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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
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                                   FORM 10-K/A

  (Mark One)

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2004

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM          TO
                                           ---------    ---------

                        Commission file Number 000-29957

                           TENGTU INTERNATIONAL CORP.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

              DELAWARE                                77-0407366
    --------------------------------             ----------------------
    (State or other jurisdiction                   (I.R.S. Employer
    of incorporation or organization)            Identification Number)

                      236 AVENUE ROAD
                 TORONTO, ONTARIO, CANADA               M5R 2J4
          ----------------------------------------     ----------
          (Address of Principal Executive Offices)     (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (416) 963-3999

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NOT APPLICABLE.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                      $.01 PAR VALUE PER SHARE COMMON STOCK
                      -------------------------------------
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

                                                        Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.)
                                                        Yes [X] No [ ]


<PAGE>

      On December 31, 2003, the aggregate market value of the voting common
equity of Tengtu International Corp. held by non-affiliates was $92,867,883.26
based on the closing price of $1.57 for its common stock on said date as
reported on the Nasdaq over-the-counter Bulletin Board.

      On November 12, 2004, the aggregate market value of the voting common
equity of Tengtu International Corp. held by non-affiliates was $26,202,898
based on the closing price of $0.24 for its common stock on said date as
reported on the Nasdaq over-the-counter Bulletin Board. On such date, Tengtu
International Corp. had 109,178,743 shares of common stock outstanding.

                                     PART I

   CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
                PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

      Our disclosure and analysis in this report contains some forward-looking
statements. Certain of the matters discussed concerning our operations, cash
flows, financial position, economic performance and financial condition,
including, in particular, future sales, product demand, growth of e-education
business in China, competition, exchange rate fluctuations and the effect of
economic conditions and technological difficulties include forward-looking
statements within the meaning of section 27A of the Securities Act of 1933,
referred to herein as the Securities Act, and Section 21E of the
SecuritiesExchange Act.

      Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures and other projections, they are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.

      Investors are cautioned that our forward-looking statements are not
guarantees of future performance and the actual results or developments may
differ materially from the expectations expressed in the forward-looking
statements.

      As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. We expressly disclaim a duty to provide updates to these forward-looking
statements, and the estimates and assumptions associated with them, after the
date of this filing to reflect events or changes in circumstances or changes in
expectations or the occurrence of anticipated events.

      We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
Forms 10-K, Form 10-Q and Form 8-K reports to the SEC.

ITEM 1. BUSINESS

      References herein to "RMB" are to the PRC Yuan renminbi. As of November
17, 2004, U.S.$1.00 = 8.28170.

OVERVIEW OF THE CURRENT STATUS OF THE COMPANY

      Tengtu International Corp. ("we," "us," or the "Company"), through its
wholly owned subsidiary, Beijing Tengtu United Electronics Development Co., Ltd.
("Tengtu United"), is engaged in the sale of software and educational materials
to schools in the People's Republic of China ("PRC"). Currently, these products
and materials consist principally of:

i. the Education Resource for Microsoft(R) Office software which incorporates
educational and teaching resources contained in our Total Solution software with
Microsoft's Office 2003;

ii. educational resources based on the PRC's required K-12 curriculum which are
distributed by satellite and on hard disk drives by Hua Xia Bo Xin Education
Software Co., a joint venture with the PRC Ministry of Education of which we
currently own 53% and which we refer to as CBERC; and

iii. teacher training resources.
<PAGE>

      Our current business consists principally of the following:

      i. Providing our products, educational materials and systems integration
services to schools as part of the PRC "Western Rural School Projects," and

      ii. Developing educational resources and negotiating with potential
strategic partners for the creation of a commercial "National Education Portal"
("NEP"), which is to be an internet and fee-based educational portal where
students and parents can purchase additional and supplemental educational
resources.

      On September 15, 2003, we entered into an agreement with Tengtu China,
Beijing Jiade Tengtu Technology Group Co., Ltd., Fan Qi Zhang and Beijing
Oriental Tai He Technology Development Co., Ltd. (collectively the "Tengtu China
Group"), pursuant to a July 1, 2003 Terms Memorandum for a restructuring
pursuant to which we acquired 100% of Tengtu United and all of the profits
generated by its business in China while the Tengtu Group continues to operate
that business (the "Restructuring Agreement"). The Restructuring Agreement was
approved by our stockholders at our annual meeting of stockholders on January
20, 2004 and the agreement was consummated on April 5, 2004.

      Since April 5, 2004, we, through our Audit Committee, have conducted a
thorough examination of the financial condition of Tengtu United, its operations
and the present and former operations of our former joint venture partner,
Beijing Tengtu China Culture and Education Electronics Development Co., Ltd.
("Tengtu China"), and the Tengtu China Group. Prior to the acquisition, Tengtu
China conducted all of Tengtu United's business with all Chinese government
entities as its agent and still conducts some of Tengtu United's business.

      As a result of the examination, we have discovered that there were
inadequate internal and financial controls and systems at Tengtu China and the
Tengtu China Group which, to date, we have discovered resulted in inaccurate
recordkeeping, accounting errors, double counting of sales, and recognition of
revenue that is considered premature under United States generally accepted
accounting principles. We have, to date, implemented a number of measures to
correct weaknesses in internal controls and financial reporting systems as
follows:

      i. We have reorganized the finance and accounting departments;

      ii. We have replaced financial management responsible for financial
reporting, and appointed Simon Xia as Chief Financial Officer of Tengtu United
to oversee the Company's financial review and reorganization;

      iii. We require our Chief Financial Officer to pre-approve all large
contracts for products or services, perform credit worthiness reviews of all
customers, perform thorough analysis of the profitability and capital
requirements of individual contracts and hold sales employees accountable for
the profitability and collectibility of sales made.

      Our systems of internal control, however, are still in the process of
evaluation and improvement as personnel are replaced and new procedures are
implemented.

      For the fiscal year ended June 30, 2004, we made a one time adjustment of
$18,700,000 to due from related party. As previously reported in a Current
Report on Form 8-K filed with the SEC on May 26, 2004, we believed that our
approximately $19.5 million receivable due from Tengtu China was materially
impaired and that we were continuing an assessment of the impairment. Upon
further assessment, we believe that approximately $800,000 of this amount will
be collected from schools resulting in a write-down $18,700,000 due from Tengtu
China in the quarter ended June 30, 2004. However, we are continuing aggressive
efforts to collect all receivables.

      In addition to the foregoing, the Tengtu China Group companies have
incurred approximately $8.37 million in bank debts and loans. We are currently
in the process of resolving and rescheduling these bank debts and loans as set
forth below:

      i. Settlement of Lawsuit by China Machinery Electronics Export Investment
Corporation ("CME") against Tengtu United and the interest in the Central
Broadband Education Resources Center ("CBERC")

      In January, 2003, Beijing Jiade Science and Technology Group, Ltd.
("Jiade") borrowed approximately RMB 19 million from CME, a Chinese state-owned
company. When the loan was not repaid, CME commenced a lawsuit in July, 2004
against Jiade in the Beijing No. 1 Intermediate People's Court, requesting Jiade
to pay back the loan. At the same time, CME applied to the court to freeze the
assets of Jiade.


<PAGE>

      The principal asset of Jiade is the Company's interest in Hua Xia Bo Xin
Education Software Co., or CBERC. The interest in CBERC was held by Jiade on
behalf of the Company and Tengtu United pursuant to April 17 and April 25, 2001
agreements with the Tengtu Group companies. In addition, the September 15, 2003
Restructuring Agreement with the Tengtu Group companies, which closed on April
5, 2004, required that the interest in CBERC be transferred to Tengtu United or
the Company. Pending completion of the transfer, the interest in CBERC was
pledged to Tengtu United by Jiade, which pledge was registered with the Beijing
Commercial Bureau.

      The court had granted a freeze of Jiade's assets, including the interest
in CBERC, from August 3, 2004 until February 2, 2005. Subsequently, CME filed a
second lawsuit seeking to invalidate the pledge agreement between Jiade and
Tengtu United.

      The Company has entered into an agreement to settle both lawsuits and
believes it will conclude a pledge agreement pursuant to which CME will grant
Jiade a one year extension of the loan to it in exchange for a commitment from
the Estate of Fan Qi Zhang to pledge shares of the Company's common stock. The
common stock will come from 15 million shares bequeathed by Mr. Zhang to solve
the "funding difficulties" of Tengtu China Group. The number of shares to be
pledged has not yet been determined because the lawsuit seeking to invalidate
the pledge agreement between Jiade and Tengtu United was dismissed on October
20, 2004, thereby strengthening our bargaining position. CME has, however,
appealed the decision.

      Settlement discussions are similarly proceeding on other Bank debts and
loans.

      These bank debts and loans are set out as follows as well as are
guarantees entered into on behalf of Tengtu United:

      Because the Tengtu China Group still conducts some of the business of
Tengtu United, Tengtu United has determined that it was necessary for it to
guarantee repayment of certain outstanding loans to the Tengtu China Group. The
guarantees currently outstanding, and their amounts, are set forth below:

         Bank                                      Loan Amount
         Hua Xia Bank                              RMB 16 million

         Agricultural Bank of China                RMB 14.3 million

      As previously reported by the Company, when Fan Qi Zhang died on October
24, 2003, he bequeathed 15 million of the 30 million shares of our common stock
that he was to receive upon the closing of the Restructuring to "solve the
funding difficulties" of the companies in the Tengtu China Group. The "funding
difficulties" of the Tengtu China Group are principally the above loans
guaranteed by Tengtu United, as well as an additional RMB 37.8 million in Tengtu
China Group debts which have not been guaranteed by Tengtu United as set forth
below:

         Bank/Lender             Loan Amount                Obligor(s)
Agricultural Bank of China       RMB3.8 million    Beijing Jiade Science and
                                                   Technology Group, Ltd.
                                                   ("Jiade")

Bank of China                    RMB 15 million    Jiade and Tengtu Electronic
                                                   Publishing House

      The Estate of Fan Qi Zhang, which controlled the Tengtu China Group
companies, has given authorization to Tengtu United to use the 15 million shares
bequeathed by Mr. Zhang to pledge to the banks holding guarantees from Tengtu
United in substitution for the Tengtu United guarantees. Discussions with these
banks are currently ongoing. The Estate of Fan Qi Zhang has also authorized the
use of a portion of the 15 million shares to pledge to CME for settlement of the
lawsuits described previously.

      The Bank of China loan is already in default and has been assigned to an
asset management company. No collection attempts have yet been made.

      While we believe that we will reach a satisfactory resolution of the above
loans and guarantees, such outcome cannot be assured. In addition, the failure
to resolve these loans and guarantees, or to pay them when they are due if they
are extended, could materially and adversely affect the Company, its business
and operations.

CORPORATE OVERVIEW AND HISTORY

      Tengtu International Corp. was incorporated on May 6, 1988, under the laws
of the State of Delaware, under the name of Galway Capital Corporation. Galway
was formed for the purpose of seeking potential business ventures. Galway ceased
operations during fiscal year 1990-1991 and was inactive until May 1996, except
on August 20, 1993, when Galway changed its name to Tower Broadcast, Inc., in
order to search for a suitable merger or reorganization candidate. On March 20,
1996, under the name Tower Broadcast, Inc., the National Association of
Securities Dealers cleared Tengtu International Corp. for an unpriced quotation
on the over-the-counter Bulletin Board.


<PAGE>

      On May 24, 1996, in connection with a change in management, we changed our
name from Tower Broadcast, Inc. to Tengtu International Corp. We changed our
name to reflect a change in business direction and affiliation with certain
Chinese firms in the Chinese educational software industry.

      Effective as of June 30, 1996, we entered into a purchase agreement with
Blue Lake Industries Limited and Tengtu Enterprises Limited, to acquire their
combined 49% interest in Tengtu United, a Sino-foreign Cooperative Joint
Venture.

      Tengtu China acts as agent for Tengtu United. In 1996, three Chinese state
owned computer companies owned Tengtu China: Legend Computer Co., Great Wall
Computer Group Co. and Taiji Computer Corporation.

      In 1999, Beijing Oriental Lian Fa Technology and Trade Group Co., Ltd.
became a shareholder in Tengtu China. Our shareholders subsequently elected Fan
Qi Zhang, the owner of Lian Fa as one of our directors. In late 2000 and early
2001, Beijing Jiade Tengtu Technology Group Co. Ltd. and Beijing Oriental Tai He
Technology Development Co., Ltd., both of which Mr. Zhang directly or indirectly
controlled, acquired 100% of Tengtu China.

      On March 6, 2002 and July 1, 2003, we entered into a letter of intent and
Terms Memorandum which resulted in the Restructuring Agreement signed on
September 15, 2003. Pursuant to the Restructuring Agreement, we acquired the 43
% of Tengtu United we previously did not own (bringing our ownership of Tengtu
United to 100%) and all of the profits generated by its business in China in
exchange for 30,000,000 shares of our common stock.

      Tengtu International Corp. functions as the North American base for Tengtu
United. Exclusive of our subsidiaries, we have a total of 2 full time employees
or consultants and focus on obtaining strategic relationships for the provision
of educational resources to the Chinese educational market through Tengtu United
and raising capital.

      Our principal and executive office is located at 236 Avenue Road, Toronto,
Ontario, Canada. Our telephone number is (416) 963-3999.

INTERCORPORATE RELATIONSHIPS

Tengtu United has entered into certain agreements with each of the companies set
forth in the first column of the following table under which Tengtu United
licenses intellectual property or perform services for such company. The table
sets forth the percentage of the revenues of each such company that are payable
to Tengtu United under the applicable agreement.

<TABLE>
<CAPTION>
                                                               Contract
----------------------------------------------------------------------------------------------------------------------------------
% of revenue
from the                 SOFTWARE LICENSE    TRADEMARK         PRODUCTS          TECHNICAL       MANAGEMENT     MANAGEMENT
company                     AGREEMENT         LICENSE         DEVELOPMENT       ASSISTANCE      CONSULTATION     SERVICES
collected by                                 AGREEMENT         AGREEMENT         SERVICES         AGREEMENT     AGREEMENT
Tengtu                                                                           AGREEMENT
United

   Company
----------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>              <C>               <C>               <C>              <C>              <C>
Tengtu China                   5%               10%               10%               5%               3%                 /
----------------------------------------------------------------------------------------------------------------------------------
Tengtu Electronic              5%               10%               10%               5%               3%                 /
Publishing House
----------------------------------------------------------------------------------------------------------------------------------
Beijing Tengtu Tian            5%               10%               10%               5%               3%                 /
Di Network Co., Ltd.
----------------------------------------------------------------------------------------------------------------------------------
Beijing Fengati                5%               10%               10%               5%                /                5%
District Teacher
Training Center
----------------------------------------------------------------------------------------------------------------------------------
CBERC                          5%               10%               10%               5%               3%                 /
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

-------------------------------------------------------------------------------
% of revenue           Education Software      Personnel
from the                 Application and      Support and     Total Amount
Company                   Dissemination        Training       of Percentage
collected by                Agreement         Assistance
Tengtu                                        Agreement
United

   Company
-------------------------------------------------------------------------------
Tengtu China                   15%                 /               48%
-------------------------------------------------------------------------------
Tengtu Electronic               /                  /               33%
Publishing House
-------------------------------------------------------------------------------
Beijing   Tengtu  Tian          /                  /               33%
Di Network Co., Ltd
-------------------------------------------------------------------------------
Beijing        Fengati          /                 10%              45%
District       Teacher
Training Center
-------------------------------------------------------------------------------
CBERC                          15%                 /               48%
-------------------------------------------------------------------------------

      We have three subsidiaries that are no longer active. TIC Beijing Digital
Pictures Co. Ltd. was engaged in the television post-production business until
1999. It continues to lease its equipment to another company, but has no active
operations. e-biztengtu.com, Inc. was incorporated for a proposed business
venture that was never completed. Edsoft Platforms (Canada), Ltd. held a 60.2%
interest in a Hong Kong educational software business, Edsoft HK, that we plan
to dissolve.

TENGTU UNITED

      Recent changes in Peoples Republic of China ("PRC") law now permit foreign
ownership of companies that were previously required to be at least partially
owned by PRC companies in the form of a Sino-foreign joint venture. Pursuant to
the Restructuring, Tengtu United was converted from a Sino-foreign joint venture
to a Wholly Owned Foreign Enterprise ("WOFE") under PRC law which is wholly
owned by Tengtu International Corp. Tengtu United currently owns all
intellectual property used in the Tengtu business in China, and has 36 employees
engaged in software development and providing various services to CBERC and the
Tengtu Group companies.

TENGTU CHINA

      Tengtu China is part of the Tengtu Group Companies, which were controlled,
directly or indirectly, by the estate of Fan Qi Zhang (the "Estate"), one of our
former directors. While the Tengtu Group Companies still conduct some of our
business, we are in the process of streamlining our operations so that most of
our business can be conducted by Tengtu United directly. However, at the present
time, Tengtu China possesses a tax license which is necessary to bid on certain
of the Western Rural School Projects, described below, and therefore, the work
on these projects must be done through Tengtu China.

      Tengtu China currently has 13 branch offices in the PRC through which it
operates.

      Another entity that is part of the Tengtu China Group Companies which we
continue to utilize is Tengtu Electronic Publishing House ("TEP"). TEP publishes
educational materials, teacher training materials, cartoons and games on CD ROM
and possesses an electronic publishing license for educational materials.
Pursuant to the Restructuring Agreement consummated on April 5, 2004, TEP will
conduct Tengtu United's business in China and remit the net profits to Tengtu
United in exchange for licensing arrangments and services to provided by Tengtu
United. We will continue to utilize TEP unless and until Tengtu United can
obtain such a license. There are four shareholders in TEP, including Tengtu
China and three other entities that the Estate controls, which own a total of
80% of the company.

THE WESTERN RURAL SCHOOL PROJECTS

      The Western Rural School Projects, as described below, are currently our
principal area of business and source of income.

      In September 2003, the PRC government approved and announced an initiative
to fund the development of education in the Western Rural areas of the PRC. This
initiative, known as the "Western Rural School Projects" is to last for five
years and is being funding with RMB 10 billion from the PRC central and local
governments. The goal of the Western Rural School Projects is to implement
modern distance learning and high quality education resources for primary and
secondary schools. Included is the provision for TV+DVD player, teaching
resources for 86,400 rural sites, satellite receiving systems for teaching for
252,000 rural primary schools and computerized classrooms for all the 3l,000
rural junior middle schools in the middle and western part of the PRC.


<PAGE>

      The contracts available as part of the Western Rural School Projects are
subject to a bid and tender process where the contract is usually awarded to the
lowest qualified bidder. The Company believes that approximately 90% of the
contracts for the Western Rural School Projects will be used for hardware and
systems integration. We are not concentrating our bidding in this area but are
focused on the software and education resources components which we believe
constitute up to 7% of the contracts. Software and education resources have
higher margins and represent our core strength due to what we believe is our
extensive market experience and relationships. Also, despite the fact that we
are not focusing on system integration contracts, we stand to benefit from the
completion of such contracts as they create customers for our software products
and resources.

      To date, we have won the bidding on seven of eleven Western Rural School
Projects contracts with a total value of up to RMB 17,530,000.

      We intend to use the advantages we have gained through the Western Rural
School Projects to grow our business by offering our products and resources in
urban schools which have sufficient budget, to pay for our products on their
own.

Education Resource For Microsoft(R) Office

      The Western Rural School Projects government funding programs represent an
important and stabilizing factor in the development of the PRC school system and
we believe it can help to expand the market for our products and services. Some
800,000 PCs will be added to the client market under the Western Rural School
Projects and we estimate that there will be bidding for up to 280,000 sets of
operating software such as the Education Resource for Office,. Further, we
estimate that approximately 1,000,000 million sets of educational software and
student-oriented software are required under the Western Rural School Projects
over the next three years. Currently the number of schools capable of
implementing computerized education is approximately 200,000, possessing some
5.5 million PCs, 90% of which are located in cities and towns. We estimate that
over 3 million sets of software will be required for this market over the next 3
years.

      We believe that the market for a product such as the Education Resource
for Office is expanding and is creating opportunities for us to customize this
software for specific local and regional applications. In the schools that can
utilize computerized lesson-preparation, we believe that over 90% are potential
customers for the Education Resource for Office(R).

      We believe that applications like Microsoft Office are not sufficient by
themselves for teacher and student needs and therefore, other lesson preparation
and study applications are necessary. The Education Resource for Office can be
customized to very specific levels to incorporate these needs in one product
thus making it a cost-efficient and a desirable tool for computerized education
in the PRC school system. Microsoft China has been working closely with us
utilizing its 300 agencies nationwide in China to aggressively develop this
market.

      We are working to integrate national sales channels with Microsoft that
will cover all 31 provinces in mainland China. This can also enable a focused
effort on major urban markets such as Beijing, Shanghai and Guangzhou where the
Education Resource for Office can leverage its advantages off the wide use of
Microsoft Office currently dominant in these markets, but lacking the resource
applications and content needed for e-learning and lesson preparation.

CBERC and Satellite Resources

      As a result of our relationship developed with the National Center for
Audio/Video Education in 1998 through 2001, the PRC Ministry of Education
selected Tengtu China to establish the CBERC. CBERC is part of a national
initiative developed in late 2000 under the "School to School" link project to
provide content to computerized classrooms across the PRC. The National Center
for Audio/Video Education recognized at that time that electronic classrooms and
school computer networks, while able to allow a school to share its internal
information technology resources, could not allow for the sharing of national
and regional educational resources. The goal of the School-to-School link
program is to have approximately 90% of all elementary and secondary schools in
China connected to national and local education resource centers (CBERC),
through a satellite network, within 5 to 10 years of 2000.

      The School-to-School link program also contemplated Local Broadband
Education Resource Centers ("LBERCs") at the Provincial and local levels. We
have established 3 provincial LBERCs which are currently inactive and 3
municipal LBERCs and 15 county level LBERCs in the form of turn-key portals.
Tengtu maintains close relationships with these LBERCs.


<PAGE>

      Through CBERC, we believe that we occupy approximately 90% of the PRC
market for satellite transmission resources. We believe that satellite-based
resources are attractive for under-developed areas in the middle and western
rural parts of the PRC where the Western Rural School Project funding is
directed. Our satellite access currently covers 100% of the market in these
provinces. Over 53,962 schools have been connected to this network.

      Recently the PRC Government announced a change in policy whereby the
elementary and middle schools covered by the Western Rural School Projects will
not be charged an annual license fee for connectivity to the network over the
term of the project funding. The effect of the new policy will be to eliminate
annual license fee revenue which Tengtu and CEBERC had anticipated. The
government has established additional dedicated funding of RMB 20 million a year
for educational resource content which will be available to Tengtu and CBERC
through bid and tender contracts. This policy does not apply to schools such as
exist in the urban centers or provinces which are not under the Western Rural
School Projects initiative. It also does not restrict the selling of products,
content or services in the future not covered under the existing program and
which could be sold directly or individually to Western Rural School Projects
schools.

      Originally, our relationship with CBERC contemplated the creation of a
fully user supported internet-based portal which could also be used for
commercial purposes. The PRC Government, has, however, decided not to pursue
such a portal, and instead focuses on providing satellite based resources and
content and hard disk drives pre-loaded with resources and content. Therefore,
while we are currently committed to fund CBERC with approximately RMB 30
million, which was to have been paid by June, 2004 under the CBERC joint venture
agreement, as modified by the parties, we believe that we will be able to
renegotiate our CBERC relationship to continue our access to its content and
resources, with a lower capital contribution. However, there can be no assurance
that the PRC government will cooperate in such renegotiations, and, even if they
do, that sufficient capital will be available to contribute to CBERC to fulfill
our obligations. The loss of our interest in CBERC would materially and
adversely affect our business and operations.

The National Education Portal

      We propose to leverage our 10 years of operating experience in the PRC
basic education market to build the number one brand of e-education resources
and on-line education service to the urban environment and household consumer.
The success of basic education on-line resources relies on the recognition and
support from students, parents, teachers and educational institutions. We
believe Tengtu currently has this recognition among 12 million+ teachers and
students across the PRC.

      We propose to establish a National Education Portal ("NEP") primarily in
urban school markets and households where internet and broadband access
represents an underserved, but emerging high growth opportunity to further the
education needs of students, teachers and schools and where parents have
demonstrated a high priority through discretionary spending to support their
children's education needs from pre-school through to university.

      We believe that the guiding principle of the PRC government in K-12
education is to actively build and develop Internet-based educational resources
to achieve balanced development of education. The Tenth Five-Year Plan of
National Educational Project states that the project of K-12 education
computerization using network based applications should be a part of the major
national development project and will be a driving force in education
modernization. The PRC government's "Decision on Basic Education Reform and
Development" documents from Ministry of Education state that network and
information technology education should be popularized to realize accelerated
development of education. In addition, the "School-to-School" link program
mentioned above has the goal of connecting 90% of schools to networks and
networked content. Finally, the "Education Rejuvenating Action Plan for
2003-2007" formulated by the PRC Ministry of Education states that the PRC
government will further invest in the development of K-12 education
computerization and overall investment in this area will account for 4% of GDP
per year.

      Pursuant to the above policies and plans, the PRC government offers
substantial support and encouragement to the various providers of
internet/network based education resource/content. We believe that (i) this
government support, (ii) a rapidly developing base of internet users in the PRC,
(iii) a fast growing economy, and (iv) a priority that parents in the PRC place
on education, can be the foundation on which we can build a fee based commercial
internet education portal in the PRC.

      The creation of the NEP would require additional capital which we would
likely have to raise from outside sources, as well as partners which would be
sought to extend content offerings in the portal. There can be no assurance that
additional capital will be available to the Company. However, we believe that we
offer an attractive opportunity to a potential investor and/or partner with 10
years of experience in the PRC educational market and access to CBERC resources
and distribution channels.


<PAGE>

OUR MARKETING AND SALES STRATEGY

      Our current marketing and sales strategy focuses primarily on the Western
Rural School Projects bid and tender process. With respect to our successful
bids, we believe that we will have created a future customer for software
updates and purchases of educational content. To a lesser extent, we are
marketing our products and content in urban schools with larger budgets which
can purchase our products without government assistance.

      We are also seeking to expand our distribution, marketing and sales
channels nationally in co-operation with strategic partners such as Microsoft
China.

INTELLECTUAL PROPERTY

      We, Tengtu United and Tengtu China rely primarily on trade secrets to
protect proprietary software products. Tengtu China executes confidentiality and
non-disclosure agreements with its software development employees and limits
access to and distribution of proprietary information and source code.

LICENSES

      In order to operate the business in China, Tengtu China, or a member of
the Tengtu Group, use or possess licenses issued by the Chinese Government. The
transmission of content via satellite for CBERC requires the use of a satellite
license. The National Center for Audio/Video Education provides Tengtu China
with the use of a satellite license pursuant to the CBERC Agreement.

      Tengtu Electronic Publishing House, a company owned in part by Tengtu
China, has an electronic publishing license for educational materials. In the
event that the electronic publishing license is lost, or is not renewed, Tengtu
China would not be able to make retail sales of books, CD ROMs and tapes in the
Chinese retail market unless it is able to obtain access to another license.

      The loss or failure to obtain a renewal of the electronic publishing
license would also prevent Tengtu China from providing educational information
and content through CBERC, or a proposed NEP, and therefore, from deriving any
revenues from CBERC or an NEP.

      In September, 2000, the State Council of China and the Chinese Ministry of
Information Industry issued regulations requiring that all commercial internet
content providers obtain an Internet Content Provider License. Such a license
will be necessary for an NEP which will disseminate information over the
internet through the portals. We intend to apply for the license.

COMPETITION

      With respect our current business, we face significant competition. There
are numerous companies bidding on the Western Rural School Projects that focus
on distance education. Some of these competitors are better capitalized and
larger than us.

      With respect to the CBERC project, Tengtu United does not face any
significant competition at the current time because the National Center for
Audio/Video Education has chosen Tengtu China as its partner for the project.

      Tengtu United also faces competition from educational resource providers
that provide information in other formats. First, there are several companies,
which set up local web schools via the Internet. Because broadband connections
are generally not available in China, the types of multimedia content available
are limited. Second, several companies provide educational content to schools by
means of a teletype machine. While this is a cheap alternative for many schools,
the educational resources in a text format are not compatible with a computer
network. Third, several companies provide educational content via a satellite
network only, which allows for transmission of multimedia materials. The price
for these materials tends to be high, but these companies do not have as much
quality content as is currently available through CBERC.

      With respect to an NEP, while there are numerous other educational portals
in the PRC, we believe that there are none which offer all of the resources
sought by students, teachers and parents in one place. Nevertheless, many of the
competitors in this area are larger and better capitalized than us, and could
possibly expand their offerings.

THE CHINESE EDUCATIONAL AND DISTANCE LEARNING MARKET

      The information in this section "The Chinese Educational and Distance
Learning Market" is from CERNET, the first nationwide education and research
computer network in China, and is available at www.edu.cn. The Chinese
government provides funding for the CERNET project and the Chinese Ministry of
Education directly manages it. Access to CERNET as a broadband distribution
channel is contemplated to be incorporated into CBERC.


<PAGE>

      CERNET has a four-layer hierarchy (the nation-wide backbone, regional
networks, provincial networks and campus networks). CERNET National Centre is
located in Tsinghua University, which is responsible for operation and
management of the CERNET backbone nationwide. The ten regional network centers
and main nodes are distributed in Tsinghua University, Beijing University,
Beijing University of Post and Telecommunication, Shanghai Jiaotong University,
Xi'an Jiaotong University, Central China University of Science and Technology,
South China Institute of Technology, China University of Electronic Science,
Southeast University and Northeast University, which are responsible for
operation, management, planning and construction of CERNET regional backbones.

THE CHINESE EDUCATIONAL SYSTEM AND RECENT POLICIES

      While education has always been a driving force in China's culture and
society, it has become a much greater priority with the emergence of a market
economy. Education is now seen as critical to enable China to compete in the
world economy.

      The Chinese central government, through the Ministry of Education, manages
education in China at a macro level, providing policy guidance and basic
educational requirements that must be taught. To a large degree, the provincial
governments are left to implement basic education through development of
teaching plans to supplement the required coursework from the central Ministry
of Education and the funding of basic education in poorer areas. County level
governments have the main responsibilities for implementing basic education on a
day to day basis.

      In China, primary and secondary education takes 12 years to complete.
Primary education generally lasts 6 years, and junior middle school and senior
middle schools 3 years each. Children generally begin primary school at the age
of 6. In 1986, China passed the Compulsory Education Law of the People's
Republic of China (the "Compulsory Education Law"), which dictates that nine
years of compulsory education (grades 1 through 9) is to become mandatory and
requires that Provincial and local governments take the necessary steps to
ensure that all students receive at least the required 9 years of education. The
goal of the Compulsory Education Law, as well as the subsequent Guidelines for
the Reform and Development of Education in China, put forth by the Chinese State
Education Commission in 1993, was to universalize compulsory education and to
eliminate illiteracy among the Chinese people. According to the Bulletin of
Statistics on National Educational Development in 1999 issued by the Chinese
Ministry of Education, the nine year compulsory education has covered 80% of
China's population since its inception.

      In 1999, the Chinese Government ratified an Action Plan for Invigorating
Education in the 21st Century, which was formulated by the Chinese Ministry of
Education. The plan recognizes the need to make China competitive in the world
economy, particularly through technology. The plan lays out a strategy to
"Invigorate China through Science, Technology and Education" and states:

      The comprehensive strength and international competitiveness of the nation
will increasingly depend on the level of education development and innovation in
science and technology and knowledge and educational development will remain a
strategic priority.

      The plan emphasizes the use of information technology in education
stating:

      The extensive use of modern information technology in education will
engender profound changes in the educational sector.

      According to the Xinhuanet news agency, in 2001, the Chinese Government
announced that by 2005, information technology will be a compulsory course in
all middle schools as well as in the primary schools in cities and other well
developed areas. It also announced that before 2010, approximately 90% of all
primary and middle schools will gain access to the Internet and broadband net,
and that for the remaining 10%, multimedia teaching facilities and other
resources will be made available.

      The plan also places a strong emphasis on modern distance education and
states: Modern distance education is a new type of education that has come into
being with the development of modern information technology. It is a major means
to build up a lifelong learning system meeting the needs of people living in an
era of knowledge economy. The Modern Distance Education Project' implemented on
the basis of existing distance education facilities and making full use of
modern information technology can effectively take full advantage of available
educational resources. This is inline with the international trend of developing
science and technology education. In view of the shortage of educational
resources, this is a strategic step to extend access to education for the large
population of our country and therefore the development of this important
infrastructure must be intensified. The demonstrative network CERNET and the
existing satellite video transmission system can serve as our basis of
development and it is desirable to raise the transmission speed of the backbone
network of CERNET, and make full use of the telecommunication resources of the
country to further enlarge the transmission capacity and network size of CERNET.
We should strive to link all higher education institutions offering bachelor's
degree programs and over 1000 secondary schools with CERNET and make access to
network possible at home to 50,000 university faculty members by the year 2000.
We should develop an integrated information system based on CERNET for online
enrollment of students admitted to college, computer-aided management of
students, record and status, and network service for new graduates seeking
employment.


<PAGE>

      Satellite-relayed television education programs will continue to function
in modern distance education. However, the existing TV education transmission
network needs to be reformed by setting up a central station, achieving its
high-speed connection with CERNET, and connecting a part of distance education
sites to computer networks. It is envisaged by the year 2000 most schools in
rural areas will be enabled to receive TV educational programs. Excellent
teachers and modern teaching methods should be involved to ensure the quality of
TV educational programs in an endeavour to meet the educational needs of remote,
insular, mountainous, forestry and pastoral areas.

      The outmoded model of distance education software development, which
suffers from unnecessary duplication of efforts, should be discarded. Here the
government should exercise its function of macro-level regulation and full
advantage should be taken of the educational resources possessed by schools of
various types and levels. Competition and the market mechanisms also should have
their role in software development. All the above-mentioned measures will
contribute to the development of high-quality educational software. The Ministry
of Education is in charge of the development of our modern distance education
program and is responsible for organizing the formulation and implementation of
the national `Plan for Developing Modern Distance Education'. The strategy for
developing the `Modern Distance Education Project' is characterized by
governmental support at the initial stage and self-financed operation in the
long run. The advanced means of information technology should be adopted in
light of China's actual conditions to keep upgrading modern distance education.

      To create a favourable condition for the development of modern distance
education, it is desirable for the telecommunications companies to give
preferential treatment to the operation of the modern distance education network
by reducing the rates of fees in accordance with current international practice.
Besides, tariff concession should be accorded to imported equipment, including
both donated and purchased items, in accordance with applicable legal
provisions.

      The plan also calls for an increase in financing for education. It
contains a commitment by the Ministry of Education to raise educational
appropriations in the budgets of the Provinces and that these increases would be
used to cover portions of expenses created by the plan.

HISTORY OF DISTANCE LEARNING IN CHINA

      While Internet based "modern" distance learning is new to China, as it is
to most countries, China has utilized distance learning for many years.
According to materials available from the CERNET, available at WWW.EDU.CN:

      Chinese educational technology first started with college audio-visual
programs in 1920's in the School of Agriculture of Jinling University. In 1922,
they used slides and films with oral explanations recorded on phonograph to
publicize the scientific methods for cotton-planting. Audio-visual education was
developed in various schools at all levels after 1949. Radio and television
universities were successively established in Beijing, Shanghai, and Shenyang in
1960. Educational technology was greatly developed after the implementation of
reform and open to the outside world policies. The State Council approved to set
up the Central Radio and Television University (CRTVU) and the Central
Audio-visual Center in China in 1978. After that radio and television
universities and audio-visual centers were restored or established in provinces,
autonomous regions, and municipalities directly under the Central Government and
separate planning cities except Tibet China Educational Television Station was
set up in 1986 and provincial educational television stations were established
in Liaoning, Jilin, Shanghai, Jiangsu, Fujian, Jiangxi, Ningxia, Xinjiang and
other provinces, cities and autonomous regions.

      As at January 1, 2001, China has approximately 44 radio and television
universities, 831 municipal radio and television university branches, and 1699
county level branches. In 1987, China began using satellite transmissions in its
system of television universities. According to CERNET, by 1997, over 10,000
satellite stations had been established in the Chinese education system.

WEB SITE ACCESS TO OUR PERIODIC SEC REPORTS

      Our Internet address is www.tengtu.com. We make our periodic SEC Reports
(Forms 10-Q and Forms 10-K) and current reports (Form 8-K) available free of
charge through our website as soon as reasonably practicable after they are
filed electronically with the SEC. Other information contained on our website is
not part of this report or any other report filed with the SEC.


<PAGE>

Item 2. PROPERTIES

      We do not own any physical properties. We have a lease for office space in
Toronto, Canada with annual rental payments of CDN$41,667 per year or
approximately U.S. $35,000. We also pay monthly rent of approximately U.S.
$12,000 per month for office space in China to support our operations in China.

Item 3. LEGAL PROCEEDINGS

      In January, 2002, Hecht & Associates, P.C., our former counsel, served us
with a summons and verified complaint which it filed as plaintiff in the United
States District Court for the Southern District of New York. We are the
defendant in the action. The verified complaint alleges that we did not pay
Hecht & Associates, P.C. for certain legal services provided to us and seeks a
judgment in the amount of $133,334.12, plus interest at the rate of 1.25%, the
costs of the action and such other relief as the court deems proper. We moved to
dismiss the complaint in its entirety.

      In January, 2002, Charles J. Hecht, a principal of Hecht & Associates,
P.C., served us with a verified complaint which he filed as plaintiff in the
Supreme Court of the State of New York, County of New York. We are the defendant
in the action. The verified complaint alleges that Mr. Hecht submitted a check
in the amount of the exercise price of certain stock options granted to Hecht &
Associates, P.C. but that we did not deliver the stock. Plaintiff seeks a
mandatory injunction requiring delivery to plaintiff of 114,166 shares of our
common stock. Plaintiff further seeks (1) damages in the sum of $51,941.34, (2)
additional damages for diminution in the value of the common stock from the time
it should have been delivered and (3) punitive damages. We moved to dismiss the
complaint in its entirety.

      Both of the above actions were settled and dismissed with prejudice
pursuant to a settlement agreement which closed on September 30, 2004. Pursuant
to the main terms of the settlement, the plaintiffs received $40,000 of escrowed
funds that Hecht & Associates, P.C. was holding and were permitted to exercise
114,116 stock options without payment of the exercise price and an additional
option for approximately 165,000 on a cashless basis yielding 74,812 shares. The
parties also exchanged general releases.

      On August 30, 2002, VIP Tone, Inc. served us with a summons and complaint
it filed as plaintiff in the Superior Court for the State of California for the
County of Alameda. VIP Tone, Inc. is a company with which we had an agreement to
provide services relating to the development of CBERC. We are the defendant in
the action.

      The complaint alleged that VIP entered into an agreement with us on
November 16, 2001 and that we attempted to terminate the agreement on January
23, 2002. The complaint further alleged that the termination was ineffective and
therefore, continuing payments are due to it.

      VIP alleged causes of action for breach of contract, fraudulent
misrepresentation, fraud/promise without intent to perform, breach of implied
covenant of good faith and fair dealing, promissory estoppel and quantum meruit.
VIP seeks damages plus punitive damages and attorney's fees.

      The Company had filed an answer denying the allegations of the complaint,
along with counterclaims for breach of contract and fraud.

      On August 27, 2004 a verdict adverse to the Company was rendered. A
judgment based on the verdict was issued on October 1, 2004, but execution of
the judgment was stayed for 60 days to accommodate the Company's post-trial
motions to reduce the judgment.

      The amount of the judgment entered against the Company was of $1,272,878.
It was also determined that the Company recover nothing on any of the Company's
counterclaims.

      On November 29, 2004, the California court granted the Company's motion
for a new trial subject to the condition that if VIP will consent to a reduction
of the judgment from $1,272,878 to $419,190, a new judgment in that amount will
be entered and VIP will not be compelled to re-try the entire case. VIP has
until the fifteenth day after the formal filing of the November 29 ruling to opt
for the entry of the $419,190 judgment.

      In the event that VIP will opt for the $419,190 judgment, the Company can
appeal from that jugment. The Company believes that there are strong grounds for
such an appeal.

      On or about September 25, 2002 Pak Kwan Cheung and Comadex Industries,
Ltd. commenced an arbitration against us at the American Arbitration Association
pursuant to a Consultant Agreement by an among Cheung, Comadex and us dated as
of October 15, 1999. The Statement of Claim filed in the arbitration alleges
that Cheung and Comadex performed their obligations under the Consultant
Agreement that Cheung was terminated without cause and that Cheung and Comadex
are entitled to the benefits and entitlements under the Consultant Agreement.

      The Statement of Claim seeks the following relief: (1) a declaration that
Comadex is the beneficial owner of 3,000,000 shares it already holds which were
issued to it in March, 2000; (2) an order for the payment of base compensation
of $620,000; (3) an order directing that we issue Comadex an option to purchase
1,000,000 shares of common stock at $.60 per share; (4) an order directing the
payment of incentive compensation equal to 1% of all capital raised in excess of
$3,000,000 by Cheung which is claimed by Cheung and Comadex to be $155,646.58;
(5) an order for the payment of incentive compensation equal to 1% of our
pre-tax net profits; (6) a declaration that Cheung and/or Comadex is entitled to
issuance by us of 300,000 options which have already been granted to him; (7) an
order for payment of Cheung's and Comadex's costs and expenses, including
attorney's fees; (8) pre-judgment and post-judgment interest; and (9) any
additional relief to which Cheung and Comadex may be entitled pursuant to the
Consultant Agreement or at law.


<PAGE>

      We plan to vigorously defend the arbitration.

      In August 2004, Comadex commenced a separate action against the Company
and all of its officers and Directors in the United States District Court for
the Western District of Washington. The First Amended Complaint in that action
alleges that (i) Comadex was denied the right to have a restrictive legend
removed from shares of common stock held by it, (ii) Pak Cheung was wrongfully
removed as a Director of the Company, (iii) the Company has failed to maintain
adequate internal controls, risk management and financial controls, (iv) failure
to make certain disclosures regarding Pak Cheung's removal as a Director and
other items in the Company's filings and (v) breaches of duty of care and
violations of the Washington State Securities Act.

      We believe that we have meritorious defenses to the action and plan to
vigorously defend the action.

      In March, 2003, B.D. Clark & Associates, Ltd. served us with a statement
of claim which was issued in the Ontario Superior Court of Justice. The
plaintiff in the action is B.D. Clark & Associates, Ltd. and we are the
defendant. The statement of claim alleges that plaintiff did not receive certain
payments due to it under two contracts beginning March 21, 1997 and ending June,
2001 which obligated plaintiff to provide consulting services to us. Plaintiff
seeks the following relief: (1) declarations that we have breached our
obligations under both contracts; (2) approximately $9,028,998 in damages for
breach of both contracts; (3) pre- and post-judgment interest; (4) costs of the
action; and (5) other relief as the Court deems appropriate.

      We believe that we have meritorious defenses to the statement of claim and
intend to vigorously defend the action.

      In January, 2003, Beijing Jiade Science and Technology Group, Ltd.
("Jiade") borrowed approximately RMB 19 million from China Machinery Electronics
Export Investment Corporation ("CME"), a Chinese state-owned company. When the
loan was not repaid, CME commenced a lawsuit in July, 2004 against Jiade in the
Beijing No. 1 Intermediate People's Court, requesting Jiade to pay back the
loan. At the same time, CME applied to the court to freeze the assets of Jiade.

      The principal asset of Jiade is the Company's interest in Hua Xia Bo Xin
Education Software Co., or CBERC. The interest in CBERC was held by Jiade on
behalf of the Company and Tengtu United pursuant to April 17 and April 25, 2001
agreements with the Tengtu Group companies. In addition, the September 15, 2003
Restructuring Agreement with the Tengtu Group companies, which closed on April
5, 2004, required that the interest in CBERC be transferred to Tengtu United or
the Company. Pending completion of the transfer, the interest in CBERC was
pledged to Tengtu United by Jiade, which pledge was registered with the Beijing
Commercial Bureau.

      The court had granted a freeze of Jiade's assets, including the interest
in CBERC, from August 3, 2004 until February 2, 2005. Subsequently, CME filed a
second lawsuit seeking to invalidate the pledge agreement between Jiade and
Tengtu United.

      The Company has entered into an agreement to settle both lawsuits and
believes it will conclude a pledge agreement pursuant to which CME will grant
Jiade a one year extension of the loan to it in exchange for a commitment from
the Estate of Fan Qi Zhang to pledge shares of Company common stock. The five
million shares will come from 15 million shares bequeathed by Mr. Zhang to solve
the "funding difficulties" Tengtu China Group.

      Subsequent to the date of the settlement agreement, on October 20, 2004,
Jiade's lawsuit challenging the pledge was dismissed. CME has appealed that
dismissal as discussions over the pledge agreement continue.

      Except as set forth above, neither we nor our subsidiaries are currently a
party to any material pending legal proceeding, nor do we know of any proceeding
that any governmental authority may be contemplating against us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.


<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

      Our common stock is quoted on the NASDAQ over-the-counter Bulletin Board.
The high and low bid prices of our common stock for each quarter within the
period April 1, 2001 through June 30, 2004 were:

DATE                                            HIGH/ASK    LOW/BID     VOLUME
--------------------------------------------    --------    -------   ---------
Qtr. ended 06/29/2001.......................      1.36        0.25    8,222,800
Qtr. ended 09/28/2001.......................      1.88        0.77    6,306,800
Qtr. ended 12/31/2001.......................      1.55        0.77    3,871,800
Qtr. ended 03/29/2002.......................      1.24        0.53    5,945,900
Qtr. ended 06/28/2002.......................      0.74        0.41    4,363,800
Qtr. ended 09/30/2002.......................      0.51        0.28    2,791,500
Qtr. ended 12/31/2002.......................      0.60        0.35    3,907,000
Qtr. ended 03/31/03.........................      0.73        0.35    4,844,000
Qtr ended 06/30/03..........................      0.70        0.49    3,802,500
Qtr. ended 09/30/2003.......................      0.74        0.47    5,556,500
Qtr. ended 12/31/2003.......................      1.68        0.48   14,861,817
Qtr. ended 03/31/04.........................      2.01        0.96   20,243,437
Qtr ended 06/30/04..........................      1.73        0.67   10,931,733

      The high and low bid prices for our common stock on September 30, 2004
were: $0.37 and $0.33.

      The above over-the-counter market high and low bid quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions. We obtained these high and low
bid quotation and volume information from Yahoo Finance.

      Because the trading price of our common stock is less than $5.00 per
share, trading in our common stock is subject to the requirements of Rule 15g-9
under the Securities Exchange Act of 1934, as amended. Under this rule,
broker-dealers who recommend such low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchase and receive the purchaser's
written consent prior to the transaction. Our common stock is also subject to
the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, which
requires additional disclosure in connection with any trades involving a stock
defined as a "penny stock" (generally, any equity security not traded on an
exchange or quoted on Nasdaq that has a market price of less than $5.00 per
share, subject to certain exceptions), including the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the associated risks. Such requirements could severely limit the
market liquidity of the common stock and the ability of purchasers in this
offering to sell their securities in the market.

      We have one class of common equity held by approximately 3,084 holders as
of November 1, 2004. No dividends have been declared during the last two fiscal
years.

      There are no technical restrictions which affect or are likely to affect
our ability to pay dividends in the future. However, we do not expect to pay
dividends in the foreseeable future.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The following table contains information regarding securities authorized
and available for issuance under our equity compensation plans for employees,
Officers, Directors and consultants. Each of the options listed were issued
under our 1997 or 1999 Stock Option Incentive Plans, or pursuant to an
individual agreement. Our 1997 and 1999 Stock Option Plans have expired and
therefore, no further option issuances will be made from those plans. The
Company has no current stock option incentive plan.


<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                             Number of                                          Number of
                             securities to be                                   securities
Plan category                issued                    Weighted average         remaining
                             Upon exercise of          exercise                 available
                             outstanding               price of                 for future
                             options,                  outstanding              issuance
                             warrants, and             options, warrants,
                             rights                    and rights
<S>                                <C>                       <C>                    <C>
Equity compensation
plans                              1,570,000                 $.218                  0
approved by security
holders (1)
Equity compensation
plans                               695,582                  $1.022                 0
not approved by security
holders (2)

Total                              2,265,582                 $.922                  0
</TABLE>

      (1) Represents options to purchase the Company's common stock issued under
our 1997 and 1999 Stock Option Incentive Plans.

      (2) Represents Warrants granted to former investor relations firms.

ITEM 6. SELECTED FINANCIAL DATA

      The following is selected summary financial information for the past five
years of our operations presented on a consolidated basis. The summary financial
data should be read in conjunction with the consolidated financial statements
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report.

<TABLE>
<CAPTION>
                                                          FOR THE FISCAL YEAR ENDED JUNE 30,
                                 2004            2003         2002          2001         2000             1999            1998
<S>                         <C>              <C>          <C>           <C>          <C>              <C>             <C>
Total Sales                   2,399,270       5,343,783   14,255,417    5,566,039       358,026          624,121       3,223,170

Income (loss) from          (69,536,548)     (2,023,024)   2,469,808     (293,169)   (4,701,285)      (1,806,397)     (4,102,014)
Continuing Operations

Income (loss) from                (0.84)         (0.030)       0.032       (0.012)       (0.225)          (0.100)         (0.234)
Continuing Operations
per Common Share

Total Assets                  5,578,153      23,827,261   27,734,300    8,833,335     2,407,842        1,911,912       2,871,926

Total Liabilities             7,973,847       4,066,520   10,829,337    5,039,508     5,488,865        3,776,010       2,662,230

Dividends Declared                    0               0            0            0             0                0               0
per Common Share
</TABLE>

(1)      As of June 30, 2004
(2)      As of June 30, 2003
(3)      As of June 30, 2002
(4)      As of June 30, 2001
(5)      As of June 30, 2000

      Earnings per share is based on weighted average number of common shares
outstanding.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION OVERVIEW

      Tengtu International Corp. ("we," "us," or the "Company"), through its
wholly owned subsidiary, Beijing Tengtu United Electronics Development Co., Ltd.
("Tengtu United"), is engaged in the sale of software and educational materials
to schools in the People's Republic of China ("PRC"). Currently, these products
and materials consist principally of:

      i. the Education Resource for Microsoft(R) Office software which
incorporates educational and teaching resources contained in our Total Solution
software with Microsoft's Office 2003;

      ii. educational resources based on the PRC's required K-12 curriculum
which are distributed by satellite and on hard disk drives by Hua Xia Bo Xiu
Education Software Co., a joint venture with the PRC Ministry of Education of
which we currently own 53% and which we refer to as CBERC and which we
consolidate in our financial statements as of April 5, 2004; and


<PAGE>

      iii. teacher training resources.

Our current business consists principally of the following:

      i. Providing our products, educational materials and systems integration
services to schools as part of the PRC "Western Rural School Projects," and

      ii. Developing educational resources and negotiating with potential
strategic partners for the creation of a commercial "National Education Portal"
("NEP"), which is to be an internet and fee-based educational portal where
students and parents can purchase additional and supplemental educational
resources.

      For the fiscal year ended June 30, 2004, we made a one time adjustment of
$18,700,000 to due from related party. As previously reported in a Current
Report on Form 8-K filed with the SEC on May 26, 2004, the Company believed that
its approximately $19.5 million receivable due from Tengtu China was materially
impaired and that the Company was continuing its assessment of the impairment.
Upon further assessment, the Company believes that approximately $800,000 of
this amount will be collected from schools resulting in a write-down of
$18,700,000 due from Tengtu China in the quarter ended June 30, 2004. However,
the Company is continuing its aggressive efforts to collect all receivables.

LIQUIDITY AND CAPITAL RESOURCES FOR THE FISCAL YEARS ENDED JUNE 30, 2004, 2003,
and 2002

FISCAL YEAR ENDED JUNE 30, 2004

      For the year ended June 30, 2004, net cash used by operating activities
totaled $3,690,103. The net loss for the year ended June 30, 2004 was
$73,015,718. Other cash changes from operating activities include non-cash
changes for depreciation of $108,288, $47,209,330 of Goodwill write off after
re-evaluation of issuing 30 million shares for a 43% of interest in Tengtu
United and consolidation of other Tengtu Group companies from the restructuring,
loss on eqity investments of $1,183,804 primarily due to the high start-up
expenses in CBERC, bad debt expenses of $18,700,000 for the one-time write off
of amounts due from related party, minority interest of $13,101, net advances to
related party of $680,185, and non-cash interest expense of $272,013 related to
the Top Eagle Holdings, Ltd. ("Top Eagle") convertible debenture.

      Cash increased as a result of the decrease of prepaid expenses of
$767,018, other receivables of $114,199, other deferred expenses of $6,957, and
notes receivables of $11,881, and a write off of $32,625 of inventory. The
decrease in accounts payable of $684,540, other liabilities of $920,554,
deferred income tax of 1,172, and prepaid revenue from customers of $20,280
decreased operating cash flow. The increase in accrued expenses of $3,274,119,
primarily from recognizing liabilities of approximately $3,150,000 for
guaranties of bank loans extended to Tengtu China, has a positive change to
operating cash flow.

      Net cash flow from investing activities was $1,262,780 for the year ended
June 30, 2004. It included acquisition of subsidiaries, net of cash acquired of
$1,270,718, and $7,938 used for purchasing of equipment.

      Net cash flow from financing activities was $4,455,283 which includes a
short-term loan of $665,942 from Orion Capital Incorporated ("Orion"), which is
owned by our Chairman, William O.S. Ballard, principal repayments of $500,000 on
the Top Eagle convertible debenture, and $60,400 on a short-term loan borrowed
by Tengtu Electronic Publishing Hourse, and $4,349,741 of cash received from a
private placement of units of common stock and common stock purchase warrants,
as well as from the exercise of warrants.

      Cash on hand is not sufficient to meet our capital investment plans and
operating requirements for the next 12 months. We are planning to raise
additional funds to meet the cash requirements for our operations, including NEP
and CBERC. There can be no assurance that such financing will be available, or
if available, that it will be on acceptable terms.

CONTRACTUAL OBLIGATIONS

      The following summarizes our contractual obligations at June 30, 2004:


<PAGE>

<TABLE>
<CAPTION>
CONTRACTUAL OBLIGATION                       TOTAL                                  PAYMENT DUE BY PERIOD
                                                                LESS THAN 1                                       AFTER 5
                                                                  YEAR          1-3 YEARS          4-5 YEARS       YEARS
<S>                                      <C>                 <C>                <C>                <C>            <C>
Short-term loans                         $1,973,159(1)       $1,973,159(1)
Total Contractual Obligation             $1,973,159(1)       $1,973,159(1)
</TABLE>

Notes:

(1) The short-term loan included the $1,000,000 convertible debenture issued to
Top Eagle less a discount of $119,583, the short-term loan from Orion of
$65,942, and a short-term loan from the Agricultural Bank of China of 1,026,800.

In addition to the foregoing, we are also committed to fund CBERC as follows:
RMB 30 million (approximately $3,624,000) within twelve months after the
establishment of CBERC and RMB 20 million (approximately $2,416,000) within
eighteen months after the establishment of CBERC. CBERC was established in
January 2003. In January 2004, an agreement was reached between Tengtu United
and CBERC, pursuant to which the payment due in January, 2004 was extended by
six months. Originally, our relationship with CBERC contemplated the creation of
a fully user supported internet-based portal which could also be used for
commercial purposes. The PRC Government, has, however, decided not to pursue
such a portal, and instead focuses on providing satellite based resources and
content and hard disk drives pre-loaded with resources and content. Therefore,
while we are currently committed to fund CBERC with approximately RMB 30
million, we believe that we will be able to renegotiate our CBERC relationship
to continue our access to its content and resources, with a lower capital
contribution. However, there can be no assurance that the PRC government will
cooperate in such renegotiations, and, even if they do, that sufficient capital
will be available to contribute to CBERC to fulfill our obligations. The loss of
our interest in CBERC would materially and adversely affect our business and
operations.

      Because the Tengtu China Group still conducts some of the business of
Tengtu United, Tengtu United has determined that it was necessary for it to
guarantee repayment of certain outstanding loans to the Tengtu China Group. The
guarantees currently outstanding, and their amounts, in RMB, are set forth
below:

       Bank                                        Loan Amount
       ----                                        -----------
       Hua Xia Bank                                RMB 16 million

       Agricultural Bank of China                  RMB 14.1 million

      As previously reported by the Company, when Fan Qi Zhang died on October
24, 2003, he bequeathed 15 million of the 30 million shares of our common stock
that he was to receive upon the closing of the Restructuring to "solve the
funding difficulties" of the companies in the Tengtu China Group. The "funding
difficulties" of the Tengtu China Group are principally the above loans
guaranteed by Tengtu United, as well as an additional RMB 37.8 million in Tengtu
China Group debts which have not been guaranteed by Tengtu United as set forth
below:

<TABLE>
<CAPTION>
         Bank/Lender                                 Loan Amount                Obligor(s)
         -----------                                 -----------                ----------
<S>                                                  <C>                        <C>
Agricultural Bank of China                           RMB3.8 million             Beijing Jiade Science and
                                                     (458,842 USD)              Technology Group, Ltd.
                                                                                ("Jiade")

Bank of China                                        RMB 15 million             Jiade and Tengtu Electronic
                                                     (1,811,222 USD)            Publishing House
</TABLE>

      The Estate of Fan Qi Zhang, which controlled the Tengtu China Group
companies, has given authorization to Tengtu United to use the 15 million shares
bequeathed by Mr. Zhang to pledge to the banks holding guarantees from Tengtu
United in substitution for the Tengtu United guarantees. Discussions with these
banks are currently ongoing. The Estate of Fan Qi Zhang has also authorized the
use of a portion of the 15 million shares to pledge to CME for settlement of the
lawsuits described previously.

      We are planning to raise additional funds to meet the cash requirements
for CBERC project and the needs of our operations for the next 12 months. There
can be no assurance that such financing will be available, or if available, that
it will be on acceptable terms.

FISCAL YEAR ENDED JUNE 30, 2003

CHANGES IN CASH FLOW


<PAGE>

      For the fiscal year ended June 30, 2003, net cash used by operating
activities totaled $3,038,009. The net loss for the year, $(1,862,412), includes
non-cash charges for depreciation and amortization of $139,772, equity loss on
investment of $76,807, non-cash compensation expenses associated with the
issuance of common shares for services of $50,835, and non-cash interest expense
of $93,820 related to a convertible debenture held by Top Eagle.

      Cash was further decreased by the increase of $1,014,450 in due from
Tengtu China, which represents 57% of Tengtu International Corp.'s share of
Tengtu United's earnings for the fiscal year ended June 30, 2003. An increase of
$131,814 in other receivables further decreased cash. A decrease in prepaid
expenses resulted in a favorable change of $205,689 to operating cash flow.

      We used net cash raised in private placements to reduce our outstanding
accounts payable and accrued expenses. For the year ended June 30, 2003,
accounts payable and accrued expenses have been decreased by $639,265.

      We did not make any investments during the fiscal year ended June 30,
2003.

      On July 5, 2002, we paid $249,200 to Quest Ventures, Ltd. to reduce the
outstanding principal of a loan made on June 6, 2002, to $1,500,000.
Subsequently, this balance of $1,500,000 was paid in full to Quest on November
30, 2002.

      The net cash flow used by financing activities was $1,596,045. The primary
source of these funds was private placements to purchase units consisting of two
Special Warrants per unit, and Common Shares, at a price of $1.00 per Unit or
$0.50 per Common Share.

      In June 2003, Min Sheng Bank of China terminated a loan agreement that
included to a $4 million restricted U.S. dollar denominated deposit used to
secure the RMB31 million (U.S.$3,744,800) long-term loan. The loan was repaid
with the $4 million.

CONTRACTUAL OBLIGATIONS

      The following summarizes our contractual obligations at June 30, 2003:

                              PAYMENT DUE BY PERIOD

CONTRACTUAL OBLIGATION             TOTAL           LESS THAN 1 YEAR    1-3 YEARS

Short-term loans                $1,454,404(1)      $1,454,404(1)
Total Contractual Obligation    $1,454,404(1)      $1,454,404(1)

Notes:

      (1)   The short-term loan is the $1,500,000 convertible debenture issued
            to Top Eagle Holdings, Ltd. The loan is due December 15, 2003.

      In addition to the foregoing, we are committed to fund CBERC as follows:
RMB 30 million (approximately $3,624,000) within twelve months after the
establishment of CBERC and RMB 20 million (approximately $2,416,000) within
eighteen months after the establishment of CBERC. CBERC was established on
January 13, 2003.

FISCAL YEAR ENDED JUNE 30, 2002

CHANGES IN CASH FLOW

      For the fiscal year ended June 30, 2002, net cash used by operating
activities totaled $3,435,798. The net income for the year, $1,578,108, included
non-cash gains on loan forgiveness of $236,559, plus non-cash charges for
depreciation and amortization of $357,512, non-cash compensation expenses
associated with the issuance of common shares for services and fees of $518,615,
non-cash interest expense of $86,555 related to convertible debentures, and
impaired assets write-off of $246,732, resulting in a net cash increase of
$2,550,963.

      This increase in cash was offset by the increase of $6,155,603 in due from
Tengtu China for the installation of Total Solution Platforms and the sales of
other Tengtu products. The increase in prepaid expense related to advances to a
third party for software products, which negatively impacted operating cash flow
by $516,876. The decreases in accounts receivable, inventories, advance to
director and other receivables resulted in a favorable change of $152,046 to
operating cash flow.

<PAGE>

      In order to conserve working capital, we continued to defer part of our
consulting fees and management compensation which contributed to the increase of
due to related party consultants of $387,496. The increase of $133,209 in
accounts payable and $28,822 in accrued expenses are related to normal operating
activities.

      The net change from investing activities was a decrease of $13,094,349 in
cash. We advanced $9,059,902 (RMB 74,999,185) to Tengtu China, of which
$1,208,000 (RMB 10,000,000) was invested in the Shandong LBERC and $724,800 (RMB
6,000,000) was invested in the Shaanxi LBERC as a long term investment,
$2,536,800 (RMB 21,000,000) was invested in CBERC as a long term investment, and
the balance was used to provide the working capital for Operation Morning Sun
and other provincial LBERC projects. We also deposited $4,000,000 with Min Sheng
Bank as collateral for a long-term loan with that bank . The net cash flow
generated from financing activities totaled $16,425,160. On June 6, 2002, we
closed a $4,000,000 loan with Quest Ventures, Ltd. Pursuant to the terms of the
loan agreement, we issued a $4,000,000 promissory note to Quest due November 30,
2002 with an interest rate of 12%. The note was secured by a general security
agreement, pursuant to which we gave Quest a security interest in all of our
assets. The note was also secured by 10,015,812 shares of our common stock
pledged by Orion Capital Incorporated, a guarantee from Orion limited to the
pledged stock and a personal guarantee from William O.S. Ballard as to
$2,500,000. The Quest loan was, in part, a bridge loan until the closing of the
private placement on June 20, 2002. Pursuant to the terms of the loan agreement
and note, the $2,500,000 personally guaranteed by Mr. Ballard was repaid to
Quest by July 5, 2002 extinguishing the personal guarantee. $2,250,800 of the
$2,500,000 repaid to Quest was raised in a private placement of Special Warrants
which closed on June 20, 2002.

      The principal balance of $1,749,200 remained outstanding on the Quest loan
as of June 30, 2002. On July 3, 2002, an additional $249,200 was repaid to Quest
leaving a principal balance of $1,500,000. The Quest loan proceeds were used to
fund CBERC start-up and portal building and development costs. With respect to
the $1,500,000 outstanding loan balance due to Quest on November 30, 2002,
Tengtu China had committed to pay it when due from monies collected in China.
The remaining amount outstanding to Quest was paid with proceeds of additional
private placements.

      We borrowed, on a short term basis, $675,560 from Orion for general
corporate administrative use. $541,332 of the $675,560 was converted to Special
Warrants on June 20, 2002.

      We borrowed approximately 3,745,000 in Chinese renminbi from Min Sheng
Bank on June 26, 2002. This line of credit bears interest at 5.58% and is
payable in full on June 26, 2007. This line of credit is fully secured by
$4,000,000 in restricted U.S. dollar denominated deposits at the Min Sheng Bank.
The funds were used to fund CBERC start-up and portal building and development
costs.

      In the fiscal year ended June 30, 2002, the total cash received from
common stock and options issued and exercised was $10,891,082. Between August 1,
2001 and June 30, 2002, we sold a total of 7,872,113 shares of common stock and
1,066,667 attached warrants for $7,832,600 through a series of private
placements. As part of the private placements, we sold 1,300,000 shares of
common stock and 216,667 attached warrants with the exercise price of $1.20 per
share for $1,300,000 on October 31, 2001 and 700,000 shares of common stock and
116,667 attached warrants with the exercise price of $1.20 per share for
$700,000 on November 15, 2001 to Orion.

      The total cash received from warrants and options issued and exercised was
$3,058,482. On June 20, 2002, we sold 2,991,332 units in a private placement for
gross proceeds of $2,991,332. The units consisted of two Special Warrants each.
541,332 of the Special Warrants were sold to Orion, a company wholly owned by
the Chairman of our Board of Directors, William O.S. Ballard. 50,000 previously
issued stock warrants were exercised at $0.218 per common share for $10,900.
100,000 warrants were also exercised at $0.285 per common share for $28,500. In
addition, $16,350 was received to exercise 75,000 previously issued options, but
shares have not been issued as of June 30, 2002. On June 12, 2002, we received
$250,000 from Fan Qi Zhang pursuant to a stock purchase agreement. Subsequently,
we received another $250,000 from Mr. Zhang in July 2002. Pursuant to a July 30,
2002 amended stock purchase agreement, we sold 1,000,000 Common Shares to Mr.
Zhang for the $500,000 received. The sale included 500,000 attached warrants to
purchase common stock at $.75 per share.

      In addition to shares issued for cash, the non-cash transactions involving
issuing common stock are described below: Pursuant to a May 15, 2002 agreement,
we issued 213,011 Common Shares to Ng Sau Hang in connection with the winding
down of the business of our subsidiary, Edsoft Platforms. Of the total shares
issued, 43,011 shares were issued as full payment of a loan and we recorded a
$236,559 gain on the forgiveness of debt, 120,000 shares were issued in payment
of the accrued interest of $60,000 on the loan, and 50,000 shares were issued
for the consulting services for which the cost was recorded in 2001.


<PAGE>

      In connection with a bridge loan to us by Quest Ventures, Ltd. that closed
on June 6, 2002, we issued 375,000 shares of common stock to Quest, which
resulted in a charge of $187,500 for a financing expense that was reflected in
the cash flow from operating activities.

      Pursuant to a contract between us and Orion, William O.S. Ballard provided
consulting services to us. As compensation for the services, we agreed to issue
Orion 20,834 shares of common stock each month. During the fiscal year ended
June 30, 2002, 250,008 shares were issued to Orion and a charge to compensation
expense of $231,257 was recorded and reflected in the cash flow from operating
activities. The contract expired in December 2002.

      Subsequent to the year-end, we issued 250,000 Common Shares to 1334945
Ontario Limited on July 18, 2002 pursuant to a settlement agreement with Gregory
Mavroudis and 1334945 Ontario Limited.

      The net cash flow generated from financing activities was less than the
funds used to support Operation Morning Sun, the CBERC and LBERC projects, and
other corporate activities by $104,988. After taking into consideration a
negative foreign exchange effect of $6,574, cash decreased by $111,561 to
$914,838.

      Pursuant to an originally $1,500,000 convertible debenture issued to Top
Eagle in December, 1999 and due December, 2003, we made quarterly interest
payments at a rate equal to the best lending rate of The Hong Kong and Shanghai
Banking Corporation plus two percent

FISCAL YEAR 2004, 2003 AND 2002 COMPARATIVE OPERATING RESULTS

                                        2004          2003              2002

Revenues...................       $2,399,270       $5,343,783        $14,255,417

      Primarily due to the delay of Western Rural School Projects by Government,
the total revenue in 2004 was $2,399,270. This total included sales of turn key
portals of $188,334, satellite connectivity equipment for $1,125,193, Total
Solution Platforms for $151,010, systems integration services for $67,930,
Educational CDs for $314,506, Microsoft products for $340,526, and Content
license fees of $110,846. Total Tengtu United/Tengtu China operations accounted
for 96% of the consolidated sales. $100,622 of revenue from CBERC and $302
revenue from TIC Beijing accounted for the remaining 4% of the consolidated
revenue.

                                  2004                2003                 2002

Gross Profit/Loss          $1,117,952            $1,977,947           $9,213,132

      For the year ended June 30, 2004, the overall gross margin associated with
Tengtu United's sales was 47%, including Total Solution platforms at 89%,
satellite equipment at 26%, educational CD-ROMs at 81%, Microsoft products at
65%, Portal at 52%, Content license fee at 99%, and System integration at 5%.

      For the year ended June 30, 2003, the overall gross margin associated with
Tengtu United's sales was 37%. The low overall gross margins were primarily due
to sales of satellite equipment supported by the Agricultural Bank credit
facility for $2,042,243 (22% gross margins) and systems integration projects
obtained through competitive bidding processes for $721,702 (8% gross margin).
The objective of sales of equipment and systems integration services supported
by the Agricultural Bank credit facility is to build a base of school users
which will pay content and licensing fees in the future.

      In the fiscal year ended June 30, 2002, the overall gross margin
associated with sales under Operation Morning Sun was 65% of which $8,422,529
was for Total Solution platforms at 75% or $1,155 per platform, $495,034 was for
satellite equipment at 30%, $11,234 was for educational CD-ROMs at 10%, and
$460,845 was for other educational software and services at 43%. Costs of Total
Solution platforms were lower in fiscal 2002 compared to fiscal 2001 primarily
because the Microsoft operating system was not needed in most platforms sold.
Most of the school computers where the platforms were installed were already
equipped with appropriate operating software. The reduction of platform costs
contributed to the improvement in gross margins.

                                        2004            2003            2002
Research and development             $803,432            $0            $971,111


<PAGE>

      In fiscal year 2004, we made a one time adjustment of $775,065 for
projects previously booked as prepaid expenses while these projects developed
products; market research determined that the products did not fit our customer
base. We recorded no research and development expenses in 2003. In fiscal 2002,
$971,111 research and development expenses were incurred with respect to a
portal software project and educational content software for China's educational
market.

<TABLE>
<CAPTION>
                                               2004               2003                 2002
<S>                                       <C>                  <C>                  <C>
General and Administrative Expenses       $2,308,723           $1,924,695           $2,511,430
</TABLE>

      General and administrative expenses increased $384,028 in the fiscal
year ended June 30, 2004 compared to fiscal year of 2003. The increase was
mainly due to approximately $216,000 of general and administrative expenses in
CBERC and other Tengtu Group companies after the Restructuring, and $170,000 of
public relations printing expenses.

      For the fiscal year ended June 30, 2003, general and administrative
expenses decreased $586,735 compared to the same period in 2002. The decrease
was mainly due to an expense credit of $335,529 from Tengtu China. The total
general and administrative expenses incurred by Tengtu United amounted to
$547,570. At our principal office in Toronto, a majority of the expenses were
legal and professional fees of $804,078 and financing related expenses of
$439,630.

      General and administrative expenses increased 25% in the fiscal year ended
June 30, 2002 from 2001 due to the higher legal and financing fees associated
with raising capital to support Operation Morning Sun and the CBERC and LBERC
projects.

                                          2004              2003           2002

Related Party Consultants              $516,708         $488,877        $865,202

      Related party consultants' expense relates to staff that manages technical
developments and financing activities in North America.

      In fiscal year of 2004, related party consultants' expenses were
consistent with the previous year's amount. Related party consultants' expense
decreased in fiscal year 2003 compared with fiscal year of 2002 due to the
elimination of some executive positions and the lower market values for the
shares issued as compensation for consulting services in fiscal year 2003.

                                          2004            2003            2002

Bad debt expense                     $18,700,000           $0              $0

      In fiscal year of 2004, we made a one time adjustment to due from related
party. As previously reported in a Current Report on Form 8-K filed with the SEC
on May 26, 2004, the Company believed that its approximately $19.5 million
receivable due from Tengtu China was materially impaired and that the Company
was continuing its assessment of the impairment. Upon further assessment, the
Company believes that approximately $800,000 of this amount will be collected
from schools resulting in a write-down of $18,700,000 due from Tengtu China in
the quarter ended June 30, 2004. However, the Company is continuing its
aggressive efforts to collect all receivables.

                                        2004              2003             2002

Collection Provision                  $92,503          $119,337         $444,031

      The provision for the fiscal year ended June 30, 2004 represents an
estimate of potential uncollectible accounts associated with sales by Tengtu
United during the year. Compared to the period in 2003, the lower amount in 2004
was primarily due to the lower sales. This provision is included in due from
related party, in 2003 and 2002.

                                         2004            2003               2002

Goodwill write-down                   $47,209,330


<PAGE>

      On April 05, 2004, we recorded on our books $47,209,330 of Goodwill after
issuing 30 million shares for a 43% of interest in Tengtu United and
consolidation of other Tengtu Group companies after the restructuring. At the
end of fiscal year, we made an evaluation based on our current business model.
Because we could not predict future cash flow with sufficient certainty, we
wrote down the full amount of the Goodwill.

                                        2004            2003              2002

Advertising Expense                     $0             $16,891           $31,885

      Limited amounts of advertising expenses were spent in 2003, and 2002 on
advertising to promote the sales in China.

                                         2004          2003              2002

Selling Expense                      $915,516       $1,387,135        $1,837,924

      For the years ended June 30, 2004 and 2003, selling expenses were lower
compared with the same period of 2002. This is primarily due to lower sales in
China.

                                         2004          2003               2002

Depreciation and Amortization          $108,288       $64,036           $81,741

      We have not made any significant purchases of equipment in past years and
depreciation and amortization expenses have remained at consistent and low
levels.

                                         2004            2003             2002

Equity Loss in Investee               $1,183,804      $(76,807)            $0

      For the fiscal 2004, CBERC recorded an equity loss of $1,153,098 that was
mainly due to the high start-up expenses, and $30,706 was related to the
investment loss in the Shaanxi LBERC.

      The equity losses in investee in 2003 relate to our investment in the
Shaanxi LBERC joint venture. The loss was primarily due to the high start-up
expenses for the joint venture.

                                        2004            2003             2002

Interest Income                        $1,635         $250,615          $3,871

      The interest income in fiscal year 2003 was earned by a $4,000,000
restricted cash deposit at Min Sheng Bank. On June 26, 2002, we borrowed
approximately $3,745,000 in Chinese renminbi from Min Sheng Bank. This line of
credit was fully secured by the $4,000,000 in restricted dollar denominated
deposits at the Min Sheng Bank. The restricted cash deposit earned interest at
6.15% annually and the interest income was paid on a semi-annual basis. The
interest earned for the fiscal year 2003 was $249,889.

                                        2004           2003              2002

Interest Expense                    $391,778          $477,054         $254,029

      For the year ended June 30, 2004, interest expense was primarily for the
interest on a convertible debenture issued to Top Eagle, which included the cash
interest payment of $135,225 and an amortization discount of $272,013 and an
accrued interest reversal of $15,460.


<PAGE>

      For the year ended June 30, 2003, interest expense consists of $267,079
incurred on the Top Eagle Debenture and a loan from Quest Ventures, Ltd., and
$209,974 of interest on the Min Sheng Bank loan in China.

      Interest expense in fiscal 2002 includes interest on a short-term loan
from Quest Ventures, Ltd. and the Top Eagle loan.

                                        2004          2003               2002

Other Income                        $1,238,023      $1,257,877        $2,045,902

      Other income in fiscal 2004 included $203,142 credit for value added tax
(VAT) paid in China for Tengtu United's sales and $1,034,881 of reversal for the
old payables in TUC, TEP, and TTN which were over 6 years old.

      Other income in fiscal 2003 included a credit for value added tax paid in
China for Tengtu United sales of $290,274, a $210,000 reversal of over accrual
of consulting fees, a $720,208 reversal of old legal and accounting fees for
which the statue of limitations has expired, and $36,310 in cash recovered from
the sale of the assets of Iconix, our former investee.

         Other income in fiscal 2002 included a $236,559 non-cash gain on debt
forgiveness related to a debenture that had been issued by Edsoft, one of our
subsidiaries, and a $1,803,079 VAT tax credit in China.

                                    2004              2003                2002

Other Expense                   $3,130,145          $704,801           $263,352

      The Other expenses in fiscal 2004 related primarily to accrued expense for
Tengtu United's guarantee of Tengtu Group Companies' bank loans of $3,150,000,
and $19,855 credit adjustment in TUC's organization expenses.

      Other expense in fiscal 2003 related primarily to an accrual for a
settlement of our litigation with Swartz Private Equity, LLC of $679,287.

      The majority of other expenses in fiscal 2002 related primarily to asset
write-offs, which consisted of $75,000 for a software license fee and $171,732
of idled assets in China.

                                   2004               2003              2002

Minority Interest                $13,101             $89,218          $2,424,092

      In fiscal 2004, $13,101 of minority interest was booked after the
Restructuring. Tengtu China controls 20% of the voting shares of Tengtu
Electronic Publishing House.

       For fiscal year of 2003 and 2002, minority interest represents Tengtu
China's 43% interest in the operating profits of Tengtu United. In fiscal 2003,
Tengtu United's net profit was $194,216. Therefore, 43% of Tengtu United net
profits were allocated to Tengtu China and $89,218 of minority interest was
recorded. In fiscal 2002, Tengtu United's net profit exceeded its accumulated
losses from prior years. Therefore, 43% of Tengtu United net profits were
allocated to Tengtu China and $2,424,092 in minority interest was recorded.

CRITICAL ACCOUNTING POLICIES

      The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles or GAAP in
the United States. The preparation of those financial statements requires us to
make estimates and judgments that affect the reported amount of assets and
liabilities at the date of our financial statements. Actual results may differ
from these estimates under different assumptions or conditions.

      Critical accounting policies are those that reflect significant judgments
or uncertainties, and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies.


<PAGE>

1. Consolidated Financial Statements

      Tengtu's business is focused on China through a now 100% owned subsidiary,
Tengtu United Electronic Corporation ("TUC" or "Tengtu United").

2. Accounting for Investments in CBERC & LBERC

      Tengtu United, through Tengtu China, established two joint ventures on
behalf of Tengtu United: one with a division of the Chinese Ministry of
Education, CBERC, and second, the Shaanxi Province Broadband Education Resource
Center, an LBERC. We account for these investments using equity method. Although
our equity interest in each of the joint ventures is over 50%, we did not
control the joint ventures due to participating rights exercised by the minority
interest holders in the management of the joint ventures. We had the ability to
exercise significant influence, but not control, over the investees. Purusant to
a revision of the Charter of CBERC, beginning April 2004, we held majority
status on the Board of CBERC. This gives us control over major decisions in the
operation and management of CBERC. As a result, we consolidated CBERC beginning
on April 1, 2004.

3. Due from Related Party

      Prior to April 204, we have engaged Tengtu China, as our agent, to conduct
all of Tengtu United's business with any Chinese government entity. As agent,
Tengtu China and its affiliated and related companies administer the daily
operations of Tengtu United: paying operating expenses, collecting receivables
and remitting net operating profits to us. In order to support the continuous
expansion of China operations, we do not expect the repayment of working capital
advances made to Tengtu China in the near term. So we use the term "Due from
related party" to describe the amount due from Tengtu China.

      As previously reported in our Current Report on Form 8-K filed with the
SEC on October 22, 2004, the Company believed that its approximately $19.5
million receivable due from Tengtu China was materially impaird and that
approximately $800,000 of this amount would be collected. This resulted in a
write-down of $18,700,000 of due from Tengtu China in the quarter ended June 30,
2004.

Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

      We operate through subsidiaries located in Beijing, China and grant credit
to customers in this geographic region. Our administrative office is located in
Toronto, Canada.

      We perform certain credit evaluation procedures and do not require
collateral. We believe that credit risk is limited because we routinely assess
the financial strength of customers, and based upon factors surrounding the
credit risk of customers, established an allowance for uncollectible accounts.
Therefore, we believe our accounts receivable credit risk exposure beyond such
allowances is limited.

      We established an allowance for doubtful accounts of $0 at June 30, 2004,
which are reserves against related party receivables in addition to our
writedown of bad debt. We believe any credit risk beyond this amount would be
negligible. At June 30, 2004, we had approximately $2,358,500 of cash in banks
uninsured.

      We do not require collateral or other securities to support financial
instruments that are subject to credit risk. For the fiscal years ended June 30,
2004, 2003 and 2002, while we recorded sales pursuant to agreements with the
Chinese Ministry of Education in our financial statements, no single school
customer accounted for more than 10% of total sales. Receivables related to
these sales transactions are grouped together with amounts due from a related
party, Tengtu China, in 2003 and 2002.

<TABLE>
<CAPTION>
                        MARKET RISK SENSITIVE INSTRUMENTS

FINANCIAL INSTRUMENT                                    CARRYING VALUE           FAIR VALUE

<S>                                                         <C>                   <C>
Instruments entered into for trading purposes               None

Instruments entered into for other than trading purposes

Cash and Cash equivalents
         United States                                     $       --            $       --
         Foreign                                            2,358,536             2,358,536
         Total                                             $2,358,536            $2,358,536
Accounts and Other Receivables, Net
         United States                                     $       --            $       --
         Foreign                                            1,033,658             1,033,658
         Total                                             $1,033,658            $1,033,658
Accounts payable
         United States                                     $   95,652            $   95,652
         Foreign                                           $  524,285            $  524,285
         Total                                             $  619,937            $  619,937
</TABLE>


<PAGE>

         The financial instruments are short-term and are not subject to
significant market risk. Substantially all financial instruments are settled in
the local currency of each subsidiary, and therefore, we have no substantial
exposure to foreign currency exchange risk. Cash is maintained by each
subsidiary in its local currency.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Our financial statements described below and the report of our
independent auditors thereon are set forth following the Index to Financial
Statements on page F-1 of this report:

Report of independent registered public accounting firm            F-1

Consolidated balance sheets at June 30, 2004 and 2003              F-2

Consolidated statements of operations and comprehensive
income (loss) for each of the three years in the
period ended June 30, 2004                                         F-3

Consolidated statements of shareholders' equity for each of
the three years in the period ended June 30, 2004                  F-4

Consolidated statements of cash flows for each of the three
years in the period ended June 30, 2004                            F-5

Notes to consolidated financial statements                         F-6 - F-20

SELECTED QUARTERLY FINANCIAL DATA

         The following supplementary financial information is provided for the
periods since we have been required to report on Form 10-Q.

SUPPLEMENTARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                               30-Jun-04          31-Mar-04          31-Dec-03          30-Sep-03          30-Jun-03
<S>                         <C>                <C>                <C>                <C>                <C>
Revenues                    $    289,008       $    354,557       $  1,329,861       $    425,843       $  1,945,640
Gross Profit                $    170,789       $    181,208       $    533,334       $    232,619       $    792,146
 Gross Profit Margin                  59%                51%                40%                55%                41%
Operating Income (Loss)     ($67,947,895)      ($   575,474)      ($   338,987)      ($   674,193)      $     57,822
  Net Income (Loss)         ($70,155,557)      ($ 1,768,995)      ($   424,815)      ($   666,350)      $     30,425
  Earnings Per Share
     Basic                  ($      0.68)      ($      0.02)      ($      0.01)      ($      0.01)      $       0.00
    Diluted                 ($      0.68)      ($      0.02)      ($      0.01)      ($      0.01)      $       0.00
</TABLE>

<TABLE>
<CAPTION>
                               31-Mar-03          31-Dec-02          30-Sep-02            30-Jun-02          31-Mar-02
<S>                         <C>                <C>                <C>                  <C>                <C>
Revenues                    $  1,913,585       $    534,187       $    638,646         $  3,959,491       $  2,993,603
Gross Profit                $  1,116,395       $    212,867       $    175,744         $  2,605,005       $  2,196,126
 Gross Profit Margin                  58%                40%                28%                  66%                72%
Operating Income (Loss)     ($   210,280)      ($   753,992)      ($ 1,104,090)        $  1,365,729       $    379,632
  Net Income (Loss)         $     62,223       ($   714,875)      ($ 1,125,648)        $    670,679       $     50,554
  Earnings Per Share
     Basic                  $       0.00       ($      0.01)      ($      0.02)        $       0.01       $       0.00
    Diluted                 $       0.00       ($      0.01)      ($      0.02)        $       0.01       $       0.00
</TABLE>

<TABLE>
<CAPTION>
                                   31-Dec-01          30-Sep-01          30-Jun-01         31-Mar-01
<S>                             <C>                <C>                <C>               <C>
Revenues                        $  4,061,008       $  3,241,315       $  2,612,335      $  1,450,879
Gross Profit                    $  2,379,319       $  2,059,682       $  1,437,678      $    818,748
 Gross Profit Margin                      59%                64%                55%               56%
Operating Income (Loss)         $    147,465       $    576,982       $    887,078      ($   143,496)
  Net Income (Loss)             ($     7,237)      $    864,112       $  2,110,188      ($   238,776)
  Earnings Per Share
     Basic                      $       0.00      $       0.02       $       0.08*      ($      0.01)
    Diluted                     $       0.00      $       0.02       $       0.08*      ($      0.01)
</TABLE>

* earnings per share is based on weighted average number of common share
outstanding.

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

      There has been no change in our independent auditors during the previous
two fiscal years. Nor have there been any disagreements with our independent
auditors during the previous two fiscal years.

ITEM 9A. CONTROLS AND PROCEDURES

      In connection with the Company's April, 2004 acquisition of the remaining
43% interest in Tengtu United from its former joint venture partner, Tengtu
China, the Company, through its Audit Committee, has been conducting a thorough
examination of the financial condition of Tengtu United and its operations.

      The review has uncovered overstatements of revenue for each quarter of
fiscal 2004. The Company believes that the overstatements were due to the
failure by Tengtu China, the Company's former joint venture partner in Tengtu
United, to maintain adequate financial controls and systems and to follow
generally accepted accounting principles. This in turn impacted the recording of
revenues for the joint venture, which are reflected in the consolidated
financial statements of the Company. The overstatements are made up of
accounting errors, double counting of sales, and recognition of revenue that is
considered premature under United States generally accepted accounting
principles because revenue was recognized before services or products had been
provided. As a result of these misstatements, the financial statements for the
first three quarters of fiscal year 2004 have been restated and re-filed.

      The Company has since implemented a number of measures to correct
weaknesses in internal controls and financial reporting systems. This ongoing
review has resulted in a reorganization of the finance and accounting
departments, the replacement of financial management responsible for financial
reporting, and the appointment of Simon Xia as Chief Financial Officer of Tengtu
United to oversee the Company's financial review and reorganization. The
Company's systems of internal control are still in the process of evaluation and
improvement as personnel are replaced and new procedures are implemented. Some
of the new procedures include requiring the CFO pre-approve all large contracts
for products or services, credit worthiness reviews of all customers, more
thorough analysis of the profitability and capital requirements of individual
contacts and a more direct measure of holding sales employees accountable for
the profitability and collectibility of sales made.

ITEM 9B OTHER INFORMATION

      None.
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

      The name and positions with us of each of our Directors and Executive
Officers are as follows:

<TABLE>
<CAPTION>
TC                                        DIRECTOR
NAME                                     POSITION                         SINCE        AGE
--------------------------------    ---------------------                 -----        ---
<S>                                 <C>                                    <C>         <C>
WILLIAM O.S. BALLARD (1),(2),(3)    Director and Chairman                  2001         57

Kennith Johnson (3)                 Director                               2004         51

Thomas Pladsen                      Director                               2004         44

JOHN MCBRIDE (1), (3)               Director                               2001         45

JOHN WATT (2)                       President                              1996         58

JING LIAN                           Vice President                          --          52

JUDY YE                             Chief Financial Officer                 --          39

DR. PENGHUI LIU                     Interim Chief Executive Officer         --          39
</TABLE>

Notes:
(1)   Member of the Compensation Committee.
(2)   Member of the Executive Committee.
(3)   Member of the Audit Committee.

      The following is a description of the qualifications and experience of
each of the current Directors:

      WILLIAM O.S. BALLARD is the Chairman of our Board of Directors, and the
Chairman of the Executive Committee of our Board of Directors. Mr. Ballard's
investment company, Orion Capital Incorporated, is currently our largest
shareholder. Mr. Ballard has a law degree from Osgoode Hall, Toronto, Canada and
is a Canadian entrepreneur and lawyer. Mr. Ballard currently serves as a
Director of three Canadian public companies, Devine Entertainment, Northfield
Capital Corporation and Southern Star Resources Inc. Until 1998, Mr. Ballard was
a partner in The Next Adventure Inc., an international entertainment company and
has, for many years, been involved in the concert promotion business. Mr.
Ballard is the founder and past President of the Toronto Entertainment District
Association, one of Canada's largest business associations and the founder and
co-chairman of Canada's prestigious Walk of Fame. He also served on the
President's Council at Sir Wilfred Laurier University and the Senate of York
University. Mr. Ballard's principal occupation for the past three years has been
providing consulting services to us. Prior to that time and starting in 1998,
Mr. Ballard's principal occupation was acting as President of Orion (a position
he still holds). Mr. Ballard was elected to our Board of Directors on November
27, 2001. As a result of Devine Entertainment's failure to file its annual
financial statement for the year ended December 31, 2002, the Ontario Securities
Commission issued a temporary cease order against Devine Entertainment, Mr.
Ballard and certain other individuals prohibiting these parties from trading in
securities of Devine Entertainment.

      Kennith Johnson is a member of our Board of Directors and Chairman of our
Audit Committee. Since November 2001, Mr. Johnson has been a financial and
strategy consultant with Johnson & Scanlon Associates. From January 2001 to
November 2001, Mr. Johnson was Senior Vice President and Chief Financial Officer
of Movado Group, Inc., a manufacturer and distributor of Swiss watches, fine
jewelry and tableware products. Prior thereto he was Vice President, Chief
Financial Officer and Chief Administrative Officer of Precise
International/Wenger N.A., a privately held manufacturer, distributor and
importer of Swiss made sports watches, fine jewelry and other products.

      Thomas Pladsen is a member of our Board of Directors. He previously served
as our Chief Financial Officer in 2001 and 2002.Since March 2001, Mr. Pladsen
has also served as the Chief Financial Officer of Cimatec Environmental
Engineering Inc., a public manufacturing company. From August 1999 to February
2001 Mr. Pladsen was a consultant to several publicly traded companies. From
January 1999 to July 1999 Mr. Pladsen was the Chief Financial Officer of Online
Direct Inc., a public software development company. Prior thereto Mr. Pladsen
served as the Chief Financial Officer of Great Lakes Minerals Inc., Newmex
Mining Company and Santa Cruz Gold Inc., a group of public mining and
exploration companies.

      JOHN MCBRIDE is a member of our Board of Directors. Over the past five
years, Mr. McBride has acted as the Managing Partner of CC Capital Partners, a
merchant banking group (1999 to present), and President of Charmac Capital
Corp., a private investment company (1992 to present). Mr. McBride is a Director
of Integrative Proteomics Inc., a Toronto, Canada based, biotechnology company
involved in the field of determining the structure and function of the human
proteome. Mr. McBride is also a director of Northfield Capital Corporation and a
founding partner of Charleswood Investments, both Toronto, Canada based merchant
banking and venture capital companies. Mr. McBride was elected to our Board of
Directors on November 27, 2001.

      The following is a description of the qualifications and experience of
Tengtu's President, Chief Executive Officer, Vice President and Chief Financial
Officer:

      JOHN WATT is our President. Mr. Watt has served as a Director from June,
1996 until January, 2004 was appointed Executive Vice President on September 17,
2000, prior to being appointed President on July 1, 2001. Mr. Watt was President
of John D. Watt & Associates, Ottawa, Canada, a consulting firm specializing in
media and entertainment industries, from 1995 to July 1, 2001. Between 1980 and
1990, Mr. Watt served as a Director General for the Government of Canada,
overseeing federal policies in cultural industries, broadcasting, and
telecommunications. He was also an advisor to the NAFTA negotiations. Mr. Watt
was responsible for regulated foreign investment policies and negotiating
bilateral treaties with 26 countries including China. Mr. Watt graduated with a
B.A. degree from Sir Wilfred Laurier University before earning his L.L.Th. in
post-graduate studies at University of Toronto and a Marketing Management
Diploma from George Brown College, Toronto.
<PAGE>

      DR. PENGHUI LIU is our interim Chief Executive Officer. Dr. Liu was
appointed our interim CEO, pending completion of a definitive agreement with the
Company, in October 2004. Over the past five years, he served as Strategic
Investment Advisor and Consultant for Everbright Securities and China National
Trust & Investment Company, respectively, Exclusive Strategic Advisor for
Telstra China, General/Primary Agent for Samsung Electronics, NEC and Siemens
Communication Networks Beijing. Dr. Liu is the founder of the Beijing Pacific
Institute of International Strategy and has served as a director of that
organization since June 1999. Dr. Liu has also served as the editor-in-chief of
the Journal - Strategy and Management since 2003.

      JING "JACK" LIAN is a Vice President. During the past five years, Mr. Lian
has been Vice-President of Bluelake Industries, Ltd., Seattle, Washington. Mr.
Lian has served as a Vice President since June 1996 and was one of our Directors
from June 1996 until November, 2002. Mr. Lian is also a founder and former
Secretary of the Chinese Educational Software Council. Mr. Lian received an M.S.
degree in Computer Science from Tsing Hua University, Beijing, China. Mr. Lian
was also a visiting scholar at the University of Washington, Seattle,
Washington.

      JUDY YE serves as our Chief Financial Officer. Ms. Ye joined Tengtu in
March 2003. Ms. Ye is a Certified Public Accountant and has a Certified General
Accountant Designation from the Certified General Accounting Association of
Ontario. Prior to joining us in 2003, Ms. Ye was a corporate accountant for
Bluenotes Limited (from 2001 until joining us) and a financial analyst and
corporate accountant for International Financial Corp. (from 1998 to 2000). Ms.
Ye graduated from China's Guilin Management Institute in 1985 with degrees in
Accounting and Statistics.

      To our knowledge, based solely on a review of such materials as are
required by the Securities and Exchange Commission, none of our officers,
directors or beneficial holders of more than ten percent of our issued and
outstanding shares of Common Stock has failed to timely file with the Securities
and Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year
ended June 30, 2004.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS AND OFFICERS

DIRECTORS

      We paid $5,000 per quarter to Kennith Johnson, but did not pay cash
compensation to any of our other Directors during the fiscal year ended June 30,
2004. Pursuant to a resolution passed by our Board of Directors on April 27,
1997, each outside director who is not an employee or consultant is entitled to
the following compensation:

      Annual Fee: $6,000
      Each Board of Directors meeting attended: $500
      Each Board of Directors committee meeting attended: $250

      No cash compensation pursuant to the April 27, 1997 resolution has been
paid to any Director. For the fiscal years ended June 30, 2000 and 1999, we
granted each member of our Board of Directors options to purchase our common
stock in lieu of a cash payment.

OFFICERS

      We paid cash compensation of $516,708 to our executive officers during the
fiscal year ended June 30, 2004. On March 29, 1999, we adopted a deferred
compensation plan for future payment of past due amounts. Pursuant to the
deferred compensation plan, we deferred all compensation to certain executive
officers until we receive certain amounts of financing. At that time, we will
begin paying salaries or consulting fees at the agreed-upon rate and 90% of the
payments will be applied to current obligations and 10% to past due compensation
and fees which have been deferred. The total compensation deferred as of June
30, 2004 was $1,207,714.

SUMMARY COMPENSATION TABLE

      The following table provides information relating to compensation for the
fiscal years ended June 30, 2004, 2003 and 2002 for our former Chief Executive
Officer and compensation payable to other highly compensated executive officers
whose total salary and bonus (as determined pursuant to SEC rules) exceeded
$100,000 (determined by reference to fiscal 2004). The amounts shown include
compensation for services in all capacities provided to us. With respect to our
former Chief Executive Officer, Pak Kwan Cheung, the salary listed represents
the amount set forth in an agreement between us and Comadex Industries Ltd., a
company owned by Pak Kwan Cheung, but not amounts received by Comadex. Comadex
received $20,000 for the fiscal year ended June 30, 2002 (see also "Legal
Matters"). For the fiscal year ended June 30, 2004, Mr. Watt received $120,000
in salary. Penghui Liu, our current chief executive officer, was appointed in
November 2004.

<PAGE>

<TABLE>
<CAPTION>
COMPENSATION                                  ANNUAL COMPENSATION                LONG TERM AWARDS
------------                                  -------------------                ----------------

                                                                              SECURITIES
                                                              OTHER ANNUAL      STOCK
                                         SALARY      BONUS    COMPENSATION     AWARD(S)     OPTIONS/
NAME AND PRINCIPAL POSITION    YEAR       ($)         ($)          ($)           ($)        SARS (#)
---------------------------    ----       ---         ---          ---           ---        --------
<S>                           <C>        <C>            <C>          <C>          <C>           <C>
John Watt, President          2004       $120,000       0            0            0             0
                              2003       $120,000       0            0            0             0
                              2002       $120,000       0            0            0             0

Pak Kwan Cheung(1)(2)         2004              0       0            0            0             0
                              2003              0       0            0            0             0
                              2002       $128,400       0            0            0             0
</TABLE>

Notes:
(1) We retained Pak Kwan Cheung's services through a consulting contract with
Comadex entered into in October 1999. Comadex was not been paid any monies
during the fiscal years ended June 30, 2000 and 2001 under the contract.
However, in fiscal 2002 Comadex was paid $20,000. The amount listed represents
compensation stated in the agreement. See "Legal Matters".

EMPLOYMENT OR CONSULTING CONTRACTS WITH EXECUTIVE OFFICERS AND DIRECTORS

JING LIAN

      We entered into an agreement with Jing Lian effective January 1, 1996 for
Mr. Lian to serve as a Vice President at an annual salary of $80,000. The
agreement also provides for the possibility of performance and incentive
bonuses.

ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS

      None of the members of the Compensation Committee of our Board of
Directors (the "Committee") served as an officer or employee during the fiscal
year ended June 30, 2004.

      BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

      During the fiscal year ended June 30, 2004, the Compensation Committee of
the Board of Directors did not meet and no new compensation was granted to any
officer. Accordingly, the Compensation Committee has not issued a report on
Executive Compensation for the fiscal year ended June 30, 2004. The Compensation
Committee is currently in the process of negotiating an agreement with Dr.
Penghui Liu to serve as CEO.

                                PERFORMANCE TABLE

      The following tables show the cumulative performance for our common stock
over our last five fiscal years compared with the performance of the Nasdaq
Composite and Technology Industry Group Performance Composite. The first table
assumes $100 invested as of June 30, 1998 in our common stock and in each of the
named indices. The performance shown is not necessarily indicative of future
performance.

Date           Tengtu Return     NASDAQ Index      Industry Index
--------------------------------------------------------------------------------
6/30/1998                100               100            100
6/30/1999                 68               142            158
6/30/2000                528               210             85
6/30/2001                690               113             54
6/30/2002                235                78             30
6/30/2003                292                87             32
6/30/2004                426               108             44

<PAGE>

Date           Tengtu Stock      Change from       % change         Calculated
               Price             prior period                       Return
--------------------------------------------------------------------------------
6/30/1998               0.19                             Base           100
6/30/1999               0.13             -0.06        -31.58%            68
6/30/2000               1.01              0.88        676.92%           528
6/30/2001               1.32              0.31         30.69%           690
6/30/2002               0.45             -0.87        -65.91%           235
6/30/2003               0.56              0.11         24.44%           292
6/30/2004               0.81              0.25         44.64%           426

Date           NASDAQ            Change from       % change         Calculated
               Composite Index   prior period                       Return
--------------------------------------------------------------------------------
6/30/1998               1895                             Base           100
6/30/1999               2686               791         41.74%           142
6/30/2000               3967              1281         47.69%           210
6/30/2001               2130             -1837        -46.31%           113
6/30/2002               1463              -667        -31.31%            78
6/30/2003               1623               160         10.94%            87
6/30/2004               2048               425         26.19%           108

Date           Industry group    Change from       % change         Calculated
               Performance       prior period                       Return
               Technology
--------------------------------------------------------------------------------
6/30/1998               1123                             Base           100
6/30/1999               1773               650         57.88%           158
6/30/2000                959              -814        -45.91%            85
6/30/2001                608              -351        -36.60%            54
6/30/2002                343              -265        -43.59%            30
6/30/2003                366                23          6.71%            32
6/30/2004                493               127         34.70%            44

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth information furnished to us with respect to
the beneficial ownership of Common Shares by each executive officer and Director
named below, and by all Directors and executive officers as a group, each as of
July 1, 2004. Unless otherwise indicated, each of the persons listed has sole
voting and dispositive power with respect to the shares shown as beneficially
owned.

<PAGE>

                                                 AMOUNT AND NATURE
                                                   OF BENEFICIAL
TITLE OF CLASS       NAME OF BENEFICIAL OWNER        OWNERSHIP        % OF CLASS
--------------       ------------------------        ---------        ----------
$.01 par common     William O.S. Ballard             16,576,074(1)      15.1%
$.01 par common     Jing Lian(2)                      1,170,750(2)       1.1%
$.01 par common     John Watt (3)                       112,000            *
$.01 par common     John McBride                        416,000            *
$.01 par common     Kenneth Johnson                           0          0%
$.01 par common     Thomas Pladsen                       27,397            *
$.01 par common     Judy Ye                                   0          0%
$.01 par common     Dr. Penghui Liu                           0          0%

$.01 par common     All executive officers and       18,302,221       16.7%
                    directors as  a group (4)
--------------------------------------------------------------------------------
* Less than 1%

Notes:

(1) Orion Capital Incorporated, a company controlled by Mr. Ballard, owns of
record all shares reported in the table as beneficially owned by Mr. Ballard,
including 835,465 shares issuable upon exercise of currently exercisable
warrants, exercisable at $0.75 per share and 70,000 shares of our common stock
pledged to Orion by a Tengtu officer and director as security for a loan made by
such person. Mr. Ballard disclaims beneficial ownership as to these shares.

(2) Includes 300,000 shares of common stock issuable upon exercise of currently
exercisable stock options at $0.218 per share granted on March 29, 1999 under
the our 1999 Non-Qualified Stock Option Incentive Plan ("Stock Option Plan").

(3) Includes 75,000 shares of common stock issuable upon exercise of currently
exercisable stock options at $0.218 per share granted on March 29, 1999 under
our Stock Option Plan.

The following table shows the holdings of all persons who are not executive
officers, directors or nominees, known by us to beneficially own more than five
percent of our outstanding common stock as of July 1, 2004

<TABLE>
<CAPTION>
                                                          AMOUNT AND NATURE
                                                            OF BENEFICIAL
TITLE OF CLASS             NAME OF BENEFICIAL OWNER          OWNERSHIP        % OF CLASS
--------------             ------------------------          ---------        ----------
<S>                      <C>                                 <C>                  <C>
$.01 par common          Orion Capital Incorporated(1)       16,576,074           15.1%

$.01 par common          Estate of FanQi Zhang               15,000,000           13.7%

$.01 par common          Qihua Lu                            11,485,714           10.5%
</TABLE>

Notes:

(1) Includes 835,465 shares issuable upon exercise of currently exercisable
warrants, exercisable at $.75 per share and 70,000 shares of common stock owned
by an officer and director, which are pledged as collateral for a mortgage Orion
has on a residence recently purchased by him. Orion has disclaimed any
beneficial interest in those common shares.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Tengtu China, our agent, carries out some of our operations and collection
of receivables. Fan Qi Zhang, one of our former directors, who died on October
24, 2004 controlled Tengtu China. It is currently controlled by his estate. As
of June 30, 2003, Tengtu United had an amount due from a related party, Tengtu
China, of approximately $18,193,000.

      On June 6, 2002, we closed a loan agreement with Quest Ventures, Ltd. for
a $4,000,000 loan. Pursuant to the terms of the loan agreement, we issued a
$4,000,000 promissory note to Quest due November 30, 2002 with an interest rate
of 12%. The note was secured by a general security interest in all of our
assets. The note was also secured by 10,015,812 Common Shares pledged by Orion
Capital Incorporated, a guarantee from Orion limited to the pledged stock and a
personal guarantee from William O.S. Ballard as to $2,500,000. Mr. Ballard is
one of our Directors and the owner of Orion. Neither Mr. Ballard, nor Orion,
received any consideration for their pledge of common stock or guarantees. The
Quest loan was, in part, a bridge loan until the closing of the private
placement on June 20, 2002. Pursuant to the terms of the loan agreement and
note, we repaid the $2,500,000 personally guaranteed by Mr. Ballard by July 5,
2002 which extinguished the personal guarantee. The balance of $1,500,000 was
paid out from proceeds financing transactions. We used the Quest loan proceeds
to fund CBERC and LBERCs start-up and portal building and development costs.

<PAGE>

      On September 15, 2003 we entered into the Restructuring Agreement with Fan
Qi Zhang and entities owned or controlled by him. See "Restructuring," above.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit, Tax and Other Fees

      The following table sets forth the fees billed to us for the fiscal years
ended June 30, 2004 and 2003 by Moore Stephens, P.C.:

                                                               2004         2003

Audit fee:                                                   61,156       63,888

Fee for quarterly reviews:                                   22,061       20,100

Assurance and related services:                              10,773       38,674

Tax Compliance, tax advice, and tax planning                  2,500        2,500

Products and services provided

Total:                                                       96,490      125,162

      The Audit Committee of our Board of Directors determined that the
provision of the above non-audit services is compatible with Moore Stephens,
P.C. maintaining its independence.

      Pre-Approval of Services by the Independent Auditor

      Our Audit Committee is responsible for appointing the Company's
independent auditor and approving the terms of the independent auditor's
services. The Audit Committee has established a policy for the pre-approval of
all audit and permissible non-audit services to be provided by the independent
auditor, as described below.

      Audit Services. Under the policy, the Audit Committee is to appoint the
Company's independent auditor each fiscal year and pre-approve the engagement of
the independent auditor for the audit services to be provided.

      Non-Audit Services. In accordance with the policy, the Audit Committee has
established detailed pre-approved categories of non-audit services that may be
performed by the independent auditor during the fiscal year, subject to the
dollar limitations set by the committee. The Audit Committee has also delegated
to the Chair of the Audit Committee the authority to approve additional
non-audit services to be performed by the independent auditor, subject to
certain dollar limitations. All other non-audit services are required to be
pre-approved by the Audit Committee.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

      (a)(1) FINANCIAL STATEMENTS

      The following financial statements of Tengtu International Corp. are
included:

      Consolidated balance sheets at June 30, 2004 and 2003

      Consolidated statements of operations and comprehensive income (loss) for
each of the three years in the period ended June 30, 2004

      Consolidated statements of shareholders' equity for each of the three
years in the period ended June 30, 2004

      Consolidated statements of cash flows for each of the three years in the
period ended June 30, 2004

      (2) OTHER SCHEDULES

<PAGE>

      All other schedules are omitted since the required information is not
present or is not present in an amount sufficient to require submission of
schedules, or because the information required is included in the financial
statements and notes thereto.

      (3) EXHIBITS

      See (c) below.

      (b) EXHIBITS

31.1    Certification of John D. Watt pursuant to Exchange Act Rules 13a-14(a)
        and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002;

31.2    Certification of Judy Ye pursuant to Exchange Act Rules 13a-14(a) and
        15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
        of 2002;

32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
        Section 906 of the Sarbanes-Oxley Act of 2002.

<PAGE>

                                   SIGNATURES

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

                                           TENGTU INTERNATIONAL CORP.

                                           By: /S/ John D. Watt
                                                ------------------
                                                John D. Watt
                                                President

Dated:   December 6, 2004

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.

/S/ JUDY YE
-------------------------------     December 6, 2004
Judy Ye
Chief Financial Officer

/S/ JOHN WATT
-------------------------------     December 6, 2004
John Watt
Director

/S/ WILLIAM O.S. BALLARD
-------------------------------     December 6, 2004
William O.S. Ballard
Director

/S/ JOHN McBRIDE
-------------------------------     December 6, 2004
John McBride
Director

/S/ THOMAS PLADSEN
-------------------------------     December 6, 2004
Thomes Pladsen
Director

/S/ KENNITH JOHNSON                 December 6, 2004
-------------------
Kennith Johnson
Director

<PAGE>

                   TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES

                          INDEX TO FINANCIAL STATEMENTS

                                    CONTENTS

Report of independent registered public accounting firm                      F-1

Consolidated balance sheets at June 30, 2004 and 2003                        F-2

Consolidated statements of operations
     for each of the three years in the
     period ended June 30, 2004                                              F-3

Consolidated statements of stockholders' equity for each of
     the three years in the period ended June 30, 2004                       F-4

Consolidated statements of cash flows for each of the three
     years in the period ended June 30, 2004                                 F-5

Notes to consolidated financial statements                            F-6 - F-20

<PAGE>

             Report of Independent Registered Public Accounting Firm

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS TENGTU INTERNATIONAL CORP.

We have audited the accompanying consolidated balance sheets of Tengtu
International Corp. and its 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 fiscal years in the period ended June 30, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the Standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tengtu International
Corp. and its subsidiaries as of June 30, 2004 and 2003, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended June 30, 2004 in conformity with accounting principles generally
accepted in the United States of America.

The accompanying statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2, the Company incurred a net
loss of $73,015,718 for the year ended June 30, 2004, used cash in operations of
$3,690,102 and, as of that date, had a working capital deficiency of $3,822,607.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
discussed in Note 2. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


                                           Moore Stephens, P.C.
                                           Certified Public Accountants
                                           New York, New York
                                           September 26, 2004


                                      F-1
<PAGE>

                   TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                Tengtu International Corp. and Subsiiaries
                        Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                          June 30,
                                                                              ---------------------------------
                                                                                2004                   2003
                                                                                ----                   ----
<S>                                                                         <C>                    <C>
                                                  ASSETS

CURRENT ASSETS
  Cash and cash equivalents                                                   2,358,536              283,802.00
  Accounts receivables, net                                                   1,033,658                       -
  Due from related party                                                              -               3,593,607
  Prepaid expenses                                                               74,778                 811,269
  Inventories                                                                   511,119                       -
  Other receivables                                                             173,150                 154,011
                                                                            ------------------------------------
    Total Current Assets                                                      4,151,240               4,842,689
                                                                            ------------------------------------

                                                                            ------------------------------------
PROPERTY AND EQUIPMENT, net                                                     197,253                  82,688
                                                                            ------------------------------------

OTHER ASSETS
  Due from Related Party                                                              -              14,497,209
  Notes receivable                                                                    -                  11,881
  Long-term Investment                                                        1,229,660               4,392,793
                                                                              1,229,660              18,901,883
                                                                            ------------------------------------
TOTAL ASSETS                                                                  5,578,153            $ 23,827,260
                                                                            ====================================

                                     LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT]

CURRENT LIABILITIES
  Accounts payable                                                              619,937               $ 752,647
  Accrued expenses                                                            3,292,601                   1,446
  Prepaid revenue from cutomers                                                 482,404                       -
  Due to related party consultants                                            1,207,714               1,207,714
  Short-term loan                                                             1,973,159               1,454,404
  Other liabilities                                                             398,033                 650,310
                                                                            ------------------------------------
    Total Current Liabilities                                                 7,973,847               4,066,520
                                                                            ------------------------------------

Minority interest                                                                77,742                       -

COMMITMENTS [Note 9]

STOCKHOLDERS' EQUITY [DEFICIT]
  Preferred stock, par value $.01 per share; authorized
    10,000,000 shares; issued -0- shares                                              0                       -
  Common stock par value $.01 per share; authorized
    150,000,000 shares; issued 110,706,914 shares
    (2003-66,736,223); outstanding 110,628,494 shares
    (2003-66,657,803)                                                         1,106,285                 666,578
  Additional paid in capital                                                 85,178,486              34,872,453
  Accumulated deficit                                                       (88,777,563)            (15,761,845)
  Accumulated other comprehensive income (loss):
    Cumulative translation adjustment                                            20,140                 (15,662)
                                                                            ------------------------------------
                                                                             (2,472,652)             19,761,524
Less: Treasury stock, at cost, 78,420 common shares                                (784)                   (784)
                                                                            ------------------------------------
    Total Stockholders' Equity                                               (2,473,436)             19,760,740
                                                                            ------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    5,578,153              23,827,261
                                                                            ====================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-2
<PAGE>

                   TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  FOR THE YEARS ENDED JUNE 30, 2004, 2003, 2002

<TABLE>
<CAPTION>
                                                                    2004                  2003               2002
                                                                    ----                  ----               ----
<S>                                                             <C>                    <C>                 <C>
SALES                                                             2,399,270             5,343,783          14,255,417
COST OF SALES                                                     1,281,318             3,365,836           5,042,285
                                                               -------------------------------------------------------
                                                                  1,117,952             1,977,947           9,213,132
                                                               -------------------------------------------------------

OPERATING EXPENSES
  Research and development                                          803,432                     -             971,111
  General and administrative                                      2,308,723             1,924,695           2,511,430
  Related party consultants                                         516,708               488,877             865,202
  Collection provision                                               92,503               119,337             444,031
  Bad debt expenses                                              18,700,000                     -                   -
  Advertising                                                             -                16,891              31,885
  Selling                                                           915,516             1,387,135           1,837,924
  Goodwill write off                                             47,209,330                     -                   -
  Depreciation                                                      108,288                64,036              81,741
                                                               -------------------------------------------------------
                                                                 70,654,500             4,000,971           6,743,324
                                                               -------------------------------------------------------

Operating Income                                                (69,536,548)           (2,023,024)          2,469,808

OTHER INCOME (EXPENSE)
  Equity earnings (loss) in investee                             (1,183,804)              (76,807)                  -
  Interest income                                                     1,635               250,615               3,871
  Interest expense                                                 (391,778)             (477,054)           (254,029)
  Other income                                                    1,238,023             1,257,877           2,045,902
  Other expense                                                  (3,130,145)             (704,801)           (263,352)
                                                               -------------------------------------------------------
                                                                 (3,466,068)              249,830           1,532,392
                                                               -------------------------------------------------------
Income (Loss) before minority interests                         (73,002,616)           (1,773,194)          4,002,201
Minority interest in subsidiarys'-Income (Loss)                      13,101                89,218           2,424,092
                                                               -------------------------------------------------------
Net Income (Loss)                                               (73,015,717)           (1,862,412)          1,578,108
                                                               =======================================================

WEIGHTED AVERAGE NUMBER OF SHARES:
Basic                                                            86,446,670            56,924,776          49,880,494
Common stock equivalents                                                  0                     0           3,171,912
                                                               -------------------------------------------------------
Diluted                                                          86,446,670            56,924,776          53,052,406
                                                               =======================================================

EARNINGS (LOSS) PER COMMON SHARE:
Basic                                                                 (0.84)                (0.03)               0.03
Diluted                                                               (0.84)                (0.03)               0.03
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-3
<PAGE>

                   TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
          FOR THE YEARS ENDED JUNE 30, 2003, 2002, 2001(RESTATED), 2000

<TABLE>
<CAPTION>
                                                    Common Stock              Additional
                                        --------------------------------        Paid-in         Comprehensive      Accumulated
                                             Shares             Amount          Capital         Income (Loss)        Deficit
                                        ---------------------------------------------------------------------------------------
<S>                                     <C>               <C>               <C>              <C>              <C>
Balance - June 30, 2000                    23,890,607           238,907        11,871,444        (4,700,749)      (15,184,372)
                                        =======================================================================================

Issuance of common stock                      636,871             6,369           140,144                --                --

Loan conversion                             7,301,526            73,015         2,139,400                --                --

Issuance of common stock for cash          13,260,669           132,606         3,845,592                --                --

Paid-in capital related to
   granted options & services                      --                --           214,908                --                --

Common Shares
   To be issued for interest expense               --                --            56,515                --                --

Paid-in capital related to
   warrents issued                                 --                --           564,466                --                --

Other Comprehensive Income:
   Foreign currency adjustment                     --                --                --            (4,998)               --

Comprehensive Income:
   Net Income                                      --                --                --          (293,169)         (293,169)

Comprehensive Income
                                        ---------------------------------------------------------------------------------------
Balance - June 30, 2001                    45,089,673           450,897        18,832,469          (298,167)      (15,477,541)
                                        =======================================================================================

Issuance of common stock
   for services                               360,008             3,600           300,058                --                --

Loan conversion                                43,011               430            21,075                --                --

Issuance of common stock
   for financing and
   interest expenses                          495,000             4,950           242,550

Issuance of common stock
   for cash net of
   financing expenses                       8,060,497            80,605         7,751,995                --                --

Issuance of common stock
   for options & services                      75,000               750            18,000                --                --

Common Shares
   To be issued for cash & options                 --                --         3,058,482                --                --

Paid-in capital related to service                 --                --            57,107

   Foreign currency adjustment                     --                --                --            (6,574)               --

Comprehensive Income:
   Net income                                      --                --                --         1,578,108         1,578,108

Comprehensive Income
                                        ---------------------------------------------------------------------------------------
Balance - June 30, 2002                    54,123,189           541,232        30,281,736         1,571,534       (13,899,433)
                                        =======================================================================================

Issuance of common stock
   for services                               125,004             1,250            50,836                --                --

Issuance of common stock from
   exercise of warrants                     3,178,679            31,787           (58,724)

Issuance of common stock for cash           9,230,931            92,309         1,261,648                --                --

Foreign currency adjustment                        --                --                --             2,126                --

Issuance of common stock
   for Special Warrants                                              --         2,707,468                --                --

Paid-in capital adjustment
   for deferred compensation                                                      629,488

Comprehensive Income(Loss)                                                                       (1,862,412)       (1,862,412)
                                        ---------------------------------------------------------------------------------------
Balance - June 30, 2003                    66,657,803           666,578        34,872,452        (1,860,286)      (15,761,845)
                                        =======================================================================================

Issuance of common stock
   for Purchase Warrants                    5,583,436         55,834.36        (55,834.36)

Issuance of common stock
   for exercising stock option                175,000             1,750         38,800.00

Issuance of common stock for cash           3,937,500            39,375         1,963,750

Issuance of common stock for
   Special Warrants                         3,074,755            30,748         2,275,319

Issuance of common stock for
   Estate of Zhang Fanqu                   30,000,000           300,000        45,150,000

Conversion of short-term loan
   to Common Stock                          1,200,000            12,000           588,000

Paid-in capital adjustment for
   issuing Top Eagle Convertible Loan                                             346,000

Comprehensive Income(Loss)                                                                      (73,015,718)      (73,015,718)

Foreign currency adjustment
                                        ---------------------------------------------------------------------------------------
Balance - June 30, 2004                   110,628,494         1,106,285        85,178,486       (73,015,718)      (88,777,563)
                                        =======================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                          Accumulated
                                             Other            Treasury        Unamortized
                                         Comprehensive          Stock          Deferred       Stockholders'
                                         Income (Loss)         at Cost       Compensation   Equity (Deficit)
                                       ---------------------------------------------------------------------
<S>                                     <C>                <C>                 <C>          <C>
Balance - June 30, 2000                       (6,216)             (784)               --       (3,081,021)
                                       =====================================================================

Issuance of common stock                          --                --                --          146,513

Loan conversion                                   --                --                --        2,212,415

Issuance of common stock for cash                 --                --                --        3,978,198

Paid-in capital related to
   granted options & services                     --                --                --          214,908

Common Shares
   To be issued for interest expense              --                --                --           56,515

Paid-in capital related to
   warrents issued                                --                --                --          564,466

Other Comprehensive Income:
   Foreign currency adjustment                (4,998)               --                --           (4,998)

Comprehensive Income:
   Net Income                                     --                --                --         (293,169)

Comprehensive Income
                                       ---------------------------------------------------------------------
Balance - June 30, 2001                      (11,214)             (784)               --        3,793,827
                                       =====================================================================

Issuance of common stock
   for services                                   --                --                --          303,658

Loan conversion                                   --                --                --           21,505

Issuance of common stock
   for financing and
   interest expenses                                                                              247,500

Issuance of common stock
   for cash net of
   financing expenses                             --                --                --        7,832,600

Issuance of common stock
   for options & services                         --                --                --           18,750

Common Shares
   To be issued for cash & options                --                --                --        3,058,482

Paid-in capital related to service                                                                 57,107

   Foreign currency adjustment                (6,574)               --                --           (6,574)

Comprehensive Income:
   Net income                                     --                --                --        1,578,108

Comprehensive Income
                                       ---------------------------------------------------------------------
Balance - June 30, 2002                      (17,788)             (784)               --       16,904,963
                                       =====================================================================

Issuance of common stock
   for services                                   --                --                --           52,086

Issuance of common stock from
   exercise of warrants                                                                           (26,937)

Issuance of common stock for cash                 --                --                --        1,353,957

Foreign currency adjustment                    2,126                --                --            2,126

Issuance of common stock
   for Special Warrants                           --                --                --        2,707,468

Paid-in capital adjustment
   for deferred compensation                                                                      629,488

Comprehensive Income(Loss)                                                                     (1,862,412)
                                       ---------------------------------------------------------------------
Balance - June 30, 2003                      (15,662)             (784)                0       19,760,740
                                       =====================================================================

Issuance of common stock
   for Purchase Warrants                                                                               --

Issuance of common stock
   for exercising stock option                                                                     40,550

Issuance of common stock for cash                                                               2,003,125

Issuance of common stock for
   Special Warrants                                                                             2,306,067

Issuance of common stock for
   Estate of Zhang Fanqu                                                                       45,450,000

Conversion of short-term loan
   to Common Stock                                                                                600,000

Paid-in capital adjustment for
  issuing Top Eagle Convertible Loan                                                              346,000

Comprehensive Income(Loss)                                                                    (73,015,718)

Foreign currency adjustment                   35,802                                               35,802
                                       ---------------------------------------------------------------------
Balance - June 30, 2004                       20,140              (784)                0       (2,473,435)
                                       =====================================================================
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-4
<PAGE>

                   Tengtu International Corp. and Subsidiaries
                      Consolidated Statements of Cash Flows
                  For the Years Ended June 30, 2004, 2003, 2002

<TABLE>
<CAPTION>
                                                                    2004             2003             2002
                                                                -----------      -----------      -----------
<S>                                                             <C>               <C>               <C>
Cash Flows From Operating Activities
Net Income (loss)                                               (73,015,718)      (1,862,412)       1,578,108
Adjustments to reconcile net income (loss) to net cash
 Used by operating activities:
 Depreciation and amortization                                      108,288          139,772          357,512
 Goodwill write off                                              47,209,330
 Loss on investment at equity                                     1,183,804           76,807               --
 Bad debt expenses                                               18,700,000
 Noncash gain on loan forgiveness                                                                    (236,559)
 Noncash financing expenses on shares issued                                                          187,500
 Noncash compensation expense on shares issued for services                           50,835          331,115
 Noncash interest expense - convertible debenture                   272,013           93,820           86,555
 Fix Assets adjustment                                                   --            2,662          246,732
 Minority interest                                                   13,101
 Net advances to related party                                     (680,185)
 Write off of inventory                                              32,625

 Changes in operating assets and liabilities:
 Accounts receivable                                               (988,893)                           16,578
 Due from related party                                             927,905       (1,014,450)      (6,155,603)
 Prepaid expenses                                                   767,018          205,689         (516,876)
 Inventories                                                                                            2,452
 Other receivables                                                  114,199         (131,814)          73,757
 Advance to director                                                                                   60,059
 Other deferred expenses                                              6,957
 Notes receivables                                                   11,881                                --
 Accounts payable                                                  (684,540)        (339,584)         133,209
 Accrued expenses                                                 3,274,119         (299,681)          28,822
 Due to related party consultants                                                   (175,319)         387,496
 Deferred income tax                                                 (1,172)
 Prepaid revenue from customers                                     (20,280)
 Other liabilities                                                 (920,554)         215,666          (16,655)
                                                                -----------      -----------      -----------

 Net Cash Used by Operating Activities                           (3,690,103)      (3,038,009)      (3,435,798)
                                                                -----------      -----------      -----------

Cash Flows From Investing Activities
 Investing in related parties                                                                      (4,590,302)
 Long-term investment                                                                              (4,469,600)
 Compensating deposit on bank loan                                                                 (4,000,000)
 Compensating deposit returned by bank                                             4,000,000
 Acquisition of subsidiaries, net of cash acquired                1,270,718
 Purchase of property and equipment                                  (7,938)                          (34,447)
                                                                -----------      -----------      -----------

Net Cash Provided (Used) by Investing Activities                  1,262,780        4,000,000      (13,094,349)
                                                                -----------      -----------      -----------


Cash Flows From Financing Activities
 Proceeds from short-term loans                                     665,942          753,717        1,883,428
 Proceeds from long-term loans                                                                      3,744,800
 Cash paid on long-term loans                                                     (3,744,800)
 Cash payments on short-term loan                                  (560,400)      (1,999,200)         (94,150)
 Cash received for shares and options issued
 and warrants exercised                                           4,349,741        3,394,238       10,891,082
                                                                -----------      -----------      -----------

Net Cash Provided (Used) by Financing Activities                  4,455,283       (1,596,045)      16,425,160
                                                                -----------      -----------      -----------


Effect Of Exchange Rate Changes On Cash                              46,774            3,018           (6,575)
                                                                -----------      -----------      -----------


Increase (Decrease) In Cash And Cash Equivalents                  2,074,734         (631,036)        (111,562)
                                                                -----------      -----------      -----------


Cash And Cash Equivalents, beginning of the year                    283,802          914,838        1,026,400

Cash And Cash Equivalents, end of the year                        2,358,536          283,802          914,838
                                                                ===========      ===========      ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements


                                      F-5
<PAGE>

                          NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY

Tengtu International Corp. (the "Company") was incorporated in Delaware on May
6, 1988 as Galway Capital Corporation for the purpose of seeking potential
ventures. On May 24, 1996 the Company changed its name to Tengtu International
Corp. The Company's main activities, which are carried out through its
subsidiaries, are the development and marketing of e-educational system software
and sourcing and distribution of e-education course content in China.

2. GOING CONCERN

As shown in the accompanying financial statements, the Company incurred a net
loss of $73,015,718 for the year ended June 30, 2004, used cash in operations of
$3,690,102 and, as of that date, had a working capital deficiency of $3,822,607.
Those factors create substantial doubt about the Company's ability to continue
as a going concern.

Management has developed a plan to alleviate these factors to enable the Company
to continue as a going concern. The Company believes its cash flow needs are
short term as sales contracts have been entered into which management believes
can provide adequate operating cash flow when the sales collections are realized
over the course of next three to four months. The Company is in negotiation with
investors provide additional funding for operations. Discussions have been held
as well with existing and potential strategic partners who have expressed
intererst in providing investment and operating capital for the Company's
on-going business plans. There can be no assurance, however, that adequate
capital will be available to the Company or if available, that it will be
available on acceptable terms.

The ability of the Company to continue as a going concern is dependent on the
success of its plan. The financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.

3. SIGNIFICANT ACCOUNTING POLICIES

a) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
subsidiaries over which it owns more than a 50% equity interest of controls more
than 50% of an entity's voting interests. Significant inter-company balances and
transactions have been eliminated on consolidation.

Our business is focused on China through a joint venture entity, Tengtu United
China ("TUC"), in which we have a 100% equity interest. Prior to April
5, 2004 (see below), Tengtu was allocated 57% and Beijing Tengtu Culture and
Education Electronics Co., Ltd. ("Tengtu China"), its joint venture partner, 43%
of the profits of TUC. Tengtu China acts as agent for TUC through a series of
agreements which sets out the nature of this agency relationship. Many of TUC's
material contracts are in the name of Tengtu China, as are virtually all of the
assets utilized to operate TUC. Included in these contracts is one contributed
by Tengtu China to TUC that gives the joint venture the right to provide the
Chinese public school system with certain educational materials. Although the
Company and its joint venture entity do not directly own or operate any of the
material assets, nor are we a party to many of the material contracts, TUC
retains beneficial interest in and control over the material assets and material
contracts by virtue of its agency relationship with Tengtu China.


                                      F-6
<PAGE>

On September 15, 2003, the Company signed an agreement with the beneficial owner
of Tengtu China that allowed the Company to purchase the 43% interest of Tengtu
China in TUC for 30 million common shares of the Company. The agreement also
gives proxy control to the Company of a number of other entities in China owned
by Tengtu China's beneficial owner. The agreement was approved by the Company's
shareholders at the Company's annual shareholders meeting held on January 20,
2004 and closed on April 5, 2004. As the result of the restructure, Tengtu began
to consolidate the operating result of China Broadband Education Resource Center
("CBERC"), Tengtu Electronic Publishing Co. Ltd ("TEP"), Tengtu Tian Di Network
Co.Ltd ("TTN"), and Tengtu Training Center starting from April 05, 2004.

b) USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at June 30, 2004 and 2003,
and reported amounts of revenues and expenses during each of the three fiscal
years ended June 30, 2004. Actual results could differ from those estimates.

c) REVENUE RECOGNITION

Revenue from the sale of hardware is recognized when the products are delivered
to the customer. Revenue from the sale of software products, which do not
require any significant production, modification or customization for the
Company's targeted customers and do not have multiple elements, is recognized in
accordance with paragraphs 7 and 8 of SOP 97-2. These paragraphs require four
conditions to be present in order to recognize revenue: (1) persuasive evidence
of an arrangement exists, (2) delivery has occurred, (3) the Company's fee is
fixed and determinable and (4) collectibility is probable.

Revenue from software license fees is recognized on a straight-line basis over
the term of the license.

Hardware and software are delivered to customers at or at approximately the same
time. Software is generally installed within two weeks of delivery.

The hardware sold includes personal desktop computers, printers, network
servers, monitors, modems, hard drives and other storage media and cables. The
Company's software cannot be installed until the hardware is delivered.
Therefore, a delay in delivery of hardware will delay the recognition of
software sales revenues.

d) LONG-LIVED ASSETS

Long-lived assets are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Statement requires that long-lived assets to
be disposed of other than by sale be considered held and used until they are
disposed of. SFAS No. 144 requires that long-lived assets to be disposed of by
sale be measured at the lower of carrying amounts or fair value less cost to
sell and to cease depreciation (amortization). SFAS No. 144 requires a
probability-weighted cash flow estimation approach in situations where
alternative courses of action to recover the carrying amount of a long-lived
asset are under consideration or a range of possible future cash flow amounts
are estimated. Additionally, goodwill will no longer be required to be allocated
to long-lived assets to be tested for impairment.

Property and equipment are stated at cost. Depreciation is provided primarily by
the straight-line method over the estimated useful lives of the assets.

e) CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The Company had no cash
equivalents at June 30, 2004 and 2003.


                                      F-7
<PAGE>

f) INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires an asset and liability approach to
determine deferred tax assets and liabilities. The deferred assets and
liabilities are determined based upon the differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that are expected to be in effect when the
differences are assumed to reverse.

The Company files a consolidated return with its subsidiaries that are eligible
to be consolidated. Separate provisions for income tax are calculated for
subsidiaries that are not eligible for consolidation into the U.S. federal
income tax return.

g) INCOME/LOSS PER SHARE

Income or loss per common and common equivalent share is computed based on the
weighted average number of common shares outstanding. Due to the anti-dilutive
effect of the assumed exercise of outstanding common stock equivalents at June
30, 2004 and 2003, loss per share does not give effect to the exercise of these
common stock equivalents in that year, but they are dilutive for the year ended
June 30, 2002.

h) ADVERTISING EXPENSE

The Company expenses advertising costs as incurred.

i) FOREIGN CURRENCY TRANSACTIONS/TRANSLATION

The functional currency of the Company's subsidiaries in China is the Chinese
renminbi ("RMB"). The Company's Canadian subsidiary uses the Canadian dollar as
its functional currency and its Hong Kong subsidiary used the Hong Kong dollar
as its functional currency until the subsidiary was dissolved during the year
ended June 30, 2002. Foreign currency transactions are translated into the
functional currency at the exchange rate prevailing on the date of the
transaction. Material gains and losses from foreign currency transactions are
reflected in the financial period in which the exchange rate changes. Foreign
transaction gains and losses in the functional currencies are immaterial.
Transactions denominated in other than the functional currencies are
insignificant and, therefore, foreign currency transaction gains and losses in
non-functional currencies are also immaterial.

Assets and liabilities of the financial statements of foreign subsidiaries are
translated into U.S. dollars utilizing the exchange rate at the balance sheet
date, and revenues and expenses are translated using average exchange rates in
effect during the year. Translation adjustments are accumulated and recorded as
a separate component of stockholders' equity.

The Chinese government imposes significant exchange restrictions on fund
transfers out of China that are not related to business operations. These
restrictions have not had a material impact on the Company because it has not
engaged in any significant transactions that are subject to the restrictions.

j) ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income represents the change in equity of the
Company during the periods presented from foreign currency translation
adjustments.

k) STOCK-BASED COMPENSATION

The Company applies the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation" for stock options and similar equity instruments
(collectively, "options") issued to employees; however, the Company continues to
apply the intrinsic value based method of accounting for options issued to
employees prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issues to Employees" rather than the fair value based
method of accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. Those transactions must be accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.

l) SOFTWARE COSTS

Software development costs are capitalized if they are incurred after
technological feasibility has been established. Purchased software is
capitalized if it has an alternative future use. Research and development costs
for new products or enhancement of existing software and purchased software that
do not meet these requirements are expensed as incurred. Capitalized costs are
amortized under the straight-line method over the lesser of five years or the
useful life of the related product. During the year ended June 30, 2003,
approximately $178,500 was capitalized and is being amortized over its estimated
useful life of two years. Amortization for the fiscal years of 2004 and 2003 was
approximately $112,100 and $66,400, respectively, and is included in the cost of
sales.


                                      F-8
<PAGE>

m) INVENTORY

Inventories are stated at the lower of cost or market. Substantially all
inventory costs are determined using the first-in, first-out [FIFO] method. At
June 30, 2004 inventory consists solely of finished goods. Inventory costs do
not exceed net realizable value.

n) ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company recognizes an allowance for doubtful accounts to ensure accounts
receivable are not overstated due to uncollectibility. Bad debt reserves are
maintained for all customers based on a variety of factors, including the length
of time the receivables are past due, significant one-time events and historical
experience. An additional reserve for individual accounts is recorded when the
Company becomes aware of a customer's inability to meet its financial
obligation, such as in the case of bankruptcy filings or deterioration in the
customer's operating results or financial position. If circumstances related to
customers change, estimates of the recoverability of receivables would be
further adjusted. As of June 30, 2004, the allowance for doubtful accounts was
$0. (See Note 8)

o) LONG TERM INVESTMENT

Tengtu China entered into a joint venture, the China Broadband Education
Resource Center ("CBERC"), with a division of the Chinese Ministry of Education
on behalf of TUC. CBERC was established for the transmission of various
educational tools to individual schools for an annual fee.

Tengtu China also formed a joint ventures with Shanxii Provinces on behalf of
TUC. The joint venture is a Local Broadband Education Resource Center ("LBERC").
It will connect to CBERC and will contain its own educational and other
materials mandated by the Province. This content will also be transmitted to
individual schools for an annual fee.

For the fiscal years ended June 30, 2004, CBERC and Shanxxi LBERC incurred
equity losses of $1,153,098 and $30,706 respectively. For the fiscal year ended
June 30, 2003, CBERC did not have material operations. Shanxii LBERC was
established at the end of fiscal 2002 and incurred an equity loss of $76,807 for
the year ended June 30, 2003. Beginning April 5, 2004, the Company consolidates
CBERC into its financial statements (see Note 3a).

4. PROPERTY AND EQUIPMENT

Property and equipment is comprised as follows:

                                                            JUNE 30,
                                                     2004                2003
                                                        $                   $
Computer hardware                                   415,399              63,203
Computer software                                         0                   0
Furniture and fixtures                                8,755               8,755
Automobiles                                         206,553             206,553
Office equipment                                    109,942              67,198
Production equipment                              1,052,868           1,052,868

Total at Cost                                     1,793,517           1,398,577
Less: accumulated depreciation                   (1,596,264)         (1,315,889)
                                                 ------------------------------
NET PROPERTY AND EQUIPMENT                          197,253              82,688
                                                 ==============================


                                      F-9
<PAGE>

Depreciation charged to operations for the years ended June 30, 2004, 2003 and
2002 was $108,288, $139,772, and $357,512, respectively, of which $0, $58,377
and $248,072 was included in cost of sales for the years ended June 30, 2004,
2003 and 2002 respectively.

5. LICENSE FEES

On June 21, 2000, the Company entered into a license agreement with Netopia Inc.
The agreement grants the Company a fee-bearing, nonexclusive license right to
promote and otherwise market Netopia's website product and service to the
Company's customers. The cost of the agreement of $125,000 was to be amortized
on a straight-line basis over five years. During the year ended June 30, 2002,
this license was determined to have no remaining value, and the $100,000 balance
of the asset was amortized immediately.

6. SHORT-TERM DEBT

      In December 1999, the Company issued a $1,500,000 convertible debenture to
Top Eagle Holdings, Ltd. ("Top Eagle"), which was due on December 15, 2003. On
that date, the Company entered into an agreement with Top Eagle pursuant to
which it paid Top Eagle $300,000 and issued to Top Eagle a new convertible
debenture in the principal amount of $1.2 million, due December 15, 2004, in
exchange for the outstanding convertible debenture in the principal amount of
$1.5 million. The Company made another principal payment of $200,000 on June 01,
2004 and reduced the principal amount to $1 million. Interest on both debentures
is equal to the best lending rate of The Hong Kong and Shanghai Banking
Corporation plus two percent (approximately 7% at June 30, 2004 and June 30,
2003, respectively).

      Orion Capital Incorporated ("Orion"), a significant shareholder of the
Company, which is owned by the Chairman of the Company's Board of Directors,
advanced $665,942 to the Company for general, operating and administrative
expenses during fiscal year of 2004. On November 6, 2003, Orion converted
$600,000 of such short-term loan into the Company's common stock at $0.50 per
share. The advance has no repayment terms or interest rate.

      On December 10, 2003 Beijing Tengtu Electronic Publishing Co., Ltd.,
("TEP") renewed a loan with an outstanding principal balance of RMB 9 million
(approximately $1,087,000) with Agriculture Bank of China. The maturity date of
the loan was June 10, 2004. On June 10, 2004, TEP repaid principal of RMB
500,000 (approximately$60,400) and the loan was extended for three months with
the maturity date of September 10, 2004. The annual interest rate for the loan
is 6.372%. (See Note 18).

7. INCOME TAXES

      For the current year, none of the Company's operating subsidiaries will be
included in its federal income tax return as these are all foreign entities and
are therefore ineligible for consolidation.

      The Company has accumulated approximately $20,509,000 of net operating
losses that may be used to offset future federal taxable income. The utilization
of the losses expire in tax years from 2005 to 2024 as follows:

                    Amount     Year Expiring June 30,
                    ------     ----------------------

               $    29,000                       2005
               $   224,000                       2006
               $         0                       2007
               $         0                       2008
               $         0                       2009
               $20,256,000               2010 to 2023
               -----------

               $20,509,000
               ===========

Due to an ownership change in the year ended June 30, 1996, annual utilization
of approximately $265,000 of the net operating losses is expected to be limited
to an estimated $60,000 by current provisions of Section 382 of the Internal
Revenue Code, as amended. As the Company is not liable for either current or
deferred income taxes for the years ended June 30, 2004, 2003 and 2002,
respectively, no provision is shown on the statement of operations. For U.S. tax
purposes, the Company has recorded a deferred tax asset of approximately
$6,973,000 at June 30, 2004 and $5,885,000 at June 30, 2003 and $5,274,000 at
June 30, 2002 due principally to net operating losses. A valuation allowance of
an identical amount has been recorded, as the Company believes that it is more
likely than not that the losses will not be utilized. The allowance has the
effect of reducing the carrying value of the deferred tax asset to $0. The
valuation allowance increased approximately $1,088,000 and $1,576,000 during the
years ended June 30, 2004 and 2003, respectively.


                                      F-10
<PAGE>

TUC has an income tax "holiday" for its first profitable and four subsequent
years as computed on a Chinese Tax basis, which is a hybridized cash basis of
accounting. This holiday reduces income taxes by 100% for years one and two, and
by 50% for years three through five. The Company has not accrued any tax assets,
liabilities or expenses due to the tax holiday. Chinese tax law allows the
carry-forward of operating losses for up to five years, but no tax assets for
prior operating losses has been recorded due to the tax holiday.

The Company is a U.S. company that operates through a branch office in Canada.
As a U.S. company, it is required to file an income tax return and report those
branch operations. The income tax returns have generated the above net operating
losses.

8.  CONCENTRATION OF CREDIT RISK

The Company operates through subsidiaries located principally in Beijing, China
and an administrative office in Toronto, Canada. The Company grants credit to
its customers in these geographic regions.

      As previously reported in our Current Report on Form 8-K filed with the
SEC on October 22, 2004, the Company believed that its approximately $19.5
million receivable due from Tengtu China was materially impaired and that
approximately $800,000 of this amount will be collected. This resulted in a
write-down of $18,700,000 of due from related party in the quarter ended June
30, 2004. The balance of approximately $800,000 is expected to be collected
directly from customers and therefore, this amount has been reclassified to
accounts receivable from due from related party.

      At June 30, 2004 and 2003, the Company had approximately $2,358,500 and
$283,800 of cash in banks over insurance limits, respectively. The Company does
not require collateral or other securities to support financial instruments that
are subject to credit risk. For the fiscal years ended June 30, 2004 and 2003,
approximately 99% of sales were generated through the contract (and successors
to the contract) contributed to TUC (see Note 3a), respectively. The customers
for all sales created by the contributed contract and its successors are the
schools governed by the Chinese Ministry of Education. Receivables related to
these sales transactions are grouped together with due from related party at
June 30, 2003. For the fiscal years ended June 30, 2004, 2003 and 2002, no
customer accounted for more than 10% of total sales.

9. COMMITMENTS AND CONTINGENCIES

a) The Company has entered into operating leases for office space, on
month-to-month basis. There are no minimum rental payments on these leases.

         Rent expense for the years ended June 30, 2004, 2003 and 2002 has been
charged as follows:

                                                       YEAR ENDED JUNE 30,
                                                2004         2003         2002
                                                  $            $            $
                                               -------      -------      -------
General and administrative expense              74,352       71,092       66,409
Selling expense                                103,248      103,248      142,860
Cost of sales                                        0            0       94,858
Total rent expense                             177,600      174,340      304,127

b) The Company is committed to begin making deferred compensation payment to its
related party consultants upon the completion of its next major financing
transaction. However, the timing of the payment of the deferred compensation and
additional contributions is discretionary and not defined in any agreement. The
Company's Board of Directors has not defined a "major financing transaction,"
and such definition will be wholly within its discretion. During the year ended
June 30, 2003, two of these consultants, who are also officers and directors of
the Company, agreed to waive approximately $629,500 of the compensation due to
them. The Company has reduced the liability and increased paid-in capital for
this amount.


                                      F-11
<PAGE>

c) The Company is party to litigation in the normal course of business. It
includes a suit brought by a Company that provided services to the Company in
the development of CBERC. On August 27, 2004 a jury verdict against the Company
was rendered for a total of approximately $1,273,000. Additionally, the jury
found that the Company should recover nothing on any of its counterclaims. A
judgement based on the verdict was issued on October 1, 2004 but has been stayed
for sixty days as the Company has filed a post-trial motion to overturn the
verdict. In consultation with its counsel, the Company believes it has
meritorious defenses and intends to appeal if its motion is unsuccessful. No
accrual for any potential loss has been made in the accompanying financial
statements for any asserted or unasserted claims against the Company.

d) The Company is obligated to fund CBERC as follows: 30 million (approximately
$3,624,000) within twelve months after the establishment of CBERC and RMB 20
million (approximately $2,416,000) within eighteen months after the
establishment of CBERC. CBERC was established in January 2003. In January 2004,
a new agreement was reached between Tengtu Untied and CBERC, pursuant to which
the payment due in January, 2004 was extended by six months. The Company is
currently seeking to renegotiate its relationship with the minority owner of
CBERC and the payment that is due.

e) Because the Tengtu China Group still conducts some of the business of Tengtu
United, Tengtu United has determined that it was necessary for it to guarantee
repayment of certain outstanding loans to the Tengtu China Group. The guarantees
currently outstanding, and their amounts, in Chinese renminbi, are set forth
below:

         Bank                                        Loan Amount
         ----                                        -----------
         Hua Xia Bank                                RMB 16 million
                                                     (1,931,970 USD)

         Agricultural Bank of China                  RMB 14.1 million
                                                     (1,702,548 USD)

      As the result of the loan guarantees TUC provided, the Company has accrued
$3.15 million as a liability for the loans as of June 30, 2004.

      Also, the Estate of Fan Qi Zhang, which controlled the Tengtu China Group
companies, has given authorization to Tengtu United to use the 15 million shares
bequeathed by Mr. Zhang to pledge to the banks holding guarantees from Tengtu
United in substitution for the Tengtu United guarantees. Discussions with these
banks are currently ongoing.

f) The Company has contracted with Agriculture Bank of China ("ABC") to have ABC
provide financing to eligible customers of the Company. ABC will provide up to
80% of the contracted selling price of the Company to the customer. The Company
provides a guaranty to the bank for any financing provided. As of June 30, 2004,
ABC has not extended any financing to the Company's customers.

10. FOREIGN OPERATIONS

The Company operates principally in China and Canada. Following is a summary of
information by area for the years ended June 30, 2004 and 2003. (000's omitted)

NET SALES TO UNAFFILIATED CUSTOMERS:                      2004             2003

China                                                    2,399            5,344
Canada                                                       0                0

                                                         2,399            5,344
Income (loss) from operations:
China                                                  (69,536)          (2,023)
Canada

Other income                                             1,238            1,258
General corporate expenses                             (70,655)          (4,001)
Net income (loss) as reported                          (73,016)          (1,862)
in the accompanying statements

Identifiable assets:                                     1,230           18,902

General corporate assets                                 4,348            4,926
Total assets as reported                                 5,578           23,827
in the accompanying balance sheet


                                      F-12
<PAGE>

      There were no inter-area sales in 2004 and 2003. Identifiable assets are
those that are identifiable with operations in each geographical area. General
corporate assets consist primarily of cash, cash equivalents, fixed assets, and
prepayments. Sales are attributed to areas based on location of customers.

11. RELATED PARTY TRANSACTIONS

As explained in Note 3a, the operations of the joint venture during the years
ended June 30, 2004, 2003 and 2002 were carried out by its agent and joint
venture partner, Tengtu China. At June 30, 2003, TUC has a balance due from
Tengtu China of approximately $18,001,600. The receivables represent funds
collected or to be collected from customers of TUC by Tengtu China in its
capacity as agent operating the business of TUC. This amount is net of an
allowance for doubtful accounts of $727,052 at 2003 (see Note 8). The minority
interest allocated to Tengtu China of $89,218 for the year ended June 30, 2003,
also offsets this receivable.

During fiscal 2004, 2003, and 2002, respectively, the Company incurred
consulting and related expenses of approximately $516,708, $488,877, and
$865,202 from officers and directors of the Company or its subsidiaries or
companies controlled by these officers and directors. $516,708, $438,042, and
$356,192 were paid for the years ended June 30, 2004, 2003 and
2002,respectively.

Of the total expenses incurred, approximately $50,800 in 2003 and $250,000 in
2002, represent the value of common shares issued for services to officers,
shareholders or companies controlled by shareholders.


                                      F-13
<PAGE>

12. EQUITY LINE

On October 25, 2000, the Company entered into an investment agreement with
Swartz Private Equity L.L.C. ("Swartz") (the "Investment Agreement"). The
Investment Agreement entitles the Company to issue and sell up to $30 million of
the Company's common stock to Swartz subject to a formula based on the stock
price and trading volume, from time to time over a three year period, following
the effective date of a registration statement on Form S-1.

As consideration for making its financing commitment to the Company, Swartz was
issued a warrant to purchase 1,200,000 shares of the Company's common stock
exercisable at prices determined by a formula until October 25, 2005. The
warrant was valued using the Black-Scholes option valuation model. The charge to
operations for the year ended June 30, 2002 was approximately $186,200.

On August 28, 2001, the Company notified Swartz that the agreements and warrants
issued to Swartz are void and unenforceable. On September 12, 2001, the Company
was served a complaint filed by Swartz in state court in Fulton County, Georgia.
In October 2001, the Company made a motion to dismiss the suit. On September 30,
2002, the Company's motion to dismiss Swartz's complaint was denied. This action
was settled on June 10, 2003. The Company has paid Swartz $400,000 in monthly
$40,000 installments, beginning July 1, 2003. On that date, Swartz received
500,000 shares of the Company's common stock in a cashless exercise of its
warrant and the investment agreement with Swartz was terminated. As security
against payment of the $400,000 cash portion of the settlement, the Company has
escrowed 1,770,000 of its common shares which have now been returned to the
Company in August 2004. The total charged to operations for 2003 was $679,300.

13. STOCK OPTIONS AND WARRANTS

The Company has established two stock option plans for its employees,
consultants and directors totaling 5,000,000 common shares. The maximum number
of shares granted to any individual under the plans is 300,000.

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

<TABLE>
<CAPTION>
                                                                                 WEIGHTED AVERAGE
               CONTRACTUAL    OUTSTANDING AT                  EXERCISE PRICE     CONTRACTUAL LIFE
               LIFE (YEAR)     JUNE 30, 2004       %         AT JUNE 30, 2004         (YEAR)
<S>                <C>            <C>            <C>             <C>                 <C>
Options            10             1,570,000      17.83%          0.218               1.78
Options             5               165,542       1.88%          0.285               0.09
Options             5               216,817       2.46%          0.670               0.12
Options            10               114,196       1.30%          0.191               0.13
Warrants            5                50,000       0.57%          0.750               0.03
Warrants            5                50,000       0.57%          1.500               0.03
Warrants            5                50,000       0.57%          3.000               0.03
Options             5               120,000       1.36%          1.350               0.07
Options             5                49,027       0.56%          0.760               0.03
Warrants            1             6,421,718      72.91%          0.750               0.73
                                  ---------
Total                             8,807,300      100.00%
                                  =========
</TABLE>

Option and warrants reconciliation:

Opening balance as of July 01, 2003:                    16,942,868
Warrants issued during the year:                         2,500,000
Warrants exercised during the year:                     (3,387,255)
Warrants expired during the year:                       (7,248,313)
                                                        ----------
Ending balance as of June 30, 2004:                      8,807,300
                                                        ==========



                                      F-14
<PAGE>

The Company uses the Black-Scholes valuation model to calculate compensation
expense for all options granted to employees in order to comply with the
pro-forma disclosure requirements of SFAS No. 123. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options. No employee stock options were granted during the
years ended June 30, 2003, 2002 and 2001, therefore, no pro-forma disclosure is
presented in these notes to the financial statements.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", requires
disclosing fair value to the extent practicable for financial instruments that
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.

For certain financial instruments, including cash and cash equivalents, trade
receivables and payable, and short-term debt, it was assumed that the carrying
amount approximated fair value because of the near term maturities of such
obligations. The fair values of long-term debt and long-term notes receivable
were determined based on current rates at which the Company could borrow or
advance funds with similar remaining maturities, which amount approximates its
carrying value.

15. STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES

For the years ended June 30, 2003, and 2002, the Company issued shares of common
stock or common stock equivalents in lieu of cash payments for services
rendered. The value of such services was $50,835, and $331,115 respectively.

During the year ended June 30, 2003, two officers and directors waived their
rights to $429,488 of consulting fees owed to them for prior years. The Company
credited this amount to paid-in capital.

                                               JUNE 30,
                                 2004             2003               2002
                                   $               $                  $
Interest Paid                  $216,036         382,631            150,654
Income Tax Paid                      --              --                 --


                                      F-15
<PAGE>

16. AUTHORITATIVE PRONOUNCEMENTS

      o     In April 2003, the Financial Accounting Standards Board issued SFAS
            No. 149, "Amendment of Statement 133 on Derivative Instruments and
            Hedging Activities", which clarifies financial accounting and
            reporting for derivative instruments, including certain derivative
            instruments embedded in other contracts and for hedging activities
            under SFAS No. 133, "Accounting for Derivative Instruments and
            Hedging Activities." SFAS No. 149 is effective for contracts entered
            into or modified after June 30, 2003 and for hedging relationships
            designated after June 30, 2003.

      o     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
            133 on Derivative Instruments and Hedging Activities", which
            clarifies financial accounting and reporting for derivative
            instruments, including certain derivative instruments embedded in
            other contracts and for hedging activities under SFAS No. 133,
            "Accounting for Derivative Instruments and Hedging Activities." SFAS
            No. 149 is effective for contracts entered into or modified after
            June 30, 2003 and for hedging relationships designated after June
            30, 2003.


                                      F-16
<PAGE>

      o     In May 2003 the FASB issued SFAS No. 150 "Accounting for Certain
            Financial Instruments with Characteristics of Both Liabilities and
            Equity" (SFAS No. 150). SFAS No. 150 revises the accounting for
            certain financial instruments that previously could be classified as
            liabilities (or, in some circumstances, assets) in the statement of
            financial condition. SFAS No. 150 also requires disclosure of the
            terms of those instruments and settlement alternatives. SFAS No. 150
            generally is effective for all financial instruments entered into or
            modified after May 31, 2003, and is otherwise effective at the
            beginning of the first interim period beginning after June 15, 2003.

      o     In December 2003 the FASB issued SFAS No. 132R, "Employers'
            Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
            No. 132R"). This Statement revises disclosures by employers about
            pensions and other postretirement benefits. The additional
            disclosures are about the asset, obligations, cash flows and net
            periodic benefit cost of defined benefit pension plans and other
            defined benefit postretirement plans. The required information must
            be provided separately for pension plans and other postretirement
            benefit plans. New disclosures for interim periods beginning after
            December 15, 2003 are also required by SFAS No. 132R.

      o     In December 2003 the staff of the Securities and Exchange Commission
            ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue
            Recognition, which supercedes SAB 101, "Revenue Recognition in
            Financial Statements." The primary purpose of SAB 104 is to rescind
            the accounting guidance included in SAB 101 about multiple element
            revenue arrangements. SAB 104 also revises the SEC's "Revenue
            Recognition in Financial Statements Frequently Asked Questions and
            Answers that have been codified in Topic 13. SAB 104 was effective
            immediately upon issuance.

            The Company expects that the adoption of the various pronouncements
            will not have a significant impact on its financial statements.

17. ALLOWANCE FOR BAD DEBTS

<TABLE>
<CAPTION>
                                             BALANCE -                           CHARGED TO OTHER                        BALANCE -
      FOR THE YEAR ENDED JUNE 30,            BEGINNING       CHARGED TO EXPENSE      ACCOUNTS          DEDUCTIONS          ENDING
<C>                                           <C>                 <C>                  <C>              <C>               <C>
2004                                          $     --            $18,792,503          $   --           $18,792,503       $   --
2003                                          $     --            $   --               $   --           $     --          $   --
2002                                          $200,097            $   --               $   --           $200,097          $   --
</TABLE>

ALSO SEE NOTES 8 AND 11

18. SUBSEQUENT EVENTS

On September 14, 2004, Dr. Liu Penghui, the interim Chief Executive Officer of
the Company, advanced RMB 500,000 (approximately $60,400) to the company for
working capital, the advance is interest free and has no maturity date.

On September 10, 2004 Beijing Tengtu Electronic Publishing Co. Ltd., ("TEP")
renewed a loan with an outstanding principal balance of RMB8.5 million
(approximately 1,027,000) with the Agriculture Bank of China. TEP repaid
principal of RMB350,000 (approximately $42,800) and the loan has been extended
for another three months with a maturity date of December 10, 2004. The annual
interest rate for the loan is 6.372%.

19. EQUITY INVESTMENT

      Tengtu China entered into a joint ventures with Shanxi provinces on behalf
of TUC. The joint venture is a local Broadband Education Resource Center
("LBERC"). They will connect to CBERC and will contain their own educational and
other materials mandated by the provinces. This content will also be transmitted
to individual schools for an annual fee.

      Although TUC's equity interest in Shanxi LBERC is over 50%, it does not
control the joint ventures due to participating rights exercised by the minority
interest holders in the management of the joint ventures. The investments,
therefore, are accounted for using the equity method of accounting as TUC has
the ability to exercise significant influence, but not control, over the
investees.

      The Company, through Tengtu United, has advanced RMB 6,000,000
(approximately $724,800) for the formation of the LBERC. For the year ended
June30, 2004 and 2003, Shaanxi LBERC had limited operations which resulted in an
equity loss of $ 30,706, and $76,807 respectively. This loss reduces the
investment to $607,278 as at June 30, 2004. The following is summarized
financial information of Shaanxi LBERC as of June 30, 2004 and 2003 and for each
of the fiscal years then ended.


                                      F-17
<PAGE>

                                                     2004                2003

Current assets                                      927,641           1,116,024
Non current assets                                  305,225             321,164
Current liabilities                                 126,784             289,517
Non current liabilities                                   0                   0
Net sales                                           332,135             114,569
Gross profit                                        127,037              52,997
Loss from continuing operations                     (34,779)            (59,150)
Net loss                                            (60,329)            (60,329)

20. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table presents certain unaudited results of operations data for
the interim quarterly periods during the years ended June 30, 2004, 2003, and
2002. The Company believes that all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the results of operations in
accordance with generally accepted accounting principles, have been made. The
results of operations for any interim period are not necessarily indicative of
the 1operating results for a full year or any future period.

<TABLE>
<CAPTION>
                               30-Jun-04          31-Mar-04          31-Dec-03          30-Sep-03          30-Jun-03
<S>                         <C>                <C>                <C>                <C>                <C>
Revenues                    $    289,008       $    354,557       $  1,329,861       $    425,843       $  1,945,640
Gross Profit                $    170,789       $    181,208       $    533,334       $    232,619       $    792,146
 Gross Profit Margin                  59%                51%                40%                55%                41%
Operating Income (Loss)     ($67,947,895)      ($   575,474)      ($   338,987)      ($   674,193)      $     57,822
  Net Income (Loss)         ($70,155,557)      ($ 1,768,995)      ($   424,815)      ($   666,350)      $     30,425
  Earnings Per Share
     Basic                  ($      0.68)      ($      0.02)      ($      0.01)      ($      0.01)      $       0.00
    Diluted                 ($      0.68)      ($      0.02)      ($      0.01)      ($      0.01)      $       0.00
</TABLE>

<TABLE>
<CAPTION>
                               31-Mar-03          31-Dec-02          30-Sep-02            30-Jun-02          31-Mar-02
<S>                         <C>                <C>                <C>                  <C>                <C>
Revenues                    $  1,913,585       $    534,187       $    638,646         $  3,959,491       $  2,993,603
Gross Profit                $  1,116,395       $    212,867       $    175,744         $  2,605,005       $  2,196,126
 Gross Profit Margin                  58%                40%                28%                  66%                72%
Operating Income (Loss)     ($   210,280)      ($   753,992)      ($ 1,104,090)        $  1,365,729       $    379,632
  Net Income (Loss)         $     62,223       ($   714,875)      ($ 1,125,648)        $    670,679       $     50,554
  Earnings Per Share
     Basic                  $       0.00       ($      0.01)      ($      0.02)        $       0.01       $       0.00
    Diluted                 $       0.00       ($      0.01)      ($      0.02)        $       0.01       $       0.00
</TABLE>

<TABLE>
<CAPTION>
                                   31-Dec-01          30-Sep-01          30-Jun-01         31-Mar-01
<S>                             <C>                <C>                <C>               <C>
Revenues                        $  4,061,008       $  3,241,315       $  2,612,335      $  1,450,879
Gross Profit                    $  2,379,319       $  2,059,682       $  1,437,678      $    818,748
 Gross Profit Margin                      59%                64%                55%               56%
Operating Income (Loss)         $    147,465       $    576,982       $    887,078      ($   143,496)
  Net Income (Loss)             ($     7,237)      $    864,112       $  2,110,188      ($   238,776)
  Earnings Per Share
     Basic                      $       0.00      $       0.02       $       0.08*      ($      0.01)
    Diluted                     $       0.00      $       0.02       $       0.08*      ($      0.01)
</TABLE>

21. OTHER INCOME

      Other income includes credits of $203,143, $290,274 and $1,752,309,
respectively, in 2004, 2003 and 2002 for value added tax (VAT) paid in China for
Tengtu United's sales.


                                      F-18
<PAGE>

      Other income in fiscal 2003 also includes a reversal of a prior year
accrual of $210,000 deemed to no longer be an obligation of the Company. In
addition, other income includes a $682,323 reversal of legal and accounting fees
totaling $120,200 which were included in accounts payable in years prior to June
30, 2003 and for which the statute of limitations has expired for the entities
that rendered these services to claim payment for them, a reversal of $37,885 of
consultant fees overaccrued in a prior year and $36,310 in cash recovered from
the sale of the assets of Iconix, our former investee.

22. FISCAL 2004 RESTATEMENT FOR 10Q1, 10Q2, AND 10Q3

In connection with the Company's April 2004 acquisition of the remaining 43%
interest in Tengtu United from its former joint venture partner, Tengtu China,
the Company, through its Audit Committee, has been conducting a thorough
examination of the financial condition of Tengtu United and its operations.

      The review has uncovered overstatements of revenue for the first three
quarters of fiscal year of 2004. The Company believes that the overstatements
were due to the failure by Tengtu China, the Company's former joint venture
partner in Tengtu United, to maintain adequate financial controls and systems,
and to follow generally accepted accounting principles.

                             AS FILED        RESTATEMENT
                           THREE MONTHS      THREE MONTHS
                               ENDED             ENDED
                           SEPTEMBER 30,     SEPTEMBER 30,   DIFFERENCE
                               2003              2003
                           -----------     ------------      -----------
  SALES                      1,908,456          425,843        1,482,613
  COST OF SALES                819,690          193,224          626,466
  Gross Profit               1,088,766          232,619          856,147
Collection provision            70,483           17,022           53,461
Other income                   267,142           59,576          207,566
Net Income (Loss)               (8,887)        (666,350)         657,463
Due from related party       4,099,223        3,385,792          713,431
Deferred Income Taxes           55,969                0           55,969

  Basic                          (0.00)           (0.01)           (0.01)
  Diluted                        (0.00)           (0.01)           (0.01)

                              AS FILED       RESTATEMENT
                            THREE MONTHS     THREE MONTHS
                               ENDED           ENDED
                            DECEMBER 31,     DECEMBER 31,    DIFFERENCE
                                2003            2003
                           -----------     ------------      -----------
  SALES                      2,286,516        1,329,861          956,655
  COST OF SALES              1,541,049          796,527          744,522
  Gross Profit                 745,467          533,334          212,133
Collection provision            89,839           52,732           37,107
Other income                   321,055           65,733          255,322
Net Income(Loss)              (180,474)        (424,815)         244,341
Due from related party       5,644,656        4,657,375          987,281
Deferred Income Taxes           85,478                0           85,478

  Basic                         (0.002)          (0.006)          (0.004)
  Diluted                       (0.002)          (0.006)          (0.004)


                                      F-19
<PAGE>

                              AS FILED     RESTATEMENT
                            THREE MONTHS   THREE MONTHS
                                ENDED          ENDED
                              MARCH 31,      MARCH 31,       DIFFERENCE
                                2004           2004
                           -----------     ------------      -----------
  SALES                      1,652,146          354,557        1,297,589
  COST OF SALES                586,540          173,349          413,191
Gross Profit                 1,065,606          181,208          884,398
Collection provision            64,315           12,802           51,513
Other income                   231,723           56,257          175,466
Equity loss in investee        (89,349)      (1,155,631)       1,066,282
Net Income(Loss)                 9,430       (1,768,995)       1,778,425
Due from related party       6,611,780        4,865,366        1,746,414
Deferred Income Taxes          132,470                0          132,470

  Basic                          0.000           (0.023)          (0.009)
  Diluted                        0.001           (0.023)          (0.010)


                                      F-20