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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended December 31, 2003

OR

For the transition period from                  to                 

Commission File Number 0-29332

PEAK INTERNATIONAL LIMITED

(Exact Name of Registrant as Specified in its Charter)

(510) 449-0100

(Registrant’s telephone number)

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

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of January 28, 2004

PART I

FINANCIAL INFORMATION

Condensed Consolidated Statements of Operations

(in thousands of United States Dollars, except share and per share data)

(See accompanying notes to Unaudited Condensed Consolidated Financial Statements)

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Condensed Consolidated Statements of Operations

(in thousands of United States Dollars, except share and per share data)

(See accompanying notes to Unaudited Condensed Consolidated Financial Statements)

3

Condensed Consolidated Balance Sheets

(in thousands of United States Dollars, except share and per share data)

(See accompanying notes to Unaudited Condensed Consolidated Financial Statements)

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Condensed Consolidated Statements of Cash Flows

(in thousands of United States Dollars)

(See accompanying notes to Unaudited Condensed Consolidated Financial Statements)

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Notes to Condensed Consolidated Financial Statements

(in thousands of United States Dollars, except share and per share data, unaudited)

Peak International Limited (the “Company”) was incorporated as an exempted company with limited liability in Bermuda under the Companies Act 1981 of Bermuda (as amended) on January 3, 1997. The subsidiaries of the Company are principally engaged in the manufacture and sale of precision engineered packaging products, such as matrix and disk drive trays, shipping tubes, reels and carrier tapes, leadframe boxes and interleaves used in the storage and transportation of semiconductor devices and other electronic components. The Company’s principal production facilities are located in the People’s Republic of China (the “PRC”) and the Company maintains offices in Hong Kong, Italy, Korea, Malaysia, the Philippines, Singapore, Taiwan, and the United States of America.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intra-group balances and transactions have been eliminated on consolidation.

The accompanying condensed consolidated financial information has been prepared by the Company without audit, in accordance with the instructions to Form 10-Q and therefore does not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America.

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting periods. Actual results could differ from those estimates. Differences from those estimates are reported in the period they become known.

The unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) which in the opinion of management are required for a fair presentation of the Company’s interim results. The results for interim periods are not necessarily indicative of the results that may be achieved in the entire year. These condensed consolidated financial statements and notes thereto should be read together with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2003.

New Accounting Standards

In April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial reporting for derivative instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions and for hedging relationships designated after June 30, 2003. The Company believes that the adoption of SFAS No. 149 will not significantly impact its current disclosures or results of operations, financial position or cash flows.

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability or an asset. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Company believes that the adoption of SFAS No. 150 will not significantly impact its current disclosures or results of operations, financial position or cash flows.

(2) Cost of goods sold

Included therein was $31 (unaudited) and $520 (unaudited) respectively (2002-$45 and $534, unaudited) write-off of machinery and molds due to technological obsolescence and capacity under-utilization for the quarter and for the nine months ended December 31, 2003.

(3) Delivery and freight expenses

For the quarter and for the nine months ended December 31, 2003, the Company incurred delivery and freight expenses of approximately $836 (unaudited) and $2,281 (unaudited) (2002—$765 and $2,062, unaudited) respectively, which have been included as part of selling and marketing expenses.

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Notes to Condensed Consolidated Financial Statements—(continued)

(in thousands of United States Dollars, except share and per share data, unaudited)

In June 2003, the Hong Kong Legislative Council passed a bill increasing the Hong Kong corporate tax rate from 16.0% to 17.5%. The Company revalued its deferred tax liabilities at this new rate and the impact was a $146 charge to income tax expense recognized in the quarter ended June 30, 2003. Hong Kong tax expense has been calculated at the new rate starting from the first quarter of fiscal 2004, adjusted for permanent exclusions.

(5) Inventories

This represents approximately $4,411 of tax reserve certificates purchased from the Inland Revenue Department (“IRD”) of Hong Kong in respect of prior year taxes that are under examination by the IRD. The placement of such certificates is a condition stipulated by the IRD.

There has been no change in the tax filing status of our Hong Kong subsidiaries since March 31, 2003.

This represents the security bond placed at a Taiwanese court in order to obtain an anti-injunction order in respect of a potential patent dispute in Taiwan. See Note 13(a) “Litigation”. Management of the Company does not expect the case to be settled within 12 months and therefore the amount was classified as a non-current asset.

Option activity relating to the Company’s stock option plan is summarized as follows (unaudited):

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Notes to Condensed Consolidated Financial Statements—(continued)

(in thousands of United States Dollars, except share and per share data, unaudited)

The following is a reconciliation of the numerator and the denominator of the basic profit per share:

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Notes to Condensed Consolidated Financial Statements—(continued)

(in thousands of United States Dollars, except share and per share data, unaudited)

For the nine months ended December 31, 2002, exercise of all outstanding stock options would have been anti-dilutive and such stock options were therefore not included in the computation of diluted loss per share.

The Company’s comprehensive profit/(loss) consists of the following:

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Notes to Condensed Consolidated Financial Statements—(continued)

(in thousands of United States Dollars, except share and per share data, unaudited)

During the quarter ended December 31, 2003, under the 1997 Stock Option Plan the Company issued one option for 10,000 shares to an employee of the Company at an exercise price of $5.605 per share and one option for 10,000 shares to an employee of the Company at an exercise price of $6.025 per share, and under the 1998 Stock Option Plan the Company issued one option for 30,000 shares to an employee of the Company at an exercise price of $5.945 per share. The Company issued 16,572 shares at a price of $3.88875 to employees for contributions made during the quarter ended September 30, 2003, and authorized the issuance of 11,302 shares at a price of $4.70475 to employees for contributions made during the quarter ended December 31, 2003, under the 2000 Employee Stock Purchase Plan.

The Company accounts for stock-based compensation awarded to employees using the intrinsic value method prescribed in Accounting Principles Board Opinions (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related interpretations. No stock-based employee compensation cost is reflected in net profit/(loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

If the Company had accounted for its stock option plans and the stock purchase plan by recording compensation based on the fair value at grant date for such awards consistent with the method of Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation”, the Company’s net profit/(loss) and profit/(loss) per share would have been (increased)/decreased as follows:

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Notes to Condensed Consolidated Financial Statements—(continued)

(in thousands of United States Dollars, except share and per share data, unaudited)

In September 2000, the Board of Directors of the Company authorized the repurchase by the Company of up to $10,000 of its common stock at prices not to exceed 150% of the Company’s net asset value per share. Common stock repurchased will be cancelled immediately. The excess of purchase price over par value is charged to additional paid-in capital.

The Company purchased 656,186 shares from Mr. T. L. Li for $2,400 on May 5, 2003. The shares repurchased from Mr. T. L. Li were immediately retired. The shares were purchased from Mr. T. L. Li at a per share price of $3.66 per share, which represented a 5% discount from the $3.85 closing price of the shares on the NASDAQ National Market on that date. The excess of purchase price over par value was recorded as a reduction to additional paid-in capital.

In addition, the Company repurchased 4,000 shares at an average price of $3.94 in the first fiscal quarter of fiscal 2004.

Arbitration

The Company was involved in arbitration with Mr. Richard Brook, the Company’s former chief executive officer, in which Mr. Brook alleged that his employment agreement had been breached and in which the Company alleged that Mr. Brook had acted improperly while employed by the Company. In November 2002, the arbitrator ruled in the Company’s favor and awarded the Company a judgment of approximately $520. The Company has recently sold and placed for sale property seized from Mr. Brook. The Company will record the proceeds of these sales upon receipt of funds. The Company anticipates that these sales will not fully satisfy the judgment and is uncertain whether it will be able to collect the remainder of the judgment against Mr. Brook and therefore no financial statement impact has been recorded in this respect.

R.H. Murphy Co., Inc. (“Murphy”) is the owner of U.S. Reexamined Patent 5,400,904 C1 and certain corresponding foreign patents, which patents are directed to specific features in trays used to carry integrated circuits. Murphy has notified the Company and certain of its customers that it believes these patents are infringed by certain integrated circuit trays that the Company provided to its customers, and indicated that licenses to these patents are available. The Company does not believe that any valid claim of these patents is infringed, and is proceeding consistent with that belief.

On July 8, 2002, the Company placed a security bond of approximately $301 at a Taiwanese district court in order to obtain an anti-injunction order so that the Company can continue to sell trays in Taiwan without being interrupted by Murphy and its three distributors in Taiwan. The Taiwanese district court granted the order in June 2002, after which Murphy’s three local distributors filed an appeal with the Taiwanese high court against the grant of the order by the district court. In December 2002, the high court ruled that the anti-injunction order should be revoked. In February 2003, the Company filed an appeal to the Taiwanese Supreme Court which was granted and resulted in the dismissal of Murphy’s local distributors’ appeals. The preliminary injunction order made it unlikely that Murphy or its local distributors would be able to obtain preliminary injunctive relief against the Company or its Taiwan customers during the pendency of the underlying litigation. In addition, the Company has filed a civil suit for permanent relief in connection with the preliminary injunction order. If its effort to receive permanent relief is not successful, Murphy and its distributors in Taiwan may assert patent infringement claims against the Company or its customers, which, if successful, could prevent the Company from selling certain of its products in Taiwan and could result in monetary damages. In December 2001 and July 2003, the Company also filed actions with the Taiwanese Intellectual Property Office to invalidate Murphy’s patent. The Company also filed a complaint in February 2002 for unfair competition with the Fair Trade Commission against Murphy. The Fair Trade Commission dismissed the action and, on February 2, 2004, the Company filed an appeal to the High Administrative Court in Taiwan. At present, the outcome of this potential patent dispute cannot be predicted with reasonable particularity and no impact to the financial statements has been reflected in this respect.

Other litigation

The Company, one of its officers, and a former employee are parties to a lawsuit filed on February 28, 2002 by a former employee in the Superior Court of California seeking unspecified damages for alleged race discrimination, sex (pregnancy) harassment, retaliation and wrongful termination. While the Company believed it had meritorious defenses to the allegations, the suit was settled in December 2003 and the case was dismissed shortly thereafter.

At December 31, 2003, the Company had commitments for capital expenditures of approximately $7,308.

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Notes to Condensed Consolidated Financial Statements—(continued)

(in thousands of United States Dollars, except share and per share data, unaudited)

A subsidiary of the Company, operating in Shenzhen in the PRC, owns a factory under construction in the PRC. In view of its production needs and market conditions, the completion of the factory under construction was delayed.

The factory under construction and the related land use right in the PRC were reclassified as ‘Asset to be disposed of by sale’ following management’s decision to dispose of the property as a general purpose industrial building during the quarter ended June 30, 2002. The property has been written down to its fair market value pursuant to the SFAS No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets,” resulting in an asset impairment charge of $10,484, $100 and $2,794 respectively in the first quarter, the third quarter and the fourth quarter of fiscal 2003. Management of the Company has been actively marketing this asset for sale since the decision to sell the factory.

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General

The following management’s discussion and analysis of financial condition and results of operations is based upon and should be read together with the consolidated financial statements of the Company and notes thereto included in this Report and the Registrant’s Annual Report on Form 10-K for the year ended March 31, 2003.

Forward-Looking Statements

Management’s discussion and analysis of financial condition and results of operations and other sections of this Report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend for the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. These statements, which include statements regarding the Company’s expected financial position, business and financing plans, our beliefs that our existing cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs in the ordinary course of business for at least the next 12 months, statements regarding possible shortages in PVC Resin and price increases in PVC Resin, our beliefs regarding foreign currency fluctuations and the potential impact of currency fluctuations on the Company, statements regarding our capital expenditures, statements regarding intellectual property rights of third parties, statements regarding the disposal of assets located in the PRC, statements regarding our critical accounting policies, and statements regarding the validity of lawsuits against the Company are forward-looking statements. Such forward-looking statements are identified by use of forward-looking words such as “anticipates,” “believes,” “plans,” “estimates,” “expects,” and “intends” or words or phrases of similar expression. These forward-looking statements are subject to various assumptions, risks and uncertainties, including but not limited to, changes in political and economic conditions in general and the unrest in the Middle East, the current war on terrorism and the impact of terrorist activities in the United States and abroad, economic conditions in the semiconductor and disk drive industries, any future economic downturn, demand for the Company’s products, acceptance of new products, technology developments affecting the Company’s products, the Company’s ability to raise additional capital if necessary, the price and availability of raw materials, fluctuations in currency markets, the outcome of lawsuits by and against the Company, increased charges for under-absorbed production overhead costs, and those discussed in the Company’s filings with the Securities and Exchange Commission. Actual results could differ materially from those contemplated by the forward-looking statements as a result of these factors and those set forth under “Factors Which May Affect Operating Results” below. These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard hereto or any change in events, conditions or circumstances on which any such statement is based.

All references to the “Company,” “Peak,” “we,” “us” or “our” herein are references to Peak International Limited, a company incorporated under Bermuda law on January 3, 1997, and, unless the context otherwise requires, its subsidiaries and predecessors. All references to “Peak (HK)” herein are to Peak Plastic & Metal Products (International) Limited, a company incorporated in Hong Kong and a wholly-owned subsidiary of the Company and, unless the context otherwise requires, its subsidiaries and predecessors. References in this Quarterly Report on Form 10-Q (“Quarterly Report”) to our historical business and operations assume that the corporate reorganization in 1997 (the “Restructuring”) by which, among other things, Peak (HK) became a wholly-owned subsidiary of the Company and the Company acquired its other subsidiaries, had already occurred as of the times to which the references relate. Any discrepancies in the tables included in this Quarterly Report between the amounts indicated and the totals thereof are due to rounding. All references to “US Dollars,” “US$” or “$” herein are to United States dollars, references to “HK Dollars” or “HK$” are to Hong Kong dollars.

Results of Operations

Net Sales. Net sales increased by approximately 12.4% to $17.0 million in the third quarter of fiscal 2004 from $15.1 million in the same quarter of fiscal 2003. The increase was primarily due to an increase in sales of our semiconductor trays, tapes and reels. It reflected an improvement in demand for most of our products, particularly semiconductors trays. Net sales of semiconductor trays increased by 28.0% over the same period last year reflecting a 38.3% increase in sales volume, and a 7.4% drop in average realized sales price. For the third quarter of fiscal 2004, net sales of tapes and reels increased by 11.9% compared to the third quarter of fiscal 2003, primarily due to a 20.0% increase in sales volume combined with a 6.8% drop in average realized sales price. Net sales for tubes increased by 19.8% compared to the same period last year, primarily due to a 32.8% increase in sales volume for tubes and a decrease of 9.8% in the average realized sales price of tubes. Net sales for disk drive trays decreased by 48.8% compared to the same period last year, driven by a volume decrease of 53.0% while the average realized sales price increased by 9.1%.

Net sales increased by 12.8% to $47.3 million for the nine months ended December 31, 2003 from $41.9 million for the nine months ended December 31, 2002. The increase was primarily due to an increase in sales of our semiconductor trays, tapes and reels. Net sales of semiconductor trays increased by 20.8% comparing the nine months ended December 31, 2003 to the nine

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months ended December 31, 2002, primarily due to an increase in sales volume by 28.8% and a 6.2% drop in average realized sales price. Net sales of tapes and reels increased by 4.6% comparing the nine months ended December 31, 2003 to the nine months ended December 31, 2002, primarily due to a 17.6% increase in sales volume, and a 11.1% drop in average realized sales price. Net sales of tubes decreased by 4.2% comparing the nine months ended December 31, 2003 to the nine months ended December 31, 2002, reflecting a 16.2% increase in sales volume and a 17.5% drop in average realized sales price. Net sales of disk drive trays decreased by 9.7% comparing the nine months ended December 31, 2003 to the nine months ended December 31, 2002, reflecting a 13.7% drop in sales volume, and a 4.7% increase in average realized sales price. The increase in net sales resulted from an increase in sales volume primarily due to a better business environment in the semiconductor industry, while the drop in average realized sales price was primarily due to increased competition and product mix changes.

The semiconductor industry is recovering from a downturn that began in 2001. Customers put significant pressure on suppliers, including Peak, to reduce prices. Some of the effects of reduced prices were offset by cost reduction programs and higher semiconductor tray volumes.

Gross Profit. Gross profit increased to $5.8 million in the third quarter of fiscal 2004 from $4.9 million in the third quarter of fiscal 2003. Gross margin as a percentage of sales improved to 33.9% in the third quarter of fiscal 2004 from 32.7% in the same quarter of fiscal 2003. The increases in gross profit and gross margin were primarily the result of higher semiconductor tray sales and cost reduction programs.

Gross profit increased to $14.1 million for the nine months ended December 31, 2003 from $10.6 million for the nine months ended December 31, 2002. Gross margin improved from 25.3% for the nine months ended December 31, 2002 to 29.8% for the nine months ended December 31, 2003 The increases in gross profit and gross margin were primarily due to better economies of scale in light of the increased sales volume and favorable product mix shift.

Profit (Loss) from Operations. An operating profit of $1.0 million was recorded in the third quarter of fiscal 2004 compared to an operating profit of $0.4 million in the third quarter of fiscal 2003. Operating margin improved from 2.8% to 6.0% when comparing the third quarter of fiscal 2004 to the third quarter of fiscal 2003. The improvement in operating income was due primarily to improved gross margin, a quarter over quarter increase in net sales and improved factory utilization, as well as the recognition of an asset impairment charge in the amount of $0.1 million in the third quarter of fiscal 2003.

An operating profit of $0.4 million was recorded for the nine months ended December 31, 2003, compared with an operating loss $13.5 million for the nine months ended December 31, 2002. The improvement in operating results was due primarily to increased net sales, better factory utilization, savings in general and administrative expenses and the recognition of an asset impairment charge in the aggregate amount of $10.6 million in the first and third quarter of fiscal 2003.

Selling and Marketing. Selling and marketing expenses increased by 12.4% to $3.0 million in the third quarter of fiscal 2004 from $2.7 million in the third quarter of fiscal 2003, primarily due to increases in freight charges and delivery expenses resulting from increased business volume and additional staff and facilities costs related to our new Advanced Products Group located in Southern California.

Selling and marketing expenses increased by 15.8% to $8.6 million for the nine months ended December 31, 2003 from $7.4 million for the nine months ended December 31, 2002, primarily due to increases in freight charges and delivery expenses resulting from increased business volume and additional staff and facility costs related to our new Advanced Products Group.

General and Administrative. General and administrative expenses decreased by 2.5% to $1.6 million in the third quarter of fiscal 2004 from $1.7 million in the third quarter of fiscal 2003 primarily due to savings in salaries and rentals and savings from other cost reduction programs.

General and administrative expenses decreased by 18.1% to $4.9 million for the nine months ended December 31, 2003 from $5.9 million for the nine months ended December 31, 2002 primarily due to savings in salaries and rentals as well as savings from other cost reduction programs and a decrease in legal and professional fees resulting from the settlement of outstanding lawsuits.

Other (Expenses) Income—net. Other (Expenses) Income —net primarily represented differences in realized and unrealized exchange (losses) gains that we recorded arising from transactions in foreign currencies. During the third quarter of fiscal 2004, a net exchange loss of $39,000 was recorded compared to a net exchange gain of $53,000 recorded in the third quarter of fiscal 2003. The loss was primarily due to unfavorable movements of the US Dollar against the Yen and Euro.

Other (Expenses) Income—net decreased by 12.5% to a net expense of $35,000 for the nine months ended December 31, 2003 from a net expense of $40,000 for the nine months ended December 31, 2002, primarily due to the fluctuation of Asian currencies against the US Dollar.

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Interest Income. Interest income decreased by 48.7% to $39,000 for the third quarter of fiscal 2004 from $76,000 for the third quarter of fiscal 2003 primarily due to reductions in bank deposit interest rates and average cash balances.

Interest income decreased by 45.0% to $0.1 million for the nine months ended December 31, 2003 from $0.2 million for the nine months ended December 31, 2002, primarily due to reductions in bank deposit interest rates and cash balances.

Income Tax Expense. An income tax expense of $0.1 million was recorded for the third quarter of fiscal 2004, compared to an income tax expenses of $0.2 million recorded in the third quarter of fiscal year 2003.

A $0.3 million tax expense was recorded for the nine months ended December 31, 2003, compared with a tax expense of $0.2 million recorded for the same period last year.

Net Profit (Loss). We had a net profit of approximately $0.9 million for the third quarter of fiscal 2004, compared to a net profit of $0.3 million for the same quarter of fiscal 2003, reflecting the effects of the previously discussed factors.

We had a net profit of $0.2 million for the nine months ended December 31, 2003, compared to a net loss of $13.4 million for the nine months ended December 31, 2002, primarily due to the recognition of an asset impairment charge in the aggregate amount of $10.6 million in the first and third quarter of fiscal 2003 and as a result of the foregoing factors.

Profit (Loss) Per Share. Diluted profit per share for the third quarter of fiscal 2004 was $0.07, compared to a diluted profit per share of $0.03 for the same period last year, reflecting the effects of the foregoing factors.

Diluted profit per share for the nine months ended December 31, 2003 was $0.02 compared to a diluted loss per share for the nine months ended December 31, 2002 of $1.06, primarily due to the recognition of an asset impairment charge in the aggregate amount of $10.6 million in the first and third quarter of fiscal 2003 and as a result of the foregoing factors.

Liquidity and Capital Resources

Our net cash provided by operating activities was $3.9 million for the nine months ended December 31, 2003, compared to net cash used in operating activities of $0.7 million for the nine months ended December 31, 2002. This increase in net cash provided by operating activities was primarily due to the reduction in operating losses and improved collections as well as the decrease in the amount of tax reserve certificates we were required to purchase.

Net cash used in investing activities was $4.5 million for the nine months ended December 31, 2003, compared to $1.9 million for nine months ended December 31, 2002. This increase was primarily due to capital expenditures of $4.5 million for the acquisition of new equipment for our Shenzhen, PRC factory during the nine months ended December 31, 2003.

Net cash used in financing activities was $1.5 million for the nine months ended December 31, 2003, compared to net cash provided by financing activities of $0.1 million for the nine months ended December 31, 2002. The increase in net cash used in financing activities was primarily due to the repurchase of shares of our common stock worth $2.4 million during the first quarter of 2004.

As of December 31, 2003, we had commitments for capital expenditures of $7.3 million and had no outstanding bank borrowings. Our cash and cash equivalents balance at December 31, 2003 was $23.6 million. We believe that our existing cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs in the ordinary course of business for at least the next 12 months. If our existing cash and cash equivalents and cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional public or private equity securities or obtain debt financing. There can be no assurance that additional funding will be available at all, or if available, will be obtained on terms favorable to us. Additional financing may also be dilutive to our existing shareholders.

Critical Accounting Policies

In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we must make a variety of estimates that affect the reported amounts and related disclosures. The following accounting policies are currently considered most critical to the preparation of our financial statements. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements.

Revenue Recognition. Our revenue is recognized when product has been shipped and title to the product has transferred to the customer. Title to the product may transfer to the end customer or distributor when shipped or when received by the customer based on a specific agreement. We evaluate the provision for estimated returns monthly, based on historical sales and returns. To

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date we have not experienced significant returns. Any increase in the level of returns could have a material and adverse effect on our financial statements.

Allowance for Doubtful Accounts. Allowance for doubtful accounts is made against accounts receivable to the extent they are considered to be doubtful. Accounts receivable in the balance sheet are stated net of such provision. We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligation to us, we record a specific reserve for bad debts against amounts due. A provision is also made based on the aging of the receivables. If circumstances change, such as the incurrence of higher than expected defaults or an unexpected material adverse change occurs regarding a major customer’s ability to meet its financial obligations to us, our estimates of the recoverability of amounts due to us could be reduced by a material amount.

Inventory Valuation. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. At each balance sheet date, inventory on hand in excess of one year’s demand or usage or those that were produced more than twelve months ago, are written down to zero. If actual future demand or market conditions are less favorable than those projected by management, additional write-downs may be required.

Valuation of Long-lived Assets. We assess the carrying value of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

Upon the existence of one or more of the above indicators of impairment, we test such assets for a potential impairment. The carrying value of a long-lived asset is considered impaired when the estimated future cash flows, undiscounted, are less than the asset’s carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.

Asset to be Disposed of By Sale. Asset to be disposed of by sale represents the factory under construction in Shenzhen, the PRC, together with the land use right on which the building is built and is stated at fair value less cost to sell as of the balance sheet date in accordance with SFAS No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets.” Fair value was calculated on the basis of a professional valuation report on the property provided by an independent appraiser.

Deferred Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes and tax bases of assets and liabilities in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is more unlikely than likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Any change in the future recoverability of the deferred tax assets could significantly affect the results of our operations or cash flows.

New Accounting Standards

In April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial reporting for derivative instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exception and for hedging relationships designated after June 30, 2003. We believe that the adoption of SFAS No. 149 will not significantly impact our current disclosures or results of operations, financial position or cash flows.

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within

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its scope as a liability or an asset. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. We believe that the adoption of SFAS No. 150 will not significantly impact our current disclosures or results of operations, financial position or cash flows.

Factors Which May Affect Operating Results

The risks and uncertainties described below are not the only ones we face. If an adverse outcome of any of the following risks actually occurs, our business, financial condition or results of operations could be materially and adversely affected. In evaluating our business, shareholders should consider carefully the following factors in addition to the other information presented herein.

Our operating results are difficult to predict and are likely to fluctuate significantly based on several factors, which can cause our stock price to decline.

Our operating results are affected by a wide variety of factors that could materially affect net sales and profitability or lead to significant fluctuations in our quarterly or annual operating results. These factors include, among others: