat a rate of 3% per annum (the “Note”); (c) a stock pledge agreement, grantingto the Company a first priority security agreement in 1,000,000 shares of theCompany’s common stock as partial security for the Note (the “Pledged Shares”);(d) original stock certificates representing the Pledged Shares; (e) personalguaranty of the Note; and (f) all of the assets of USSF. To date, the Companyhas received 3,000,896 shares of the Company’s common stock.  However, the Company has not received stockcertificates for the Pledged Shares or the assets of USSF and has made demandon the other parties for fulfillment of the conditions to the settlement.  The Company has reserved the right to takeall actions for breach of the settlement, including reinstituting the originalaction.  The 3,000,896 shares of commonstock received as part of the settlement are

 

F-31

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accounted for as treasury stock and valued at$150,000 based on the adjusted closing sales price of $0.05 per share asreported by the National Quotation Bureau’s “Pink Sheets” and was recorded in Other income (expense) on the consolidatedstatement of operations during fiscal 2003.

 

On April 1, 2004, Opta filed an actionagainst TurboComm, in New Jersey Federal Court, asserting two causes of actionfor breach of contract, and over $900,000 unpaid interest. On May 27, 2004,Opta filed a Request to Enter Default against TurboComm.  On June 29, 2004, a Default was enteredagainst TurboComm. See Note 20.

 

On April 14, 2004, Correlant filed alawsuit against TurboComm in the District Court of Taiwan seeking to collectTurboComm’s outstanding debt of approximately $2,300,000. Correlant soldproducts to TurboComm and paid certain license fees on TurboComm’s behalf.  Correlant invoiced TurboComm for all productsand license fees, yet TurboComm refused to pay. A settlement was reached subsequent to June 30, 2004.  See Note 20.

 

***Employee Separation Agreements***

 

In connectionwith the Vice President of Engineering and co-founder’s resignation fromCorrelant in July 2003 (Note 1), the Company entered into an EmploymentSeparation Agreement/Consulting Agreement with the former Vice President ofEngineering.  Under the terms of theagreement, Correlant agreed to pay the former Vice President of Engineering$2,000 and repurchase 272,000 Correlant shares held by the former VicePresident of Engineering for $0.07 per share for a total of $19,000.  To date, the former Vice President ofEngineering remains in possession of his Correlant stock.  In addition, the Company agreed to pay 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.

 

In connectionwith the President and co-founder’s resignation from Correlant in July 2003(Note 1), the Company entered into an Employment SeparationAgreement/Consulting Agreement with the former President.  Under the terms of the agreement, Correlantagreed to pay to the former President $20,000 and repurchase 327,000 Correlantshares held by the former President for $0.07 per share for a total of$23,000.  To date, the former Presidentremains in possession of his Correlant stock. In addition, the Company agreed to pay the former President $23,000 permonth for one year, from January 2004 through December 2004, toprovide advice and input related to certain Correlant business matters.

 

In March 2004, GoVideo executed two-year employment agreementswith its top executives for an aggregate base salary of $891,000 per year, plusa severance package to include nine to ten months of base salary forterminations without cause.

 

**Note 17 – Employee Benefit Plan**

 

Opta has a 401(k) salary deferral Plan (“Opta Deferral Plan”), which isfunded based on employee contributions. The terms of the original Opta Deferral Plan do not require Opta to makecontributions to the Deferral Plan on behalf of each eligible employee.  As such, there were no matching contributionsduring fiscal 2004, 2003 or 2002.

 

During April 2003, GoVideo established a 401(k) plan (“GoVideoDeferral Plan”).  The terms of theGoVideo Deferral Plan do not require GoVideo to make a contribution.  Rather, matching contributions are on adiscretionary basis, equal to a percentage of an employee’s contribution to theGoVideo Deferral Plan for the year. There were no matching contributions during fiscal 2004 and 2003.

 

During the fiscal years covered by thisreport, Correlant had a 401(k) salary deferral Plan (“Correlant Deferral Plan”),which was funded based on employee contributions.  See Note 20. The terms of the Plan provided for the Company to make contributions tothe Plan on behalf of each eligible employee (as defined) in an amount equal to100% on the first 6% of the eligible employee’s deferred compensation contribution(as defined).  Correlant’s contributionsto the Deferral Plan were approximately $74,000, $213,000 and $196,000 duringfiscal 2004, 2003 and 2002, respectively.

 

F-32

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**Note 18 – Segment and Geographic Information**

 

**Segment Information**

 

FASB Statement 131, *Disclosures about Segmentsof an 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 chief operating decision makeris the Chief Executive Officer. The Company is organized geographically and byline of business. While the Chief Executive Officer evaluates results in anumber of different ways, the primary basis for which the allocation ofresources and financial results are assessed is product type.  Prior to the purchase of GoVideo, the Companyoperated in one industry segment: the development, manufacture and distributionof products used for broadband Internet access, including data-over-cableequipment and digital subscriber line (“DSL”) access and networking devices.  Subsequent to the purchase of GoVideo on April 18,2003, the Company added an additional segment to its operations: thedevelopment, marketing, and distribution of innovative, high performanceconsumer electronic products.  Thefollowing table presents a summary of the Company’s businesses and operatingsegments (*in thousands*):

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

 

Disclosed in the table below is the reconciliation of the loss fromoperations attributable to operating segments to loss from continuingoperations before income taxes and non-controlling interest and total assetsattributable to operating segments to total assets (*in thousands*):

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

 

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**Geographic Information**

 

During fiscal 2004, 2003 and 2002, theCompany recorded revenues throughout the U.S., Taiwan, Japan and Europe asdetermined by the final destination of the product.  The following table summarizes total netrevenues attributable to significant countries (*in thousands*):

 
| ** **       | ** ** | **Year Ended June 30,** | ** **  |
|------------------|------------|------------------------------|-------------|
| ** **       | ** ** | **2004**                     | ** **  | **2003** | ** ** | **2002** | ** ** |
| Japan            |       | **$**                        | **215**     |   | $ | 54 |   | $ | 30,033 |   |
| Taiwan           |       | **163**                      |        | 9,446 |   | 20,757 |   |
| U.S.             |       | **124,819**                  |        | 9,478 |   | 5,090 |   |
| Europe and other |       | **127**                      |        | 476 |   | — |   |
|             |       | **$**                        | **125,324** |   | $ | 19,454 |   | $ | 55,880 |   |

 

Presented below is informationregarding identifiable assets from continuing operations, classified byoperations located in the United States and Asia (*in thousands*):

 
| ** ** | ** ** | **June 30,** |
|------------|------------|-------------------|
| ** ** | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
| U.S.       |       | **$**             | **70,755** |   | $ | 52,586 |   | $ | 52,842 |   |
| Asia       |       | **365**           |   | 401 |   | 500 |   |
|       |       | **$**             | **71,120** |   | $ | 52,987 |   | $ | 53,342 |   |

 

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

 

The following table sets forth selected unaudited quarterly informationfor the Company’s last two fiscal years. The Company believes that all necessary adjustments (which consistedonly of normal recurring adjustment) have been included in the amounts statedbelow to present fairly the results of such periods when read in conjunctionwith the financial statements and related notes included elsewhere herein *(in thousands, except per share data):*

 
| ** **                       | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|----------------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
| 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** | **)** |
| ** **                       | ** ** | ** **        | ** ** | ** **         | ** ** | ** **        | ** ** | ** **         | ** ** |
| Fiscal 2003:                     |       |              |       |               |       |              |       |               |       |
| Total net  revenues              |       | $                 | 4,325      |               | $          | 2,725             |       | $                  | 2,047      |   | $ | 10,357 |   |
| Gross profit                     |       | 1,569             |       | 403                |       | 63                |       | 2,036              |       |
| Net loss                         |       | $                 | (1,415     | )                  | $          | (2,380            | )          | $                  | (23        | ) | $ | (2,548 | ) |
| Net loss per  share – basic |       | $                 | (0.02      | )                  | $          | (0.04             | )          | $                  | 0.00       |   | $ | (0.04 | ) |

 

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#### **Note 20 – SubsequentEvents**

 

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

 

On July 7, 2004, the Company’s Board ofDirectors approved the closure of Beijing Lotus.  All assets of Beijing Lotus were transferredto DigiTech during September 2004.

 

On July 30, 2004, Correlant reached asettlement agreement with TurboComm. Under the agreement, Correlant dismissed its lawsuit against TurboCommin exchange for the transfer of 700,000 Series A and 300,000 Series C shares ofCorrelant preferred stock owned by TurboComm. Both parties mutually agreed torelease and discharge any and all claims that each may have against the otherparty.

 

On August 31, 2004 Opta reached asettlement agreement with TurboComm. Under the agreement, TurboComm agreed to pay Opta $20,000 and deliver686,000 shares of Opta, constituting all shares owned by TurboComm.  Both parties mutually agreed to release anddischarge any and all claims that each may have against the other party.

 

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.

 

Due to the shut down of operations,Correlant’s operations moved out of the San Diego facility to reduceexpenses.  Currently, Correlant operatesfrom Opta’s office.  Effective November 1,2004, Correlant and Opta moved to 1350 Bayshore Highway, Suite 740, Burlingame,CA 94010. The new telephone number is 650-579-3610.  The new fax number is 650-579-3606.  The lease expires for the new executiveoffice October 31, 2005 with an option to renew for an additional 12months.  The monthly rent is $4,800.

 

On November 1, 2004, GoVideo entereda forbearance agreement (“Agreement”) with its line of credit lender.  As discussed in Note 9, GoVideo did notcomply with the financial covenants as the required minimum net income was notachieved during certain months of fiscal 2004. Subsequent to fiscal 2004, GoVideo did not comply with the financialcovenants as the required minimum net income was not achieved during the monthsended July 31, 2004 and August 31, 2004.  In the Agreement, GoVideo agreed to thefollowing significant conditions:

 

•                  To pay allthe lender’s costs and expenses associated with existing default;

•                  To pay$15,000 by January 15, 2005 as consideration for of forbearance and otheraccommodations provided by the lender under the Agreement, which has since beenpaid;

•                  To pay thelender all the accrued interest at the default rate for the period between June 1,2004 and September 1, 2004 in the amount of $122,000;

•                  To not payany subordinate indebtedness (see Note 10); and

•                  To not incurcapital expenditures in excess of $100,000.

 

The Agreement also called for thefollowing modifications:

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

•                  A change tothe minimum net income per month requirement for the period of October 1,2004 through December 31, 2004. GoVideo has not met all the amended monthly financial requirements.

•                  The increaseof the minimum interest charge from $15,000 to $22,500 per month; and

•                  A reductionin the Borrowing Base.

 

On November 4, 2004 Correlantentered a lease termination agreement for its San Diego facility.  Correlant agreed to pay a termination paymentof $370,000, a consideration fee of $4,000 and surrender all claims to thesecurity deposit of $43,000.  All costsassociated with the lease termination were accrued at June 30, 2004 andincluded in Restructuring charges (see Note 11) on the Company’s statement ofoperations.

 

In February 2005, the previously discussedloan from TCL Industries to Opta matured. See Note 10.  The note has

 

F-35

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been extended until July 21, 2005.  All original loan terms, other than thematurity date, remain the same during the loan extension.

 

In February 2005, the previously discussedloans from TCL Industries and Asia Focus Industrial Ltd. to GoVideomatured.  See Note 10.  The current due date for the loan with TCLIndustries is July 24, 2005.  The currentdue date for the loan with Asia Focus Industrial Ltd. is August 11, 2005.  All original loan terms, other than thematurity date, remain the same during the loan extension.

 

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