##### Table of Contents



---

---

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 20-F

|           |  |                                                                                               
|---------- |  | ----------------------------------------------------------------------------------------------
|(Mark One)
|[   ]      |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934          
|           |  | For the fiscal year ended: December 31, 2003                                                  
|[   ]      |  | 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
001-15012

Hanaro Tongshin Chushik Hoesa

(Exact Name of Registrant as Specified in Its Charter)


Hanaro Telecom, Inc.

(Translation of Registrants Name Into English)


The Republic of Korea(Jurisdiction of Incorporation or Organization)

Shindonga Fire & Marine Insurance Building
Tae-pyong-ro 2-43
Chung-gu
Seoul, Korea 100-733(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
N/A

Securities registered or to be registered pursuant to Section 12(g) of the Act:

|                                                                                                              |  |                                                                    
|------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------
|Title of each class                                                                                           |  | Name of each exchange on which registered                          
|                                                                                                              |  |                                                                    
|                                                                                                             
|Common Shares, par value Won 5,000 per share                                                                  |  | The Korea Securities Dealers Association Automated
Quotation Market
|                                                                                                              |  |                                                                    
|American Depositary Shares, evidenced by American
Depositary Receipts, each representing
one (1) Common Share |  | The Nasdaq National Market                                         

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: N/A

Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of December 31, 2003:

|                                            |  |                                                                                                        
|------------------------------------------- |  | -------------------------------------------------------------------------------------------------------
|Common Stock, par value Won 5,000 per share |  | 462,135,180 Common Shares (including 2,302,312
Common Shares represented by American Depositary
Shares)



---

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 which financial statement item the registrant has
selected to follow.
Item 17 [   ] Item 18 [X]



---

---





---



##### Table of Contents



TABLE OF CONTENTS Currency Translation
    
    
    1Forward-Looking Statements
    
    
    1ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    2ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    2ITEM 3. KEY INFORMATION
    
    
    2ITEM 4. INFORMATION ON THE COMPANY
    
    
    14ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    34ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    49ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    58ITEM 8. FINANCIAL INFORMATION
    
    
    65ITEM 9. THE OFFER AND LISTING
    
    
    67ITEM 10. ADDITIONAL INFORMATION
    
    
    70ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    91ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    93ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    94ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    94ITEM 15. CONTROLS AND PROCEDURES
    
    
    94ITEM 16. [Reserved]
    
    
    94ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    94ITEM 16B. CODE OF ETHICS
    
    
    95ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND EXPENSES
    
    
    95ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    95ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    95ITEM 17. FINANCIAL STATEMENTS
    
    
    96




---



##### Table of Contents



ITEM 18. FINANCIAL STATEMENTS
    
    
    96ITEM 19. EXHIBITS
    
    
    96EX-1.1 ARTICLE OF INCORPORATIONEX-8.1 LIST OF SIGNIFICANT SUBSIDIARIESEX-11.1 CODE OF ETHICS (ENGLISH TRANSLATION)EX-12.1 SECTION 302 CERTIFICATION OF CEOEX-12.2 SECTION 302 CERTIFICATION OF CFOEX-13.1 SECTION 906 CERTIFICATION




---



##### Table of Contents



Currency Translation We publish our financial statements in Korean Won. In this annual report,
references to Korean Won, Won or W are to the currency of Korea, and
references to U.S. dollars, U.S.$ or $ are to the currency of the United
States. This annual report contains translations of Korean Won amounts into
U.S. dollar amounts, solely for your convenience. Unless otherwise indicated,
the translations have been made at U.S.$1.00=Won 1,192.0, which was the noon
buying rate in The City of New York for cable transfers in Korean Won as
certified for customs purposes by the Federal Reserve Bank of New York on
December 31, 2003. On June 10, 2004, the noon buying rate was U.S.$1.00=Won
1,160.0. You should not construe these translations as representations that
the Korean Won amounts actually represent such U.S. dollar amounts or could
have been or could be converted into U.S. dollars at the rates indicated or at
any other rates. 
 Forward-Looking Statements This annual report contains forward-looking statements that are based on
our current expectations, assumptions, estimates and projections about our
company and our industry. The forward-looking statements are subject to
various risks and uncertainties. Generally, these forward-looking statements
can be identified by the use of forward-looking terminology such as
anticipate, believe, estimate, expect, intend, project, should
and similar expressions. Those statements include, among other things, the
discussions of our business strategy and expectations concerning our market
position, future operations, margins, profitability, liquidity and capital
resources, as well as statements concerning expansion of our network coverage
and increases in the number of subscribers to our services. We caution you
that reliance on any forward-looking statement involves risks and
uncertainties, and that although we believe that the assumptions on which our
forward-looking statements are based are reasonable, any of those assumptions
could prove to be inaccurate, and, as a result, the forward-looking statements
based on those assumptions could be incorrect. The uncertainties in this
regard include, but are not limited to, those identified in the risk factors
set forth in Item 3Key InformationRisk Factors. In light of these and
other uncertainties, you should not conclude that we will necessarily achieve
any plans and objectives or projected financial results referred to in any of
the forward-looking statements. We do not undertake to release the results of
any revisions of these forward-looking statements to reflect future events or
circumstances. References All references to Korea herein are references to The Republic of Korea.
All references to Hanaro Telecom, we, us or our herein are references
to Hanaro Telecom, Inc. 1




---



##### Table of Contents



PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION 3.A SELECTED FINANCIAL DATA The following selected consolidated financial data of Hanaro Telecom
should be read in conjunction with the audited consolidated balance sheets as
of December 31, 2002 and 2003, and the related audited consolidated statements
of operations, shareholders equity and cash flows for the fiscal years ended
December 31, 2001, 2002 and 2003, and the notes to the consolidated financial
statements, and with Item 5Operating and Financial Review and Prospects,
included in this annual report. The selected consolidated financial data set
forth below for the fiscal years ended December 31, 1999, 2000, 2001, 2002 and
2003 are derived from our audited consolidated financial statements. Our
consolidated financial statements as of December 31, 1999 and for the fiscal
year ended December 31, 1999 were audited by PricewaterhouseCoopers,
independent accountants. Our consolidated financial statements as of December
31, 2000, 2001, 2002 and 2003 and for the fiscal years ended December 31, 2000,
2001, 2002 and 2003 were audited by Anjin Deloitte LLC (formerly known as Anjin
& Co.), a member firm of Deloitte Touche Tohmatsu, independent accountants. We
commenced providing telecommunications services on April 1, 1999. Our consolidated financial statements are prepared in accordance with
Korean GAAP, which differs in significant respects from U.S. GAAP. See Note 25
to our consolidated financial statements. Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(millions of Won, except number of shares and per share data)
    
    (thousands of U.S.$except number ofshares and pershare data)Statements of Operations Data:Korean GAAP:Revenues
    
    W
    23,482
    
    
    
    W342,804
    
    
    W
    830,721
    
    
    W
    1,417,854
    
    
    W
    1,383,486
    
    
    $
    1,160,643Voice revenue(1)
    
    
    4,540
    
    
    
    34,089
    
    
    
    114,529
    
    
    
    210,664
    
    
    
    248,964
    
    
    
    208,862Leased line revenue(2)
    
    
    1,766
    
    
    
    8,767
    
    
    
    17,706
    
    
    
    111,813
    
    
    
    37,992
    
    
    
    31,873Broadband revenue(3)
    
    
    16,520
    
    
    
    284,159
    
    
    
    641,544
    
    
    
    969,635
    
    
    
    982,693
    
    
    
    824,407Other
    
    
    656
    
    
    
    15,789
    
    
    
    56,942
    
    
    
    125,742
    
    
    
    113,837
    
    
    
    95,501Operating expenses
    
    
    163,739
    
    
    
    647,415
    
    
    
    1,001,335
    
    
    
    1,396,426
    
    
    
    1,312,792
    
    
    
    1,101,336Operating income (loss)
    
    
    (140,257
    )
    
    
    (304,611
    )
    
    
    (170,614
    )
    
    
    21,428
    
    
    
    70,694
    
    
    
    59,307Non-operating income
(expenses), net
    
    
    63,410
    
    
    
    (2,476
    )
    
    
    (78,194
    )
    
    
    (149,106
    )
    
    
    (231,606
    )
    
    
    (194,300
    )Income (loss) before income
tax
    
    
    (76,847
    )
    
    
    (307,087
    )
    
    
    (248,808
    )
    
    
    (127,678
    )
    
    
    (160,912
    )
    
    
    (134,993
    )Income tax (expense) benefit
    
    
    5,568
    
    
    
    (57
    )
    
    
    (35
    )
    
    
    (1,083
    )
    
    
    (302
    )
    
    
    (254
    )Minority interest loss (income)
    
    
    
    
    
    
    1,974
    
    
    
    2,941
    
    
    
    3,736
    
    
    
    (85
    )
    
    
    (71
    )
 2




---



##### Table of Contents



Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(millions of Won, except number of shares and per share data)
    
    (thousands of U.S.$except number ofshares and pershare data)Net income (loss)
    
    W
    (71,279
    )
    
    W
    (305,170
    )
    
    W
    (245,902
    )
    
    W
    (125,025
    )
    
    W
    (161,299
    )
    
    $
    (135,318
    )Weighted average number of
shares outstanding (in
thousands)  Basic
    
    
    206,868
    
    
    
    257,836
    
    
    
    285,440
    
    
    
    298,251
    
    
    
    321,310
    
    
    
    321,310Weighted average number of
shares outstanding (in
thousands)  Diluted
    
    
    206,868
    
    
    
    257,836
    
    
    
    285,440
    
    
    
    298,251
    
    
    
    321,310
    
    
    
    321,310Basic and diluted earnings
(loss) per share of
common share and ADS(4)
    
    
    (345
    )
    
    
    (1,184
    )
    
    
    (861
    )
    
    
    (419
    )
    
    
    (502
    )
    
    
    (0.42
    )U.S. GAAP:Net income (loss)
    
    
    (70,607
    )
    
    
    (298,351
    )
    
    
    (244,447
    )
    
    
    (162,525
    )
    
    
    (165,988
    )
    
    
    (139,252
    )Basic and diluted
earnings (loss) per
share of common share
and ADS(4)
    
    
    (341
    )
    
    
    (1,157
    )
    
    
    (856
    )
    
    
    (545
    )
    
    
    (517
    )
    
    
    (0.43
    )
 As of December 31,
    
    As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(millions of Won)
    
    (thousands of U.S.$)Balance Sheet Data:Korean GAAP:Working capital(5)
    
    W
    717,778
    
    
    W
    (40,488
    )
    
    W
    (303,936
    )
    
    W
    (855,808
    )
    
    W
    (117,614
    )
    
    $
    (98,669
    )Property and equipment, net
    
    
    832,452
    
    
    
    2,438,865
    
    
    
    3,146,589
    
    
    
    3,134,314
    
    
    
    2,550,921
    
    
    
    2,140,034Total assets
    
    
    1,892,043
    
    
    
    3,351,246
    
    
    
    4,104,265
    
    
    
    4,104,785
    
    
    
    3,386,548
    
    
    
    2,841,064Net assets
    
    
    1,571,759
    
    
    
    1,667,078
    
    
    
    1,568,392
    
    
    
    1,515,498
    
    
    
    1,757,903
    
    
    
    1,474,751Long-term debt(6)
    
    
    40,098
    
    
    
    1,008,401
    
    
    
    1,896,839
    
    
    
    2,128,703
    
    
    
    1,157,582
    
    
    
    971,126Capital stock
    
    
    1,200,000
    
    
    
    1,320,000
    
    
    
    1,320,000
    
    
    
    1,396,613
    
    
    
    2,310,676
    
    
    
    1,938,487Total shareholders equity
    
    
    1,571,759
    
    
    
    1,667,078
    
    
    
    1,568,392
    
    
    
    1,515,498
    
    
    
    1,757,903
    
    
    
    1,474,751Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. GAAP:Property and equipment, net
    
    
    832,452
    
    
    
    2,438,865
    
    
    
    2,727,091
    
    
    
    2,703,850
    
    
    
    2,554,089
    
    
    
    2,142,692Total assets
    
    
    1,911,765
    
    
    
    3,384,218
    
    
    
    3,672,451
    
    
    
    3,678,342
    
    
    
    3,461,453
    
    
    
    2,903,904Total shareholders equity
    
    
    1,582,647
    
    
    
    1,681,712
    
    
    
    1,476,683
    
    
    
    1,399,589
    
    
    
    1,783,296
    
    
    
    1,496,054
   (1)
    
    Consists of revenues derived from services provided to fixed line
customers.(2)
    
    Consists of revenues derived from services that give the subscriber the
right to use a private line exclusively.(3)
    
    Consists of revenues derived from high-speed data transmission services
and Internet access services.(4)
    
    Earnings (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares outstanding. For comparability
purposes, we recalculated the weighted average number of common shares for
the years ended December 31, 2001 and 2002 due to the issuance of new
shares in 2003 at a price below market.(5)
    
    Working capital means current assets minus current liabilities.(6)
    
    Long-term debt includes long-term debt in local and foreign currencies,
debentures, long-term obligations under capital leases, long-term
Asset-Backed Securities payable and, current portion of Asset-Backed
Securities payable and long-term debt. As ofDec 31,
    
    Dec 31,
    
    Dec 31,
    
    Dec 31,
    
    Dec 31,
    
    April 30,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2004Other Data:Residential subscribers
    
    
    159,690
    
    
    
    1,274,327
    
    
    
    2,391,952
    
    
    
    3,544,001
    
    
    
    3,443,492
    
    
    
    3,534,406Corporate subscribers
    
    
    35,231
    
    
    
    208,682
    
    
    
    355,816
    
    
    
    273,377
    
    
    
    283,452
    
    
    
    305,044Corporate leased lines(1)
    
    
    534
    
    
    
    1,488
    
    
    
    3,216
    
    
    
    6,709
    
    
    
    6,680
    
    
    
    6,305Employees
    
    
    889
    
    
    
    1,501
    
    
    
    1,519
    
    
    
    1,576
    
    
    
    1,489
    
    
    
    1,506
 As ofDec 31,
    
    Dec 31,
    
    Dec 31,
    
    Dec 31,
    
    Dec 31,
    
    April 30,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2004Network route kilometersowned(2)
    
    
    3,020
    
    
    
    6,419
    
    
    
    8,804
    
    
    
    12,425
    
    
    
    15,317
    
    
    
    15,652Network route kilometersleased(3)
    
    
    656
    
    
    
    2,887
    
    
    
    2,991
    
    
    
    5,487
    
    
    
    5,821
    
    
    
    9,967Office buildings connected with fiber optic lines
    
    
    734
    
    
    
    1,304
    
    
    
    1,608
    
    
    
    2,978
    
    
    
    3,216
    
    
    
    3,277Apartment complexes connected with fiber optic lines
    
    
    1,404
    
    
    
    3,827
    
    
    
    4,972
    
    
    
    6,470
    
    
    
    7,219
    
    
    
    7,487Switches installed (voice)
    
    
    19
    
    
    
    32
    
    
    
    37
    
    
    
    38
    
    
    
    38
    
    
    
    38Switches Installed (data)(4)
    
    
    30
    
    
    
    143
    
    
    
    156
    
    
    
    161/140
    
    
    
    161/149
    
    
    
    161/149
  (1)
    
    The 6,680 leased lines in service as of December 31, 2003 included 3,156
individual Internet dedicated lines connected to corporate subscribers and
3,273 individual traditional leased lines connected to corporate
subscribers. The 6,305 leased lines in service as of April 30, 2004
included 2,935 individual Internet dedicated lines connected to corporate
subscribers and 3,370 individual traditional leased lines connected to
corporate subscribers.(2)
    
    Includes owned fiber optic lines within cities we service, including
fiber optic last mile connections. 3




---



##### Table of Contents



(3)
    
    Includes leased fiber optic lines within cities we service, including
portions of our backbone, but does not include inter-city connections.(4)
    
    The data as of December 31, 2002, 2003 and April 30, 2004, represents the
number of ATM/routers installed. Exchange Rate Information The following table sets forth, for the periods and dates indicated,
certain information concerning the noon buying rate for Korean Won announced by
the Federal Reserve Bank of New York, expressed in Korean Won per U.S.$1.00.
We do not intend to imply that the Won or U.S. dollar amounts referred to
herein could have been or could be converted into U.S. dollars or Won, as the
case may be, at any particular rate, or at all. At End
    
    AverageYear Ended December 31,
    
    of Period
    
    Rate(1)
    
    High
    
    Low(Won per U.S.$1.00)1999
    
    W
    1,136.0
    
    
    W
    1,187.7
    
    
    W
    1,241.8
    
    
    W
    1,124.52000
    
    
    1,267.0
    
    
    
    1,140.0
    
    
    
    1,267.0
    
    
    
    1,105.52001
    
    
    1,313.5
    
    
    
    1,293.4
    
    
    
    1,369.0
    
    
    
    1,234.02002
    
    
    1,186.3
    
    
    
    1,242.0
    
    
    
    1,332.0
    
    
    
    1,160.62003
    
    
    1,192.0
    
    
    
    1,193.0
    
    
    
    1,262.0
    
    
    
    1,146.02004 (through June 10)
    
    
    1,160.0
    
    
    
    1,166.4
    
    
    
    1,195.1
    
    
    
    1,141.4
 At EndMonth Ending
    
    Of Period
    
    High
    
    Low(Won per U.S.$1.00)December 31, 2003
    
    W
    1,192.0
    
    
    W
    1,200.0
    
    
    W
    1,183.0January 31, 2004
    
    
    1,174.0
    
    
    
    1,195.1
    
    
    
    1,172.0February 29, 2004
    
    
    1,179.0
    
    
    
    1,180.0
    
    
    
    1,152.2March 31, 2004
    
    
    1,146.7
    
    
    
    1,181.0
    
    
    
    1,146.7April 30, 2004
    
    
    1,173.6
    
    
    
    1,173.6
    
    
    
    1,141.4May 31, 2004
    
    
    1,165.0
    
    
    
    1,191.0
    
    
    
    1,165.0
  (1)
    
    The average of the noon buying rates on the last date of each
month (or a portion thereof) during the period. 3.B CAPITALIZATION AND INDEBTEDNESS Not applicable. 3.C REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. 4




---



##### Table of Contents



3.D RISK FACTORS Our business, financial condition or results of operations are subject to
various changing competitive, economic, political and social conditions,
including the following factors. You should pay particular attention to the
fact that we are a Korean company and are governed by a legal and regulatory
environment which in some respects may differ from that which prevails in other
countries. Risks Related to Our Company Although we believe that we have sufficient working capital to fund our
operations and sustain our debt service and debt repayment obligations in the
short-term, we cannot guarantee that we will generate sufficient cash flow from
operations or obtain adequate financing on acceptable terms or at all to
implement our business plan in the mid to long-term. Since our incorporation we have incurred substantial net losses in each
year. For the years ended December 31, 2001, 2002 and 2003, we had net losses
of Won 245.9 billion (U.S.$206.3 million), Won 125.0 billion (U.S.$104.9
million) and Won 161.3 billion (U.S.$135.3 million), respectively. Although we
have started to achieve operating income since 2002, we incurred operating
losses of Won 304.6 billion (U.S.$255.5 million) and Won 170.6 billion
(U.S.$143.1 million) for the years ended December 31, 2000 and 2001,
respectively, resulting from the significant infrastructure, marketing,
technology and other costs incurred in the development of our services. We
expect that, as we improve our profitability and financial structure, our
operating income will increase and net losses will decrease. However, we
cannot assure you that we will continue to achieve or increase our operating
income or that we will reduce our net losses or achieve net income in the
foreseeable future. See Item 5Operating and Financial Review and Prospects
and our consolidated financial statements for a discussion of our past
performance. As a result of the rapid expansion of our business, the substantial
operating losses we incurred in the past and the continuing net losses since
our incorporation, we have principally relied on equity and debt financings to
fund our operations and have significant debt and debt service and repayment
obligations. As of March 31, 2004, on a non-consolidated basis, we had Won
999.4 billion of long-term liabilities (excluding current maturities) and Won
491.6 billion of current liabilities (including the current portion of
long-term debt). We currently anticipate making capital expenditures of
approximately Won 356.5 billion during 2004 (of which we have spent Won 23.8
billion in the first quarter of 2004). Our debt service and debt repayment
requirements relating to our outstanding indebtedness, on a non-consolidated
basis, are approximately Won 208.5 billion and U.S.$0.6 million in the second
half of 2004 and Won 441.1 billion and U.S.$0.1 million in 2005. Although we
believe that, with the equity and debt financing we obtained in November 2003,
we have sufficient working capital to meet our currently anticipated debt
repayment, capital expenditure and debt service requirements and accounts
payable in 2004 and 2005 and to implement our short to mid-term business plan
on a fully funded basis, in order to maintain our competitive position and
continue to meet the increasing demands for service quality, availability and
competitive pricing, we may need to incur additional capital expenditures on
enhancing our networks and expanding our subscriber base. See Item 5Operating and Financial Review and ProspectsLiquidity and Capital Resources
for a more detailed discussion of our historical and planned capital
expenditures. Our actual future financing requirements will also depend on our
future performance, market conditions and other factors, many of which are
beyond our control and cannot be predicted with certainty. In addition, we may
need to raise additional funds (through long-term borrowings, the proceeds of equity and corporate bond offerings and vendor financing) to
acquire complementary businesses, develop new products or otherwise respond to
changing business conditions or unanticipated competitive pressures or
technological or marketing hurdles. Our ability to obtain additional financing
will be dependant on our future performance and market conditions, among other
factors. We cannot assure you that long-term borrowings, vendor financing, or
any alternative financing will be available on favorable terms, or at all. If
we are unable to obtain sufficient new debt or equity financing, we may need to
modify, delay or abandon elements of our business plan, which could have a
material adverse effect on our business, financial condition and results of
operations. 5




---



##### Table of Contents



Prices for communications services may fall and adversely affect our revenues
per subscriber. We currently derive substantially all of our revenues from monthly
subscription fees for our high-speed Internet access services. The prices of
communications services and products in general have fallen historically, and
may continue to fall. We may be required to reduce prices for our high-speed
Internet access services to respond to competition and look for additional
revenue sources. The failure to achieve and sustain adequate pricing levels or
to replace lost revenues from falling subscription fees with other revenue
sources would have a material adverse effect on our revenues per subscriber,
the overall profitability of our business and our financial condition. Certain existing shareholders are, or are affiliated with, entities that
compete with, or may compete in the future with, our company. Certain existing shareholders such as Dacom Corporation and its
affiliates, Samsung Electronics and its affiliate, SK Telecom and its
affiliates and Daewoo Securities compete, directly or indirectly, with our
service offerings. Dacom provides high-speed Internet access in limited areas
in Korea and Dacom and Samsung Networks, Inc., an affiliate of Samsung, operate
ISPs in Korea. SK Networks Co., Ltd. and Dacom are engaged in the leased line
business. In addition, some of our shareholders belong to conglomerates or
chaebol that dominate the Korean economy across multiple industries. We
therefore expect certain of our shareholders or their affiliates to engage in
businesses that compete with our products and services. We have several interconnection and office space lease agreements with our
shareholders and their affiliates. The conflicts of interest that currently
exist or may arise in the future through competition in our business markets
may impair or affect our relationship with our alliance shareholders. Disruption in relations with vendors, suppliers, Powercomm, KEPCO, cable
network operators or system operators could materially affect our ability to
provide services. We are dependent on third party suppliers of hardware components and
software to build and operate our network. Although we attempt to maintain a
minimum of two vendors for each required product, some components used by us in
providing our communications services may not be compatible with the products
of certain vendors. A failure by a supplier to deliver compatible products on
a timely basis, or our inability to develop alternative sources at a reasonable
cost, could result in delays, increased costs and subscriber cancellations
which could have a material adverse effect on us. As of April 30, 2004, approximately 41.4% of our hybrid fiber coaxial
(HFC) subscribers currently use the cable lines for HFC access services from
Powercomm Co., Ltd., a subsidiary of Dacom, on a non-exclusive basis. The CATV access network lease agreement
with Powercomm expires in May 2005. The term is automatically renewable for
another three years unless a party gives notice of non-renewal at least three
months prior to expiration. However, Powercomm has the right to terminate the
lease agreement if it discontinues its cable network business. We believe that
our ability to provide services through Powercomms cable lines enhances our
profitability and revenues per subscriber. We also lease from KEPCO ancillary
facilities such as electric poles and conduit ducts for use in building our own
local fiber optic network and our own HFC networks. Our agreement with KEPCO to
lease its ancillary facilities allows us to expand our network coverage at a
lower cost. Accordingly, the termination of the lease agreements could have a
material adverse effect on our operations. Furthermore, failure by Powercomm
to properly maintain its network or KEPCO to properly maintain its ancillary
facilities could result in service disruptions or reduced data transmission
quality. 6




---



##### Table of Contents



In order to secure access to last-mile connections in our subscriber areas
that are not covered by our network, which areas consist primarily of small
apartment buildings and single-family residences, we have entered into lease or
affiliation agreements with cable network operators and system operators. Our
competitors are also trying to establish relationships with cable network
operators and system operators. We cannot assure you that we will be able to
maintain our relationships with these operators. If we fail to maintain our
relationships with these operators, we may be unable to provide our services in
areas covered by such operators or may be required to make significant capital
expenditures to build our own last-mile connections in those areas. We outsource a significant portion of our sales force needs. Our lack of
direct control over our sales forces actions may materially affect our sales
and marketing efforts. As of April 30, 2004, we had 565 employees in our marketing and sales
department and directly operated 18 service centers. In order to rapidly
expand the coverage of our marketing and sales efforts in a cost-efficient
manner, we outsource a significant portion of our sales force needs. We
currently utilize 70 exclusive Hanaro Telecom customer centers, 42 cable system
operators in each service area in which we provide HFC connections to our
network and individual agents that target commercial and residential buildings
that are connected to our backbone network. The outside sales force and its
employees are not employees of Hanaro Telecom; therefore, the amount of control
we exercise over the sales force is necessarily limited. If our training,
compensation and monitoring programs fail to ensure the quality and performance
of our outside sales force, our sales and marketing efforts will be materially
affected and the performance of our company, including the number of new
subscribers, could suffer. Any acquisitions or strategic investments we make could disrupt our business
and adversely affect our financial condition. As part of our ongoing business development strategy, we may consider
acquisitions and strategic investments in complementary companies, products or
technologies. In the event of any purchases, we could issue stock that would
dilute our current stockholders percentage ownership, incur debt or assume
liabilities of the acquired business. Our operation of any acquired business
will involve numerous risks, including problems combining the purchased
operations, technologies or products and unanticipated costs. We cannot assure
you that we will be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future and any failure
to do so could disrupt our business and adversely affect our financial
condition. We have not made all of the research and development expenditures we committed
to make as a condition to maintaining our perpetual license to operate local
telephony services. As part of our Network Service Provider (NSP) license, we hold a perpetual
license to operate local telephony services on a nationwide basis in Korea. As
a condition to maintaining this license, we agreed to make certain research and
development expenditures described in the business plan we submitted to the
Ministry of Information and Communication of Korea (MIC) as a part of our
license application. To date, we have not made all of such research and
development expenditures and the MIC has not requested that we fulfill our
research and development commitments we made in our local telephony business
license application. We do not believe that the MIC is likely to require us to
make the remaining expenditures or suspend or revoke our local telephony
business license because of our failure to make such expenditures. However, we
cannot assure you that the MIC will not take any of these actions. If we are
requested by the MIC to make such expenditures and we fail to make the
remaining expenditures on a timely basis, the MIC may suspend or revoke our
license to operate our local telephony business. Suspension or revocation of
our local telephony business license would have a material adverse effect on
our business, financial condition and results of operations. 7




---



##### Table of Contents



Risks Related to Our Industry The telecommunications sector in Korea is evolving, which may lead to
additional competitors with significantly greater resources. KEPCO transferred all of its cable assets to Powercomm, a subsidiary of
KEPCO, in 2000. KEPCO sold a 10.5% equity interest in Powercomm to several
Korean entities, including SK Telecom and Pohang Iron & Steel Co., Ltd. in July
2000 and sold a 45.5% equity interest in Powercomm to a consortium led by Dacom
in December 2003. The consortium led by Dacom may not be willing to continue
to lease such assets on the terms and conditions set forth in the CATV access
network lease agreement we have with Powercomm, if at all. We believe that the telecommunications sector in Korea is rapidly
evolving. The high-speed Internet access market is currently led by three
major service providers, two of which have acquired smaller high-speed Internet
service providers in 2001. We expect more small to medium-sized
telecommunications companies to merge and the number of service providers in
the market to continue to decrease. Future business combinations and alliances
in the telecommunications industry may create additional competitors with
resources far greater than ours. Any significant changes in the
telecommunications sector could have a material adverse effect on our business,
financial condition and results of operations. The telecommunications market is very competitive. High-speed Internet access.The high-speed Internet access market in
Korea is a relatively new market. KT is our main competitor in the market for
the Digital Subscriber Line (DSL) services, consisting of the Asymmetric
Digital Subscriber Line (ADSL) and Very high bit rate Digital Subscriber Line
(VDSL) services and Thrunet is our main competitor in the HFC market. DSL (ADSL & VDSL).In providing DSL services, we primarily compete with
KT. KT has an extensive fiber optic backbone network throughout Korea and has
significantly greater capital resources than we do. KT currently provides DSL
services and we understand that KT is upgrading its last-mile connections and
related transmission facilities to provide DSL services to its subscribers at
speeds comparable to ours. We believe that KT is likely to focus its upgrading
process and marketing efforts in our targeted high density, high demand areas.
As of April 30, 2004, KT and Hanaro Telecom had market shares of approximately
81.5% and 17.2%, respectively, in the DSL services market in Korea. HFC.Our primary competitor in providing high-speed Internet access via
cable networks is Thrunet. We, together with Thrunet, utilize almost all of
Powercomms cable network. Onse Telecom and Dacom are also competitors who
have been providing their services through the lines of district cable network
operators, which are proprietors of smaller, localized cable networks. In
addition, we may face additional competition in the future from a variety of
sources, including long distance telecommunications companies, other cable
operators, direct broadcast satellite operators, wireless communications
providers, on-line service providers and resellers. As of April 30, 2004,
Hanaro Telecom, Thrunet and Onse Telecom had market shares of approximately
37.8%, 32.9% and 10.4%, respectively, in the HFC services market in Korea. 8




---



##### Table of Contents



Multimedia services.In the Internet services sector, there are currently
79 commercial ISPs according to Korea Network Information Center (KRNIC) as of
April 30, 2004. We believe that there are several ISPs currently developing
high-end multimedia products comparable to those available through HanaroDream. Internet Data Center services.In May 2000, we began providing
server-based support services to our corporate clients through N-GENE, our
Internet data center (IDC) in Seoul. The IDC services market in Korea is
highly competitive. There are currently five major IDC service providers in
Korea, namely, KT, Korea Internet Data Center Inc., Hanaro (N-GENE), Prism and
Hostway. Local telephony.We are the only competitor to KT, the dominant local
incumbent, in the local telephony market. Prior to the commencement of our
operations in April 1999, KT was the sole provider of local telephony services
in Korea. As of April 30, 2004, KT and Hanaro Telecom had market shares of
approximately 95.4% and 4.6%, respectively, in the local telephony services
market in Korea. As a result of having to compete with KT in all of our markets and the
increases in the number of additional competitors in the Internet access market
and the multimedia services market, we currently encounter and expect to
continue to encounter significant pricing pressure and other forms of
competitive pressures in the future. Advances in technology, as well as
changes in the marketplace and the regulatory environment, are constantly
occurring, and we cannot predict the effect that ongoing or future developments
may have on us or on the pricing of our products and services. Increased price
or other competition could adversely affect our business, financial condition
and results of operations. We cannot assure you that we will have the
financial resources, technical expertise or marketing and support capabilities
to compete successfully. We are a party to legal proceedings arising from disruption in the Internet
service caused by computer viruses. On January 25, 2003, the Slammer Worm originating from countries such as
the United States and Australia infected the MS SQL Server 2000 of the
Microsoft Corporation and disrupted the Internet service between Microsoft and
a number of Internet service providers, including us. As a result, numerous
Internet users experienced outages on their email servers and websites. We are
a party to two legal proceedings in relation to such outages. Such legal
proceedings are currently pending in Seoul Central District Court. We do
not expect that an unfavorable decision in the above legal proceedings will
directly affect our financial condition, as the amount of damages are fairly
small and the absence of class action lawsuits in Korean law will prevent an
expansion of litigation. However, we are not certain whether the outcome of
the above legal proceedings will be in our favor. If we lose, we may face
additional legal actions based on similar grounds by other customers or
Internet users, which could adversely affect our business, financial condition
and results of operations. Furthermore, other computer viruses which we cannot
control could result in Internet service disruptions in the future. Risks Related to Ownership of ADSs or Common Shares Ownership of shares may be subject to certain restrictions under Korean law,
including percentage ownership limitations. Prior to making an investment in 10% or more of the outstanding voting
shares of a Korean company, foreign investors are generally required under the
Foreign Investment Promotion Law of Korea to submit a report to a foreign
exchange bank in Korea pursuant to a delegation by the Ministry of Commerce,
Industry and Energy. Failure to comply with this reporting requirement may
result in the imposition of criminal sanctions. Subsequent sales by such
investor of its shares in such company will also require a prior report to such
bank. 9




---



##### Table of Contents



The Telecommunications Business Law of Korea restricts foreign ownership
in voting shares of a network service provider, including our company. At
present, a foreign government, foreigner or any legal entity owned by a
foreigner that has 15% or more of its outstanding voting shares, including
stock-equivalents and investment equity such as depositary receipts, owned by a
foreign government, foreigner or any specially related person as the largest
shareholder may not own more than 49% of the aggregate number of the issued and
outstanding voting shares of any network service provider. In the event that
such foreign ownership restrictions are violated, the holders of shares in
excess of the legal limitations cannot exercise voting rights with respect to
the shares exceeding such limit and the MIC may require that corrective
measures be taken to comply with the legal restrictions. In addition, the MIC
may impose a mandatory performance fee on the non-complying party and the
service provider may refuse to enter the violating shareholders shares in
excess of the legal limitations in its corporate register. The Telecommunications Business Law also requires the MIC to undertake a
public interest review when a shareholder of a service provider becomes a
controlling shareholder of the service provider. Depending on such review,
which assesses the impact of the transaction on the national security, public
good and order of society, the MIC may order an amendment or suspension of the
relevant contract, suspension of the voting rights, or ultimately, a sale of
shares. See Item 4Information on the CompanyBusiness OverviewKorean
Telecommunications Laws and RegulationsOwnership Restrictions. As a result of our issuance of new shares to a consortium of investors led
by AIG Asian Infrastructure Fund II and AIG Asian Opportunity Fund, or AIG,
Newbridge Capital, Inc., or Newbridge, and Telecom Venture Group Ltd., or TVG,
foreign ownership in our voting shares exceeded 49% and the MIC issued a
corrective order on April 7, 2004 requiring us to take corrective measures to
reduce the foreign ownership in our voting shares. Shortly after we received
the corrective order from the MIC, one of our foreign shareholders sold its
shares and we are currently in compliance with the foreign ownership limitation
regulations. However, we cannot assure you that foreign ownership in our
voting shares will not exceed 49% or that, as a
result of such violation, the MIC will not impose restrictions on our
foreign shareholders voting rights or our business or impose penalties on us. Any dividends paid on our common shares will be in Won and fluctuations in the
exchange rate between the Won and the U.S. dollar may affect the amount
received by holders of ADSs. Under our Articles of Incorporation, we are permitted to pay dividends to
our shareholders beginning in the fiscal year in which our aggregate
carried-over loss, incurred since the date of commencement of our local
telephony services, has been made up in full. We do not expect this to occur
in the foreseeable future. However, if we do declare cash dividends sometime
thereafter, the dividends will be paid to the depositary for the ADSs in Won
and then converted by the depositary into U.S. dollars. Fluctuations in the
exchange rate between the Won and the U.S. dollar will affect, among other
things, the amounts a registered holder or beneficial owner of ADSs will
receive from the depositary as dividends. 10




---



##### Table of Contents



Holders of ADSs outside Korea may not be able to exercise preemptive rights and
certain other rights. The Commercial Code of Korea and our Articles of Incorporation require us,
with certain exceptions, to offer shareholders the right to subscribe for new
shares of our common shares in proportion to their existing ownership
percentage whenever new shares of our common shares are issued. Under the
deposit agreement governing the ADSs, if our company offers any rights to
subscribe for additional shares of our common shares, the depositary under the
deposit agreement, after consultation with us, may make such rights available
to the holders of ADSs or dispose of such rights on behalf of the holders and
make the net proceeds available to them or, if the depositary is unable to take
such actions, it may allow the rights to lapse with no consideration to be
received by the holders of the ADSs. The depositary is required to make
available any rights to subscribe for any securities only when a registration
statement under the United States Securities Act of 1933 is in effect with
respect to the securities or if the offering of the securities is exempt from
the registration requirements under the Securities Act. We are under no
obligation to file a registration statement under the Securities Act to enable
holders of the ADSs to exercise preemptive rights for our common shares
underlying the ADSs, and we cannot assure you that any registration statement
would be filed or that an exemption from the registration requirement under the
Securities Act would be available. Holders of ADSs that are not entitled to
exercise preemptive rights may thereby suffer dilution of their interests in
our company. Shareholders may be subject to Korean tax. Under the Korean tax laws, holders of the ADSs in the United States may be
subject to Korean withholding taxes on the capital gains and dividends in
respect of the ADSs unless an exemption or a reduction under the income tax
treaty between the United States and Korea exists. Under the U.S.-Korea tax
treaty, capital gains realized by holders that are residents of the United
States eligible for treaty benefits will not be subject to Korean taxation upon
the disposition of the ADSs, with certain exceptions. See Item 10Additional
InformationTaxationKorean Taxation for a more detailed discussion of the
effects of Korean tax laws on the holders of ADS. Generally, a non-Korean
registered holder or beneficial owner of ADSs who is not exempt under an
applicable tax treaty will be subject to withholding taxes (subject to
production of satisfactory evidence of the acquisition and transfer costs of
the ADSs) at the rate of the lesser of 27.5% of the net capital gains or 11.0%
of the gross sales proceeds on the capital gains and at the rate of 27.5% on
dividends. The market price and trading volume of the ADSs may be volatile. Under current Korean law, our common shares acquired in the open market or
withdrawn from the depositary facility for the ADSs may be deposited into the
depositary facility created under the deposit agreement governing the ADSs
without our consent up to the total number of shares withdrawn under the
deposit agreement. If the total number of shares to be deposited exceeds the
total number of shares withdrawn under the deposit agreement, our consent is
required for the excess amount. Moreover, under the terms of the deposit
agreement, the ADSs are freely exchangeable for our common shares, and the
number of outstanding ADSs will decrease to the extent that the number of our
common shares withdrawn from the depositary facility exceeds the number of
shares deposited under the depositary facility. Future sales of ADSs and common shares could lower our share price. If existing shareholders decide to sell large amounts of our shares, the
trading price for the ADSs and our shares could fall. We believe that some of
our five major shareholders are currently contemplating selling their shares of
our common shares. Any announcement of a sale by any major shareholders of our
shares or any such sale may have a material adverse effect on the price of our
common shares or the ADSs. We cannot assure you that such sales of our common
shares will or will not occur. 11




---



##### Table of Contents



Risks Related to Korea There are unique economic and political risks associated with investing in
Korean companies. Recently there have been several adverse economic and political
developments in and around Korea. Because all of our revenues are derived from
services provided in Korea, these adverse developments may have a significant
impact on the demand for our services and our operations. In addition to the negative effect of the worldwide recession and
uncertainties surrounding the world economy, the confrontation with North Korea
has been a constant source of tension in the Korean peninsula, which has and
will affect the expectations, perceptions and status of the Korean economy.
Moodys Investors Service, Inc., one of the worlds three largest credit-rating
agencies, has downgraded its rating outlook for South Korea by two notches to
negative from positive because of the increased uncertainty regarding North
Koreas actions and possible responses from the international community.
Recently, discussions between governments of Korea and the United States about
withdrawing the American Forces stationed in Korea have become another factor
of uncertainty affecting the Korean economy. The Korean economy in 2004 is unlikely to show a big growth as domestic
demand and investments are expected to decrease. One cause of such decrease in
the domestic demand and deterioration in consumer sentiment is the record-high
credit card and household debt, which constrains any increases in consumption. Furthermore, in March 2003, SK Global (which subsequently changed its name
to SK Networks Co., Ltd.), an affiliate of Koreas third largest conglomerate,
the SK group, was charged with an accounting fraud. The SK Global scandal
caused temporary disruptions to the financial market as interest rates soared
and investors withdrew their funds from investments in bonds and commercial
papers issued by SK Global. In addition, the Korean labor market
experienced several labor disturbances in 2003, including the strike led
by the Korean Cargo Workers Federation of the Korean Confederation of Trade
Unions in May and August 2003. In the political arena, the first half of 2004 was fraught with political
controversy caused by President Roh Moo-Hyuns alleged breach of election laws,
which eventually culminated in an impeachment of the President by Koreas
National Assembly on March 12, 2004. President Rohs presidential powers were
suspended for 64 days until the Korean Constitutional Court revoked the
impeachment in May 2004. The negative consequences of any or all of the above factors for the
Korean economy and the economic and social environments in which we operate
could be severe, and as a result, our business operations could be adversely
affected. Telecommunications laws and regulations in Korea may result in unanticipated
changes to the Korean regulatory regime and may adversely affect our business
operations. Under Korean law, the government, primarily through the MIC, has authority
to regulate the telecommunications industry. The MIC has the responsibility
for monitoring the rates charged by our company. See Item 4Information on the
CompanyBusiness OverviewKorean Telecommunications Laws and Regulations for a
more detailed description of the regulatory environment in Korea. Each
agreement for interconnection with other service providers is subject to
approval by, or reporting requirements to, the Korea Communications Commission.
Government policies relating to the telecommunications industry and the
regulatory environment in which we operate may change. Such changes may have a
material adverse effect on us. 12




---



##### Table of Contents



We may be liable for information disseminated over our Internet services
network. Korean law relating to liability of ISPs for information carried on or
disseminated through their networks is not completely settled. Decisions,
laws, regulations and other activities regarding content liability may
significantly affect the development and profitability of companies offering
on-line and Internet access services, including us. The imposition upon ISPs
of potential liability, such as liability for defamatory speech or copyright
infringement, for materials carried on or disseminated through their systems
could require us to implement measures to reduce our exposure to such
liability. Such measures may require that we spend substantial resources or
discontinue some services or content offerings. Any of these actions could have
a material adverse effect on our business, financial condition and results of
operations. We do not carry errors and omissions insurance. Our pricing structure is subject to the supervision of the Korean government;
therefore, the government may interfere with any proposed changes to our
pricing scheme. With respect to network-based services, we must report in advance any
changes in our pricing structure to the MIC. We are not required to obtain the
MICs approval prior to changing our pricing structure. However, the MIC may,
for any reason, find our revised pricing structure to be inappropriate and
request that we revise our pricing structure. In addition, if the Korea
Communications Commission finds that our pricing structure restricts fair
competition, it may order us to take corrective measures or impose an
administrative fine of up to 3% of our average annual revenues for the three
years preceding the violation. Therefore, it is the standard business practice
in the telecommunications industry in Korea to report to, and consult with, the
MIC prior to instituting any pricing changes. We cannot assure you that any
future changes in our prices
and our pricing policy that we believe are advantageous to our company
will be acceptable to the MIC. 13




---



##### Table of Contents



ITEM 4. INFORMATION ON THE COMPANY 4.A HISTORY AND DEVELOPMENT OF THE COMPANY Hanaro Telecom, Inc. is a stock corporation organized under the laws of
the Republic of Korea. We were incorporated on September 26, 1997. Our legal
and commercial name is Hanaro Tongshin Chushik Hoesa in Korean, and Hanaro
Telecom, Inc. in English. Our registered office is located in the Shindonga
Fire & Marine Insurance Building, Tae-pyong-ro 2-43, Chung-gu, Seoul, Korea,
100-733, telephone number (82-2) 6266-5000. Our agent for U.S. federal
securities law purposes is CT Corporation System, 111 Eighth Avenue, New York,
NY 10011. Hanaro Telecom was established as Koreas second local call carrier.
Since our inception, we have been striving to become the leading provider of
high-speed Internet access, data and multimedia services in Korea. Some of the
important events in the development of our business are set forth below:  
    
    In October 1997, we received our perpetual license to provide
fixed-link local telephone service on a nationwide basis in Korea.
    
    In June 1998, we registered as a specific service provider to
resell or provide the same type of telecommunication services as those
of domestic or foreign network service providers.
    
    In October 1998, we launched our CATV high-speed Internet access
services.
    
    In April 1999, we launched our local call and high-speed Internet
access services in Seoul, Pusan, Inchon and Ulsan.
    
    In March 2000, we successfully completed a global offering of our
ADSs on the Nasdaq National Market.
    
    In May 2000, we opened the Internet Data Center to provide
server-based support in the form of co-location, dedicated server
hosting and web hosting.
    
    In July 2000, we launched our commercial Local Multipoint
Distribution System (LMDS) service.
    
    In December 2001, we acquired a controlling equity interest in
Dreamline, the fourth largest broadband access provider in Korea.
    
    In February 2002, we launched our wireless Local Area Network (LAN)
services.
    
    In April 2002, we transferred our HanaNet portal business-related
assets and approximately 20 employees to a subsidiary of Dreamline,
DreamX.net Co., which subsequently changed its name to HanaroDream.
    
    In June 2002, we commenced providing commercial Broadband Wireless
Local Loop (B-WLL) high speed wireless Internet service, which is the
first of such services to be launched in Korea.
    
    In August 2002, we launched our Very high bit rate Digital
Subscriber Line (VDSL) service, offering data transmission speeds of up
to 20 Mbps since January 2003. 14




---



##### Table of Contents




    
    In October 2002, we acquired a 24.75% equity interest in Korea
Digital Cable Media Center, and the Fair Trade Commission of Korea
approved it as our affiliated company.
    
    In January 2003, we received a perpetual license to provide long
distance telephony services, including inter-city and international
services.
    
    Mr. Yun-Sik Shin, our former chief executive officer, resigned at
our annual shareholders meeting held on March 28, 2003. At an
extraordinary shareholders meeting held on August 5, 2003, Mr.
Chang-Bun Yoon was appointed as our new chief executive officer and
representative director.
    
    In June 2003, we commenced providing fixed line number portability
service.
    
    On November 18, 2003, we issued new shares to a consortium of
investors led by AIG, Newbridge and TVG having an aggregate value of
Won 585 billion, as a result of which they acquired an aggregate of
39.6% equity interest in us. AIF II NT, Ltd. and its affiliate became
our largest shareholder holding a 13.67% equity interest in us. See
Item 10Additional InformationMaterial ContractsInvestment Agreement
between Hanaro Telecom and an Investment Consortium led by AIG,
Newbridge and TVG. Following such new share issuance, there was a
change in certain members of our management. See Item 6Directors,
Senior Management and Employees. See
Item 5Operating and Financial Review and ProspectsLiquidity and
Capital Resources for a description of our principal capital expenditures for
the last three fiscal years and currently in progress. We have not received any public takeover offers by third parties. 4.B BUSINESS OVERVIEW General Hanaro Telecom is a provider of high-speed Internet access, local
telephony, multimedia, data and Internet data center services in Korea. We
offer our subscribers always-on, high-speed Internet access at speeds up to ten
Mbps over our own and leased networks. We also offer our subscribers local
telephony services as one of only two companies licensed to own and operate a
local telephony network in Korea, the other being KT, which is the local
incumbent. In addition, we provide leased line services and IDC services to
our corporate clients. We commenced commercial operations of our high-speed Internet access and
local telephony services on April 1, 1999. We are currently focused on rapidly
deploying our state-of-the-art fiber optic backbone network in densely
populated metropolitan areas. As of April 30, 2004, we have deployed our fiber
optic backbone network in 40 cities and one district. As of April 30, 2004, we
provided high-speed Internet access services to 1,228,004 subscribers through
our fiber optic last-mile connections. We also provide high-speed Internet access services through hybrid fiber
coaxial (HFC) cable lines, fixed wireless, or LMDS, connections and wireless
LAN connections. As of April
30, 2004, we provided high-speed Internet access services to 1,484,878
subscribers in 132 districts through owned and leased cable lines, to 25,119
subscribers through LMDS connections and to 28,252 subscribers through wireless
LAN connections. 15




---



##### Table of Contents



Description
    
    Dec 31, 2001
    
    Dec 31, 2002
    
    Dec 31, 2003
    
    April 30, 2004VDSL
    
    
    
    
    
    
    
    
    
    
    26,715
    
    
    
    197,737Residential
    
    ADSL
    
    
    984,432
    
    
    
    1,195,916
    
    
    
    1,033,619
    
    
    
    1,011,822Cable Modem
    
    
    920,243
    
    
    
    1,312,045
    
    
    
    1,457,700
    
    
    
    1,483,511Broadband
    
    Corporate
    
    ADSL
    
    
    30,247
    
    
    
    25,673
    
    
    
    18,272
    
    
    
    18,445Cable Modem
    
    
    80,357
    
    
    
    77,735
    
    
    
    1,619
    
    
    
    1,367LMDS
    
    
    
    
    29,917
    
    
    
    37,698
    
    
    
    26,715
    
    
    
    25,119Wireless LAN
    
    
    
    
    
    
    
    
    376
    
    
    
    22,504
    
    
    
    28,252Sum
    
    
    2,045,196
    
    
    
    2,649,443
    
    
    
    2,725,563
    
    
    
    2,766,253Voice
    
    
    
    
    
    
    702,572
    
    
    
    870,333
    
    
    
    1,001,381
    
    
    
    1,073,197Leased Line
    
    
    
    
    
    
    3,216
    
    
    
    5,861
    
    
    
    6,680
    
    
    
    6,305Total
    
    
    
    
    
    
    2,750,984
    
    
    
    3,525,637
    
    
    
    3,733,624
    
    
    
    3,485,755
 For the years ended 2001, 2002 and 2003, we had the following revenues and
total sales generated by our business segments (in millions of Won): Broadband
    
    Voice
    
    Leased line
    
    Other
    
    Total2001
    
    
    641,544
    
    
    
    114,529
    
    
    
    17,706
    
    
    
    56,942
    
    
    
    830,7212002
    
    
    969,635
    
    
    
    210,664
    
    
    
    111,813
    
    
    
    125,742
    
    
    
    1,417,8542003
    
    
    982,692
    
    
    
    248,964
    
    
    
    37,992
    
    
    
    113,838
    
    
    
    1,383,486
 Products and Services We currently provide high-speed Internet access services, local telephony
services and leased line services in Korea pursuant to several wire-line based
options and wireless technologies. Access to our Data Network We currently provide always-on, high-speed Internet access services
through several service offering options. We offer broadband Internet services
to subscribers in large residential and commercial buildings through fiber
optic networks, to subscribers in less densely populated residential areas
through HFC networks and to subscribers in small and medium-sized commercial
buildings as well as medium to low density housing complexes through LMDS
networks. Residential subscribers in areas in which we have built out our fiber
optic network have the choice of two types of DSL services, namely ADSL and
VDSL services. Corporate subscribers, generally, have the choice of ADSL, VDSL
or our dedicated access line services. Subscribers in service areas in which
we lease or have built out HFC networks are generally limited to HFC-connection
based data services. Our high-speed Internet access services are marketed
under the brand name, HanaFos. DSL (ADSL & VDSL) Services.DSL services are provided primarily over
existing copper lines in the subscribers premises, which are connected to our
backbone network through fiber optic last-mile connections. We believe our DSL
service is the best quality, high-speed Internet access service available to
residential subscribers. Our DSL service offering is targeted at high-volume
residential subscribers. ADSL services offer data transmission speeds of up to
eight Mbps and VDSL services offer data transmission speeds of up to 50 Mbps.
In addition, Internet users in Korea pursuant to traditional dial-up services
must pay local per minute telephony charges, whereas DSL subscribers pay a flat
fee. Therefore, we believe that subscribers that average over two hours a day
on the Internet realize cost savings through our ADSL services. As of April
30, 2004, we provided ADSL services to 1,228,004 subscribers, which consist of
1,011,822 residential subscribers and 18,445 corporate subscribers, and VDSL
services to 197,737 subscribers. 16




---



##### Table of Contents



HFC Services.Our cable-network based services are currently available in
132 service areas. HFC connections to our data network allow for maximum speeds
of ten Mbps downstream and 700-800 Kbps upstream through the use of cable
modems installed at our subscribers premises. We have simultaneously entered
into a cable network based strategy while building our own fiber optic network
because the use of existing HFC lines allows our company to expand our coverage
area with low capital expenditure obligations. We have not invested in
building out our fiber optic network or pursuing affiliation or lease
agreements with district cable network operators in areas in which we have
agreements with Powercomm to use its cable lines. As of April 30, 2004, we
provided HFC services to 1,484,878 subscribers, which consist of 1,483,511
residential subscribers and 1,367 corporate subscribers. Wireless Services.Wireless services using wireless technologies such as
LMDS and LAN allow us to connect subscribers to our backbone through wireless
last mile connections. We believe wireless offerings allow us to expand our
coverage area at a lower cost per subscriber and more rapidly than through
connecting subscribers to our backbone through fiber optic connections, thereby
allowing us to cope with the expected increase of the subscribers efficiently. We commenced commercial services of high-speed Internet access and
multimedia and data services using LMDS communications technology in July 2000.
Services using LMDS are transmitted at a maximum speed of ten Mbps, a speed
that exceeds that currently possible through ADSL wire-line technology. LMDS
services are marketed primarily to medium-sized businesses and apartment
complexes. Our LMDS services are currently provided in eleven cities, including
Seoul and Pusan. As of April 30, 2004, we provided LMDS services to 25,119
subscribers. We commenced providing HanaFos AnyWay wireless LAN services in April
2002, which allow Internet access through mobile devices such as notebook
computers or personal digital assistant units equipped with a LAN card for
users within the coverage of our access points. Internet access services using
wireless LAN are transmitted at a maximum speed of eleven Mbps. We currently
provide wireless LAN services in approximately 360 access point areas across
the nation, including key public areas such as hotels, subway stations,
shopping malls, colleges and fast food stores. We provide our wireless LAN
services to residential and corporate subscribers as well as subscribers who
require Internet access on a temporary basis, particularly those subscribers
who need mobile Internet access. As of April 30, 2004, we provided wireless
LAN services to 28,252 subscribers. Local Telephony Services We are the sole competitor to KT in the local telephony market. In
addition to local dial tone service and other basic features such as call
forwarding, call waiting, dial back and voicemail services, we offer
value-added services such as wake-up call, unified messaging and
teleconferencing services in order to distinguish our services from those
available from the local incumbent. In June 2003, we commenced providing fixed line number portability
service. This service allows subscribers wishing to change the service provider
from KT to Hanaro Telecom to continue to use their current telephone number.
Initially, we launched the service in Ansan, Sihueng, Chungju, Kimhae and
Sooncheon and have since expanded our service area to various other
metropolitan areas and plan to do so in Pusan and Seoul within this year. As of April 30, 2004, we provided local telephony services to 718,820
residential subscribers and to 285,099 corporate subscribers. Most of our
residential subscribers receive local telephony services bundled with our ADSL
services. 17




---



##### Table of Contents



We believe the ability to offer local telephony distinguishes our service
offerings from that of communication services providers, other than KT, because
it allows our subscribers to receive both data and local telephony services
through a single provider and thus receive one bill for both service offerings. Voice over Internet Protocol (VoIP) Services.In April 2002, we commenced
providing VoIP services bundled with cable modem-based broadband Internet
services under the name HanaFos cable + voice, which allow simultaneous use
of high-speed Internet and local telephony services. We currently provide VoIP
services in certain parts of Seoul and major metropolitan areas. As of April
30, 2004, we provided HanaFos cable + voice services to 69,278 subscribers. Internet and Related Support Services On October 1, 1998, we launched HanaNet (hananet.net), our ISP, as the
primary vehicle for our content and multimedia service offerings. In April
2002, we transferred our HanaNet portal business-related assets and
approximately 20 employees to a subsidiary of Dreamline, DreamX.net Co., which
operates the portal site, dreamx.net. DreamX.net subsequently changed its name
to HanaroDream Corp., and launched a new site, hanaFOS.com in July 2002,
featuring a variety of basic on-line services, including personal homepages,
free email services, chatting services, bulletin board and social communities,
and multimedia contents including movies, music, comics, animation, popular
on-line games, on-line education, sports, news and television
dramas. In March 2002, we entered into an agreement with HanaroDream
under which HanaroDream provides the basic on-line services and contents of its
portal site to our subscribers, for a term of three years. See Item
10Additional InformationMaterial ContractsInternet Service Agreement between
Hanaro Telecom and HanaroDream for a summary of the terms of the agreement. Internet Data Center. We opened N-GENE, our IDC, in May 2000 with a total area of approximately
40,000 square meters. Through N-GENE, we provide our corporate subscribers
with server-based support in the form of co-location and dedicated server
hosting. As of April 30, 2004, N-GENE hosted approximately 9,900 servers. Co-location. This service allows our customers to connect their servers
directly to our backbone network at Gbps rates, which are much faster than the
speed of leased Internet lines. This service is appropriate for corporate
customers with multiple servers and for those who need broadband circuit
capacity. Dedicated server hosting. We provide our customers with servers with their
desired specifications, which are connected to our backbone network at Gbps
rates. By using our dedicated server hosting services, customers can have
access to dedicated servers without the burden of purchasing or maintaining the
servers. Leased Line Services We hold a license to operate leased line services on a nationwide basis in
Korea. We commenced providing dedicated leased line services in January 2000.
As of April 30, 2004, we had 6,305 traditional leased line subscribers. Our
leased line fees vary depending on the distance and bandwidth requirements of
our subscribers. As we upgrade the transmission capability of our inter-city
connections, we expect to expand the scope of our leased line services. 18




---



##### Table of Contents



We, through Hanaro Telecom America, provide international data services in
Korea and the United States, respectively, initially targeting U.S.-based South
Korean companies. Seasonality Hanaro Telecom does not encounter seasonal changes in demand for its
services. For a description of factors that affect the demand for Hanaro
Telecoms services, see Item 3Key
InformationRisk Factors. Sales and Marketing Sales We are focused on bringing our high-speed Internet access, data and
multimedia services, as well as our local telephony services, to both corporate
and residential users. Sales to corporate subscribers are handled through our in-house sales
group. Our sales people initially focus on securing contracts with large
commercial complexes, thus allowing us to install our remote terminals at their
premises. After installation of our equipment, sales people focus their
attention on individual corporate clients located within the premises. Sales
people that secure contracts with corporate clients remain the main contact person for
all aspects of the subscribers needs, including installation, customer service
and follow-up service. Our in-house sales staff receives an annual bonus which
can equal up to 37.5% of the base rate for our company based upon
performance. We currently outsource a significant portion of our sales force needs.
Our outside sales force receives a one to two week training session on how to
sell our products and services. The training includes basic instruction on
etiquette and selling techniques, as well as classes regarding our corporate
image and our products and services. Follow-up sessions are held to introduce
new products and services to the sales force. Our outside sales force sells our
services through the following channels: Customer Centers.We have exclusive agreements with 69 Hanaro Telecom
customer centers, 20 of which are located in Seoul, nine in Pusan and four in
Inchon. Each of the customer centers sells only our products and services.
Customer centers receive a commission from us for each service contract and
installation contract secured. Customer centers sub-contract out to smaller
distribution outlets within their area to increase their sales coverage.
Customer centers have also commenced sales through telemarketing. CATV System Operators.The system operators in each of the areas covered
by our cable network leasing arrangements have the right to sell our services
within their respective areas. In the event a potential subscriber elects a
non-cable service, such as ADSL, that is available in that service area, the
subscriber is referred to one of our customer centers. The cable system
operators and re-transmission operators in each of the 42 service areas in
which we have commenced operations have started selling our services and
products. Agents.Once a commercial or residential building is wired for our
services, we employ tenants to sell our products and services within the
building. We also utilize other individual sales agents and small sales
agencies to sell our products and services in our coverage areas. Our agents
receive a sales commission for each new subscriber. 19




---



##### Table of Contents



We also have agreements with other types of service providers in order to
further expand our sales coverage. We are a party to agreements with the
construction subsidiaries of certain of our affiliates pursuant to which we
install our network equipment in newly built commercial and residential
buildings, which in turn allows builders to advertise their new buildings as
cyber buildings. In order to add more Internet network game players to our
subscriber base, we offer Game Plus, popular network games bundled with our
high-speed Internet access service. Marketing We use a variety of marketing programs and media to raise awareness of our
services and products. Our marketing programs include:  
    
    advertising in newspapers and magazines;
    
    advertising on television and radio;
    
    participating in trade shows;
    
    campaigns within service areas using direct mail,
telemarketing, leaflets, posters and vehicle stickers; and
    
    creating alliances with key Internet content
providers. We also organize special events to promote our products and services, such
as Internet seminars, campus events and joint presentations with Korean
securities firms. We spent a total of Won 27 billion for advertising in 2003. Customer Service We maintain an emphasis on customer care to differentiate us from our
competitors. We provide 24-hours-a-day, 365-days-a-year customer support
through our call center. We also have a customer claim center located within
our call center to handle subscriber claims regarding our service quality and
billing. Our trained customer service representatives handle all subscriber
calls. All service representatives receive a one-week orientation training and
on-site supervisors provide additional support. We believe it is important for
customer service representatives to have a thorough knowledge of our services
and products. All calls to the call centers are recorded and service
representatives are graded periodically based on performance. We strive to
answer all calls within 10 seconds. We are currently receiving approximately
50,000 calls per day into our call centers. We use automated answering
services to respond to routine inquiries, such as account balances. As of
April 30, 2004, we employed 1,060 workers in our call centers, each working
eight hour shifts. We anticipate that we will continue to hire additional
customer support personnel as the size of our subscriber base increases. Subscribers can also voice their complaints through e-mail. Questions or
complaints that we feel are common issues arising among our subscribers are
posted, together with our response, on a bulletin board on our home page. We believe it is important for subscribers to have face-to-face access to
our representatives. We have approximately 130 customer centers, including our
70 exclusive customer centers. We also have 18 direct services centers. Our
sales staff at our customer centers receive customer service training in
addition to their sales training. Customer center staff are trained to handle
all subscriber complaints. Our in-house sales people monitor the performance of
the customer center employees during their visits to the customer centers. 20




---



##### Table of Contents



Information Systems and Billing Information Systems We currently utilize an information system network which consists of three
separate systems: the customer support system, the operational support system
and the business support system. The customer support system handles all
information related to an individual subscriber, including customer care and
billing information and marketing and sales data. The operational support
system handles all data regarding management of our operations and acts as the
interface to the network management system, which monitors the performance of
our network and delivery of services 24-hours-a-day, every day. This interface
allows for quick identification of network defaults and relays the information
to our customer support system. Finally, the business support system handles
data regarding internal business operations, including accounting and
personnel. Our information system is designed to integrate all of our internal
support services. The majority of the integration of our internal support
services has been completed. We believe integration of our information system is important because it
permits customer care, sales engineering, service management, service delivery,
accounting and inventory sales management personnel to access a single
subscriber record. Accordingly, a subscriber will be able to get support for
any of our products and services with one phone call. By providing
comprehensive, real-time customer information, this system is designed to
enable our customer service representatives to respond faster to inquiries,
provide greater quality customer care and identify more opportunities to sell
additional products. In addition, credit history information regarding
potential and existing subscribers obtained from credit analysis organizations
is available through our integrated information system network. This allows
our sales and operational staff to block services to problem subscribers at an
early stage. Billing Our billing system has been designed to provide our sales and marketing
staff with flexibility to design innovative pricing plans and service offerings
and to make payment by our subscribers easy. We currently provide for joint
billing to our subscribers for our services with Dacoms long-distance and
international telephone services. The billing system is also capable of
immediately processing discounted billing rates for different types of calls.
In addition, the system allows subscribers to pay for our services over the
Internet or by monthly direct deposits from banks. Each subscriber may also
access on-line a detailed breakdown of services rendered to such subscriber. Competition High-speed Internet Access.In the high-speed, broadband Internet access
market, our competition comes from KT and Thrunet. DSL (ADSL & VDSL).KT is our only competitor that is not limited in the
coverage of its services by the coverage of its network. KT, as the local
incumbent telecommunications carrier, has an extensive fiber optic backbone
network throughout Korea and has significantly greater capital resources than
we do. KT currently provides ADSL services and we understand that KT is
upgrading its last-mile connections and related transmission facilities to
provide DSL services to its subscribers at speeds comparable to ours. KT
launched digital subscriber line services in June 1999. Furthermore, we
believe that KT is likely to focus its upgrading process and marketing efforts
in our targeted high density, high demand areas. As of 30, 2004, KT and Hanaro
Telecom had market shares of approximately 81.5% and 17.2%, respectively, in
the DSL services market in Korea. 21




---



##### Table of Contents



HFC.Thrunet launched its cable-based services in July 1998. Our
agreement with Powercomm to use its cable network is not exclusive; therefore,
Powercomm may lease the cable network that we currently lease to additional
service providers. We, together with Thrunet, currently utilize almost all of
Powercomms cable networks. Onse Telecom, Dreamline and Dacom provide services
through the lines of district cable network operators, which are proprietors of
smaller, localized cable networks. KT also owns a large cable network;
however, its existing network does not have the two-way communication
capability that is necessary for the provision of high-speed Internet access.
We believe KT is currently focusing on upgrading its telephone lines, rather
than its cable network. As of April 30, 2004, Hanaro Telecom, Thrunet and Onse
Telecom had market shares of approximately 37.8%, 32.9% and 10.4%,
respectively, in the HFC market in Korea. Multimedia Services.In the Internet services sector, there are
currently 79 commercial ISPs. Korea.com, a service provided by Thrunet,
Chollian, a service provided by Dacom and Kornet, a service provided by KT, are
currently developing and/or providing multimedia products comparable to those
available on HanaNet, which is now integrated with DreamX.net of Dreamline. Internet Data Center Services.In the IDC services market, there are
currently five major IDC service providers in Korea: KT, Korea Internet Data
Center, Hanaro (N-GENE), Prism and Hostway. We commenced IDC services in May
2000. Competition in this market is primarily based on price and service
quality. Some of these major providers are expanding their service capacities.
In addition, approximately 10 small and medium-sized data centers provide IDC
services similar to ours. Local Telephony.In the local telephony market, we are the only
competitor of the local incumbent, KT. KT currently enjoys a 96% market share
in the local telephony market. Fees charged by KT for local telephony service
are currently regulated by the Korean government. We are only required to
report our fees charged for local telephony services to the government. KT, as
the local common carrier, must provide its local telephony services to all
subscribers requesting service. We do not have a universal service obligation.
Thus we are able to focus our roll-out on areas with higher density, greater
average disposable income and, therefore, stronger demand for our products and
services. Leased Line Services.In the leased line services market there are
currently five primary service providers in Korea: KT, Powercomm, Dacom, SK
Networks and Hanaro Telecom. We commenced leased line services in September
1999. Competition in this market is primarily based on price, network coverage
and quality. KT is currently the leading provider of data communications
services in Korea. In order to provide leased line services, the service
provider must have a license to provide network services. Intellectual property We hold 87 registered trademarks (including five program copyrights), 13
registered patents and two registered industrial design rights in Korea. As of
April 30, 2004, we also had 18 trademark applications pending and 11 patent
applications pending at the Korea Industrial Property Office. While we
consider all of our intellectual property to be important, we do not consider
any one or group of patents, trademarks or industrial design rights to be so
important that their expiration or termination would materially affect our
business. In 1999, KT filed a claim with the Industrial Property Tribunal of the
Korea Industrial Property Office, seeking a declaratory decision that our use
of the name Hanaro Telecom falls within the scope of its right to the service
mark Hanaro Telecom. In 2001, the Patent Court concluded that our use of
Hanaro Telecom did not fall within the scope of KTs rights in the service
mark Hanaro Telecom. Accordingly, we may continue to use Hanaro Telecom as
our corporate name. 22




---



##### Table of Contents



In 2000, KT filed another petition with the Industrial Property Tribunal
seeking a declaratory decision that our use of Hanaro Telecom falls within
the scope of its right to the service mark Hanaro. The Industrial Property
Tribunal subsequently dismissed KTs petition, holding that our use of Hanaro
Telecom did not fall within the scope of KTs right to the service mark
Hanaro. Licenses NSP License.Under the Telecommunications Basic Law, the
telecommunications services that an NSP may provide are restricted to those for
which it has received a license from the MIC. To date, we have received the
following types of NSP licenses from the MIC. In October 1997,
we received our perpetual license to provide fixed-link local telephone
service on a nationwide basis in Korea. The founding shareholders of our
company paid a one-time fee of Won 45.0 billion for such license. In August
1999, we obtained a perpetual license to provide domestic leased line services,
for which we paid a one-time fee of Won 1.9 billion. In February 2000, we
obtained a perpetual license to provide value-added telephone services relating
to long distance telephone services and international telephone services, for
which we paid one-time fees of Won 0.3 billion and Won 0.1 billion,
respectively. In August 2000, we obtained a perpetual license to provide
international leased line services for which we paid a one-time fee of Won 0.2
billion. In January 2003, we obtained perpetual license to provide long
distance telephony services, including inter-city and international services.
Our licenses to provide such NSP services are subject to satisfaction of
certain terms and conditions, including the following:  
    
    The licenses required us to make annual contributions to the
Information Promotion Fund for the purpose of research and development
pursuant to the Telecommunications Business Law. On May 9, 2002, the
MIC announced that, effective from 2002, only the NSPs whose total
voice and leased line services revenue amount for the preceding year
was more than Won 30 billion and that realized a net profit in the
preceding year, are required to make annual payments for the purpose of
research and development in the amount of 0.5% of the total voice and
leased line services revenue, to the extent that the amount of such
payment does not exceed the amount of the net profit for the preceding
year.
    
    We must comply with the business plan submitted to the MIC in all
material respects. If necessary, the business plan may be revised in
accordance with the procedures set out in the Guidelines for Handling
of Change of Business Plan of Network Service Provider. The initial
service fee must be in compliance with the business plan. We must
submit an application to the MIC in order to increase the service fee,
together with supporting documentation. No fees are required to be paid to the government of Korea in connection
with its approval of us as a network service provider. SSP License.In June 1998, we also registered as a specific service
provider. This registration is for an indefinite term. As a specific service
provider, we are permitted to provide the following services:  
    
    By utilizing our own switching facilities and other
telecommunications facilities owned by network service providers,
resell or provide the same types of telecommunications services as
those of domestic network service providers.
    
    By leasing telecommunications facilities owned by other network
service providers, resell the same types of telecommunications services
as those of domestic network service providers. 23




---



##### Table of Contents




    
    By utilizing our own facilities, provide telecommunications
services within a specific building. Our registration as a specific service provider contains the following
conditions:  
    
    The commencement of, and any changes in the terms of, service must
be announced in one or more daily newspapers published in Korea at
least one week prior to the effective date.
    
    In conducting our international telecommunications business, we
must refrain from any actions that may interfere with fair competition.
    
    In the event our annual revenues for the previous year with respect
to the specific service provided exceeds the amount set by MIC, we must
make annual contributions to the Information Promotion Fund pursuant to
the Telecommunications Business Law.
    
    We should submit detailed information on the location of our major
facilities and the structure of our network to the MIC prior to the
commencement of our commercial operations. No fees are required to be paid to the government of Korea in connection
with our registration as a specific service provider. Network Operator License.Pursuant to the Integrated Cable Broadcasting
Law (recently replaced by the Broadcasting Law), in June 1999, we were
designated by the MIC as a network operator in the cable television industry.
As a network operator, we are permitted to install, operate and lease network
facilities to system operators in 57 regions throughout Korea. No fees are
required to be paid to the government of Korea in connection with such
designation. Our designation as a network operator requires that we establish the
transmission network in compliance with the technical standard set forth in
Article 25 of the Telecommunications Basic Law and obtain approval from the MIC
prior to providing network facilities to system operators. Wireless Frequency Allocation.In February 1998, we obtained the right
to the WLL frequency of 2.3 GHz bandwidth for 20MHz down- and up-stream. In
August 1999 we obtained the LMDS frequency of 26 GHz for 400 MHz down- and 160
MHz up-stream. These rights are for an indefinite term and no fees are required
to be paid to the government of Korea in connection with such rights. After
June 2005, the MIC plans to reallocate the right to the WLL frequency for the
portable Internet business. Cable Landing License in the United States.In July 2000, Hanaro Telecom
America Inc., our U.S. subsidiary, obtained a Section 214 license from the U.S.
Federal Communications Commission. This license authorizes Hanaro Telecom
America to operate as a facilities-based international common carrier and to
resell the international services of authorized U.S. common carriers. Interconnection We have entered into interconnection agreements that allow for
interconnection of the telecommunication facilities of our company and other
telecommunication operators. These interconnection agreements allow our
customers to connect to the networks of other telecommunications operators and
receive telecommunications services, such as local, long distance and
international call and cellular phone call services, through our network.
Pursuant to the Telecommunications Basic Law, a telecommunication service
provider is required to enter into interconnection arrangement with any other
telecommunications service provider that requests interconnection. In
addition, the MIC issues guidelines regarding interconnection. The
guidelines generally require that interconnection charges be based on the
rates set by the MIC after examining the costs to regulated operators, such as
KT and SK Telecom, of carrying a call. The regulated operators are required to
calculate such costs every other year. In the event a dispute arises between
interconnecting parties, the Korea Communications Commission is to act as the
arbitrator. 24




---



##### Table of Contents



We have entered into interconnection agreements with all major
telecommunication service providers in Korea. The chart below sets forth the
type and name of service providers that we have such agreements with. Type
    
    Name of ProvidersLocal
    
    KTDomestic long-distance
    
    KT; Dacom; Onse TelecomInternational
    
    KT; Dacom; Onse TelecomCellular
    
    SK TelecomPersonal communication service providers
    
    KT Freetel Co., Ltd.; LG Telecom Co., Ltd.Wireless paging services
    
    Real Telecom Ltd.; Seoul Mobile Telecom,
Inc.; Eyesvision Corp.
 Korean Telecommunications Laws and Regulations Overview Koreas telecommunications industry is subject to comprehensive regulation
by the MIC pursuant to provisions of the Telecommunications Basic Law (Law No.
4393 of August 10, 1991, as amended), the Telecommunications Business Law (Law
No. 4394 of August 10, 1991, as amended), and the Radiowave Act (Law No. 6197
of January 21, 2000) (collectively, the Telecommunications Laws). In
addition to the Telecommunications Laws, industry participants are subject to
regulation under various laws of general application. The Telecommunications
Laws empower the MIC to regulate and supervise, among other things, entry into
the telecommunications industry, allocation of radio spectrum, the scope of
permissible business of telecommunications service providers, technologies used
by telecommunications service providers, rate-setting, deposit requirements,
the focus and budget of research and development, and interconnection
revenue-sharing between telecommunications service providers. The Ministry of Information and Communication The MIC is responsible for information and telecommunications policy,
radio and broadcasting technology, postal service and postal finance. Telecommunications Laws Under the Telecommunications Basic Law and the Telecommunications Business
Law, telecommunications service providers are currently classified into three
categories: Network Service Providers (NSPs), Specific Service Providers (SSPs)
and Value-added Service Providers (VSPs). We are classified as an NSP and also
registered as an SSP. An NSP provides specified types of telecommunications
services as licensed by the MIC, in most cases with its own telecommunication
networks and related facilities. As an NSP, we have licenses to provide local
telephony services, leased line services (domestic and international),
long distance and international telephony services. These licenses are for
indefinite terms. 25




---



##### Table of Contents



The telecommunications services provided by an NSP may include local, long
distance and international telephone services, leased line services, cellular
communications services, paging services, PCS services, services using
frequencies allocated by the MIC, trunked radio system services and such other
services as designated by the MIC. VSPs provide telecommunications services
other than those services specified for NSPs, such as data communications using
facilities leased from an NSP following notification to the MIC. The newest
category of service providers, the SSPs, is intended to occupy a middle ground
between NSPs and VSPs. The Telecommunications Business Law provides that there
are three types of SSP licenses:  
    
    type 1 reseller licenses for entities that have their own switching
facilities and resell or provide the same types of telecommunications
services as those of NSPs;
    
    type 2 reseller licenses for entities that do not have their own
switching facilities and resell the same type of telecommunications
services as those of NSPs; and
    
    intra-building telecommunications service provider licenses for
entities that provide telecommunications services within a specific
building through their own facilities. Ownership Restrictions Under the current Telecommunications Basic Law and the Telecommunications
Business Law, an NSP, such as Hanaro Telecom, must be an entity incorporated in
Korea in order to qualify for a license from the MIC. In addition, the
Telecommunications Laws restrict the ownership of NSPs by certain shareholders.
Ownership interests in NSPs are subject to the following ownership
restrictions:  
    
    a foreign government, foreigner or any legal entity owned by a
foreigner that has 15% or more of its outstanding voting shares,
including stock-equivalents and investment equity such as depositary
receipts, owned by a foreign government, foreigner or any specially
related person as the largest shareholder may not own more than 49% of
the aggregate number of the entitys issued and outstanding
voting shares; provided, if a legal entity owned by a foreigner holds 1% or
less shares in the relevant NSP, it is not regarded as a foreigner. In
the event a foreign government or a foreigner owns shares in excess of
the shareholding restriction, the holders of shares in excess of such
limitations cannot exercise the voting rights with respect to the shares
exceeding such limitations, and the MIC may require the foreigner who
has acquired shares in violation of such restriction, the violating NSP
or the shareholder of the violating foreign entity to take corrective
measures to comply with such restriction within a grace period of 6
months. The MIC may also impose on a non-compliant violator a mandatory
performance fee within 3/1000 of the purchase price of the share per
day;
    
    a government (other than KT) or a local government cannot for an NSP
license;
    
    under the recent amendment of the Telecommunications Business Law, a
major NSP (a licensed NSP, an NSP designated through a rate setting, KT
or SK Telecom) is restricted from acquiring shares in another NSP in
excess of 5%. In the event that a major NSP at any time violates the
shareholding restriction, the holders of shares in excess of such
limitations cannot exercise the voting rights with respect to the shares
exceeding such limitations. 26




---



##### Table of Contents



Under the recent amendment of the Telecommunications Business Law, if a
shareholder of an NSP becomes a controlling shareholder by means of any of the
following, the MIC may review whether the transaction is against national
security, the public good, or the order of society:  owning 15% or more of total outstanding shares of the NSP in concert
with a specially related person;  a change in the largest shareholder of the NSP;  the NSP or its shareholder entering into an agreement with a foreign
government or a foreigner on matters defined in the Presidential Decree as an
important business affair, such as appointment of directors or the purchase or
sale of business; or  a change in the shareholder who holds actual control of the management
of the NSP. If the MIC decides in the negative, it may order an amendment or
suspension of the relevant contract, suspension of the voting rights, or the
sale of shares. The MIC is to set up a Public Interest Review Committee to
review the public interest side of an NSPs transaction such as a share
acquisition. The MIC may also impose on a non-compliant violator a mandatory
performance fee within 3/1000 of the purchase price of the share per day, or an
administrative penalty of up to Won 100 million for cases that do not relate to
shareholding. The MIC has the authority to recommend to NSPs that they provide funds for
national research and development of telecommunications technology and related
projects. In the past, the MIC has recommended that industry participants
contribute a percentage of their total revenues to research and development,
including for national research and development projects. Currently, we are
required to contribute 0.5% of the total annual service revenues derived from
our voice and leased line services in the event that we have net income for the
preceding year. The MIC may revoke an NSPs license. The grounds for revocation include
fraud in obtaining the license, failure to perform in accordance with any
condition imposed by the MIC upon issuance of the NSP license, violation of the
rules restricting beneficial ownership and control, failure to commence
business within the time period designated by the MIC, failure to abide by the
general terms for service either reported to or approved by the MIC, and
violation of the Telecommunications Laws. If an NSP wants to cease its business
or dissolve, such NSP must obtain MIC approval. The Korea Communications Commission also has the authority to monitor
unfair business practices among telecommunication service providers in
accordance with the Telecommunications Business Law. The guidelines under the
Enforcement Decree of the Telecommunications Business Law (amended and elevated
from former MIC regulation to a Presidential Decree) specify fair competition
among telecommunications companies under the Telecommunications Business Law.
If an NSP or any telecommunication service provider is in violation of these
guidelines, the MIC may order such telecommunication service provider to take
certain actions, including (i) separating the service providing
organization, (ii) changing its internal accounting regulations, (iii)
disclosing certain company service related information, (iv) changing its
articles of incorporation, the terms of any service contracts and any
interconnection agreement, (v) suspending the act that violates fair
competition, (vi) making a public announcement of the violation and (vii)
measures necessary for the rectification of any violation, such as removal of
telecommunications facilities which gave rise to the violation. In addition,
the MIC may impose upon such telecommunication service provider fines, subject
to certain exceptions, up to 3% of the entitys average sales revenues
generated from the service in violation of such guidelines during the three
years preceding such violation. 27




---



##### Table of Contents



The Telecommunications Business Law requires us to permit other service
providers to interconnect to our networks for purposes of offering other
services. In the event an agreement with a new service provider desiring
interconnection is not reached within 90 days, a service provider can appeal to
the Korea Communications Commission. We have entered into interconnection
arrangements with most major service providers in Korea, including KT, Dacom,
Onse and other NSPs, and expect that we will enter into more interconnection
agreements as additional license for telecommunications services are issued. Rate Setting As an NSP, we must report to the MIC the rates and the contractual terms
for each type of service we provide. In addition, an NSP that has a dominant
market share for a specified type of service must obtain approval from the MIC
for the rates charged and the general terms for such service if its revenues
from such service for the previous year exceed a specific revenue amount set by
the MIC. Each year, the MIC may designate, pursuant to regulations, the NSPs and
the rates and general terms of services provided by such NSPs that require MIC
approval. On June 20, 2003, the MIC designated the local telephone service of
KT and the mobile service of SK Telecom as requiring MIC approval. The MIC
requires fees and charges, in terms of the methods of their calculation, to be
adequate, fair and objective. The MIC may order changes in the rates if it
deems the rates to be unreasonable and against public policy. Licensing Under the Telecommunications Business Law, the MIC promulgated a
regulation specifying a detailed standard of review, application method and
application period for each new NSP license. Upon receipt of the application,
the MIC considers various factors in its approval process, including
reasonableness of the service provision plan, size of facilities for the
services, financial and technical soundness of the applicant, results of
development of technology and plans for new technological developments. Frequency Allocation The MIC has the discretion to allocate and adjust the frequency band for
each type of service. Upon allocation of new frequency bands or adjustment of
frequency bands, the MIC is required to give public notice. The MIC also
regulates the frequency to be used by each radio station. We have been
allocated the frequency of 2.3 GHz bandwidth for 20 MHz downstream and upstream
and the frequency of 26 GHz bandwidth for 360 MHz downstream and 150 MHz
upstream. Other Laws Companies that operate line facilities for cable broadcasting are required
to register with the MIC under the Broadcasting Act (Law No. 6139 of January
12, 2000). We are registered as a service provider under such Act. If we are deemed a market-dominating business entity, we may be subject to
certain regulations under the Monopoly Regulation and Fair Trade Act. In
determining whether an entity is a market-dominating business, the Korean Fair
Trade Commission reviews the entitys market share, the existence and severity
of barriers to entry to the concerned market, the relative size of the entitys
competitors and other factors. 28




---



##### Table of Contents



In the case of abusive business practices by a market-dominating business
entity, the Korean Fair Trade Commission may order such entity to cease and
desist from such business practices, publicly announce that it has engaged in
abusive business practices and/or take other corrective measures it deems fit.
The Korean Fair Trade Commission may also impose fines of up to 3% of the
entitys average sales revenues during the three years preceding the violation.
In addition, a violation of the Monopoly Regulation and Fair Trade Act can
bring about criminal sanctions. The violating entity may be fined up to Won
200.0 million or its representative(s) may receive imprisonment of up to three
years, although imprisonment is rarely, if ever, imposed. The Foreign Exchange Transaction Law, the Foreign Investment Promotion Law
and their regulations require companies, such as Hanaro Telecom, to obtain
approval from, or file a report with, a foreign exchange authority in
connection with any foreign direct investment. The authority may be the
Ministry of Finance and Economy (MOFE), The Bank of Korea or the designated
foreign exchange bank. The type of approval or report required depends on the
type of business engaged in by the investor and/or the amount of the investment
being made. 4.C ORGANIZATIONAL STRUCTURE As of April 1, 2001, we and our Korean affiliates have been designated as
member companies of a business group subject to restrictions on debt
guarantees as well as a business group subject to restrictions on mutual
shareholding by the Korean Fair Trade Commission based on the new criteria
prescribed by the amended Monopoly Regulation and Fair Trade Act. Under the
amended Monopoly Regulation and Fair Trade Act, a member company of both the
business group subject to restrictions on debt guarantees and the business
group subject to restrictions on mutual shareholding is subject to, among
others, the following restrictions: subject to certain exceptions, such
company (i) shall not acquire or own shares of an affiliate company which
acquires or owns its shares; nevertheless, for newly designated companies, the
application of this restriction is waived for one year from the date of such
designation; and (ii) shall not provide payment guarantees with respect to bank
loans for its domestic affiliates for two years from the designation date. The following table lists information concerning the significant
subsidiaries of Hanaro Telecom: Percentage of
    
    Percentage ofOwnership and
    
    Ownership andVoting Interest
    
    Voting Interestheld by Hanaro
    
    held by HanaroJurisdiction of
    
    Telecom
    
    TelecomName
    
    Incorporation
    
    as of Dec 31, 2003
    
    as of April 30, 2004Hanaro Telecom America, Inc.
    
    Delaware, USA
    
    
    100
    %
    
    
    100
    %Hanaro Realty Development &
Management Co., Ltd.
    
    Korea
    
    
    99.99
    %
    
    
    99.99
    %Hanaro Telephone & Internet
Information, Inc.
    
    Korea
    
    
    99.99
    %
    
    
    99.99
    %Hanaro WEB(n)TV Co., Ltd.
    
    Korea
    
    
    90.91
    %
    
    
    90.91
    %Dreamline Corporation1
    
    Korea
    
    
    26.28
    %
    
    
    14.18
    %M-Commerce Co., Ltd.2
    
    Korea
    
    
    30.29
    %
    
    
    30.29
    %
  Notes:
    1.
    
    As of December 31, 2003, our ownership percentage in Dreamline
diluted from 32.18% to 26.28% due to a third partys investment in
Dreamline on November 17, 2003. As of April 30, 2004, our ownership
percentage was 14.18%. As a result of our ownership percentage falling
below 30%, in accordance with the generally accepted accounting
principles in Korea, Dreamline and its 37.19% subsidiary, HanaroDream,
were excluded from our consolidated financial statements as of December
31, 2003. In March 2004, the Fair Trade Commission of Korea approved the
exclusion of Dreamline and its 37.19% subsidiary, HanaroDream, from our
group of affiliated companies. 29




---



##### Table of Contents



2.
    
    Although there has been no change in our ownership percentage in
M-Commerce Co., Ltd., because we are not the largest shareholder and
because we have no nominated members on the board of directors of
M-Commerce, the Fair Trade Commission of Korea approved the exclusion of
M-Commerce from our group of affiliated companies in April 2004. 4.D PROPERTY, PLANTS AND EQUIPMENT Facilities Our principal properties consist of transmission facilities and
telecommunications equipment and information centers located throughout Korea.
We own two central telecommunication centers in Seoul, for the purposes of
managing our nationwide network. The area of each such center is approximately
15,000 square meters. We also own four regional telecommunication centers in
Pusan, Taegu, Kwang-ju and Taejeon, to manage the networks in those regions.
The area in square meters of such centers is approximately 5,800, 6,900, 7,600
and 4,300, respectively. Those centers are equipped with exchange and
transmission equipments. We also have 35 exchange offices equipped with exchange equipments in 25
cities including Seoul, Pusan, Taegu, Taejeon and Kwang-ju. We own 31 of those
offices and lease the remaining four offices. We also have 39 transmission
offices equipped with transmission equipments in 28 cities including Seoul,
Pusan, Taegu, Taejeon and Kwang-ju. We own 23 of those offices and lease the
remaining 16 offices. We lease our executive offices located in the Shindonga Fire & Marine
Insurance Building in Chung-gu, Seoul. Of the net book value of our total plant, property and equipment as of
December 31, 2003 (excluding construction in progress), transmission facilities
and telecommunication equipment represented 85.2%, buildings and real property
represented 11.3% and other assets represented 3.5%. As of December 31, 2003,
our fiber optic network consisted of 22,123 kilometers of owned and leased
lines. We believe that our existing facilities are adequate for current
requirements and that additional space can be obtained on commercially
reasonable terms to meet future requirements. Network We believe that in order to become the leading provider of high-speed
Internet access, data and multimedia services to subscribers in Korea, it is
vital to design and install a network that utilizes state-of-the-art
technology. We believe our technologically advanced backbone network allows us
to provide services that are not possible over traditional networks.
Subscribers are connected to our network either through fiber optic lines to
the subscribers premises or through the use of HFC lines in areas in which we
have built or leased cable networks. We began delivery of commercial services
through wireless last-mile connections in Seoul in July 2000. Backbone Network Our always-on, high-speed Internet access and multimedia services and our
local telephony services are currently provided over our fiber optic backbone
network and last-mile connections consisting of 12,871 kilometers of owned and
leased fiber optic cable. Our backbone network is a SDH-based ring type
backbone with duplicate routers to ensure high system reliability. We utilize
the latest switches and other technologies in our backbone network to ensure
high quality and fast transmission. Our state-of-the-art system utilizes
technologies that offer the following advantages over traditional networks: 30




---



##### Table of Contents



Deployment of Gigabit IP Network over WDM Backbone Systems.Our data
network utilizes Gigabit IP routers over 40 Gbps wavelength division multiplex
(WDM) systems, which offer greater transmission speed capability than
traditional backbone network. The maximum transmission speed currently is 2.5
Gbps with transmission speeds expected to increase to 10 Gbps by the end of
this year and this will allow us to offer quality-guaranteed high-speed
Internet access. We also deploy ATM switch which aggregate ADSL and dedicated
access lines. CCS7 Signaling Method.Our voice network utilizes the CCS7 signaling
method, which offers two principal advantages over traditional signaling
methods. First, the CCS7 signaling method allows our network to accommodate
certain value-added services such as number portability. Second, the CCS7
signaling method provides for shorter post-dialing delays. A call completed
over our network only requires a 0.4 second delay whereas one over a
traditional voice network requires a 1.9 to 2.9 seconds delay. V5.2 Protocol to Increase Voice Network Efficiency.We are the first in
Korea to provide services using the V5.2 protocol. This protocol allows us to
efficiently connect multiple subscribers to our fiber optic network through a
single fiber optic connection by using remote terminals that are installed at
the subscribers premises. Our network lines have been installed using existing infrastructure,
including subway routes and electrical poles, in order to minimize the cost of
our roll-out. Our backbone network has been built using technologies of
multiple vendors, including Lucent Technologies and NEC Corporation. We
believe that network telecommunications technologies have been standardized and
are generally compatible such that equipment and hardware provided by different
vendors can be used within an integrated network and we are not captive to any
one vendor for important equipment for our network. We have our own points of presence (POP) in Palo Alto, San Jose and Los
Angeles in California, U.S.A. Our backbone network also has a direct link of
1.8 Gbps to these POPs in the United States via our own cable capacity and
leased circuit. In addition, we are working with all
Korean Internet exchanges and major ISPs for domestic Internet
interconnection, including DACOM IX, Korea-Internet Neutral Exchange and KT-IX. We have an indefeasible right to use the following international leased
lines on various submarine cables connecting the United States, Asia and
certain parts of Europe, for 15 years or until the end of the economically
useful life of such cables. BandwidthConnecting
    
    
    
    CapacityPoints
    
    Providers
    
    Quantity
    
    Acquisition CostKorea  US
    
    Iljin C2C Ltd.; Onse
Telecom; Asia Global
Crossing; Dacom Crossing;
Flag Telecom
    
    17 x STM-1
    
    U.S.$30,019,880Korea  Japan
    
    Iljin C2C; Teleglobe
Dacom; Teleglobe
Onse Telecom
    
    4 x STM-1
3 x STM-1
1 x E-1 /
    
    U.S.$3,010,000
U.S.$9,780,000
U.S.$4,000,000
 31




---



##### Table of Contents



BandwidthConnecting
    
    
    
    CapacityPoints
    
    Providers
    
    Quantity
    
    Acquisition Cost2 x STM-1Korea  JapanKorea Hong Kong
    
    Onse Telecom
    
    19,158km
    
    U.S.$1,168,638Japan  US
    
    Teleglobe; Metromedia Fiber Network
    
    3 x STM-1
    
    U.S.$1,250,000Japan  US Cable Network
    
    2 x STM-1
    
    U.S.$5,800,000Korea  Vietnam
    
    Dacom
    
    2 x Half E-1
    
    Won 159,940,000Korea  Belgium
    
    Dacom
    
    2 x Half E-1
    
    Won 236,132,000Korea  Singapore
    
    Iljin C2C
    
    1 x Half STM-1
    
    U.S.$350,000Korea  China
    
    Enterprise Networks
    
    1 x Half STM-1
    
    U.S.$1,000,000US  UK
    
    France Telecom; Britain Telecom
    
    4 x STM-1
    
    U.S.$392,000
   (1)
    
    Each STM-1 represents a bandwidth capacity of 155Mbps.(2)
    
    Each E-1 represents a bandwidth capacity of 2Mbps. In addition, we have agreements with foreign ISPs such as Cable & Wireless
IDC, Sprint Communications Co., L.P., AboveNet Communications, Inc., MCI
WorldCom Korea Ltd., XO Communications Services, Aleron Broadband Services, LLC
and Teleglobe for global Internet Protocol transit services. Our backbone network has been deployed in 82 cities and 50 districts,
including Seoul, Pusan, Inchon, Taegu and Ulsan. Each of the ten local loops
is interconnected by 40 Gbps WDM backbone network using fiber optic lines
leased from Dacom. The interconnections between these other backbone networks
will also be leased from other network service providers. We have expanded our voice network by installing voice switches in 33
cities and launched VoIP services in April 2002. Fiber to the Office and the Curb We connect subscribers in large commercial buildings and apartment
complexes with over 300 units to our backbone network through fiber optic
connections directly to the premises.
These subscribers have two basic options in the mode of service to be used
to secure access to our data network. Services over copper lines.Subscribers in large buildings can receive
our services by installing ADSL modems in their offices or homes that allow our
services to be provided through existing copper lines within the building. Our
subscribers premises are then connected to our backbone network through fiber
optic last-mile connections. Single-family homes and small apartment buildings
located within a one kilometer radius of certain of these large buildings can
also receive ADSL services through copper connections we install from the
remote terminals located in the large buildings. These additional services are
provided in order to maximize the return on expensive remote terminals and
other equipment installed in connection with our fiber optic connection
services. ADSL services operate at a maximum speed of eight Mbps downstream
and 768 Kbps upstream. Internet Direct service.Large corporate subscribers often find
dedicated line service to be the most cost effective means of securing
high-speed data transmission capability. Our dedicated line service, which we
call Internet Direct service, is provided through our ATM-based network and
Gigabit routers at maximum speeds of up to 2.5 Gbps. 32




---



##### Table of Contents



We believe direct connections to our state-of-the-art backbone network
through fiber optic lines offer the highest level of system reliability and
transmission speed capability. Hybrid Fiber Coaxial We currently provide our high-speed Internet access through hybrid fiber
coaxial connections in 117 service areas. These HFC connection services are
provided over our own cable network in 46 service areas, Powercomms cable
network in 41 service areas and other system operators cable networks in 30
areas. The approximate number of homes passed in these areas is 11.7 million. We have agreements with cable system operators in 30 service areas. Each
of these system operators is responsible for maintaining subscriber lines and
subscriber relationships within its service area. The system operators in the
service areas in which we own a network also provide cable television services
to subscribers. We receive a portion of the revenues generated by the system
operators cable television services. Most of the agreements are for one-year
terms that are automatically renewed absent termination by either party. The head-end of each system operator is connected to our regional data
center at a maximum speed of 1 Gbps, either through self-constructed fiber
optic lines or through lines leased from Dacom. We currently provide services
using HFC lines at a maximum speed of ten Mbps downstream and 600-700 Kbps
upstream. As of April 30, 2004, we provided our services to 8,422,489
households and 1,491,168 subscribers through our HFC connection services. As
of April 30, 2004, our network was connected to 1,727 cells through HFC
connections. Wireless Connections We also provide the use of wireless last-mile connections to our fiber
optic network. We expect wireless connections to allow us to expand the
coverage of our network at a lower cost per subscriber than through building
wire-line connections to our backbone network. In addition, wireless
connection equipment and infrastructure are easier and quicker to install than
wire-line connections to our backbone network. LMDS services.Services utilizing LMDS technology are marketed to small
corporate subscribers and small apartment complexes. LMDS services are
available in ten cities, including Seoul and Pusan. LMDS technology is a
technology used around the world in broadband wireless telecommunications
systems. As of April 30, 2004, our network was connected to 1,117 buildings
through LMDS connections. Internet Data Center In May 2000, we opened N-GENE, our IDC, in Seoul with a total area of
40,000 square meters. N-GENE has the capacity to accommodate 150,000 servers.
As of April 30, 2004, N-GENE hosted approximately 10,180 servers. 33




---



##### Table of Contents



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion together with the rest of this
annual report, including the financial statements and related notes included
elsewhere in this annual report. Our financial statements have been prepared
in Korean Won and prepared in accordance with Korean GAAP. The results
discussed below are not necessarily indicative of the results to be expected in
any future periods. 5.A OPERATING RESULTS Results of Operations We commenced commercial operations of our high-speed Internet access
services and voice services on April 1, 1999 through fiber optic connections in
the cities of Seoul, Pusan, Ulsan and Inchon. We currently provide our
high-speed Internet access services in 82 cities and 50 districts and voice
services in 33 major cities. As of April 30, 2004, we had 1,506 employees and
had 2,766,253 high-speed Internet access service subscribers, 1,073,197 local
call service subscribers and 6,305 leased line service subscribers. Year ended December 31, 2003 compared to the year ended December 31, 2002 Operating Revenues.Our total revenue for the year ended December 31,
2003 was Won 1,383,486 million (U.S.$1,160.6 million), a decrease of Won 34,368
million, compared to total revenue of Won 1,417,854 million in 2002. The
decrease in total revenue in 2003 was primarily due to a decrease in revenue of
Won 73,821 million from our leased line services from Won 111,813 million in
2002 to Won 37,992 million in 2003, offset in part by increases in revenue of
(i) Won 38,300 million from our voice services from Won 210,664 million in 2002
to Won 248,964 million in 2003 and (ii) Won 13,058 million from our broadband
services from Won 969,635 million in 2002 to Won 982,693 million in 2003. The
decrease in our leased line services revenues was primarily due to the
exclusion of leased line services revenues from Dreamline in 2003 as a result
of the dilution of our equity interest in Dreamline in November 2003 and the
exclusion of Dreamline from our group of affiliated companies. The increase in
our voice services revenue was primarily due to an increase in the number of
our subscribers from 939,852 as of December 31, 2002 to 1,001,381 as of
December 31, 2003. The increase in our broadband services revenue was due to
an increase in the number of our active broadband services subscribers. After
excluding approximately 240,000 inactive subscribers in October 2003, the
number of our active broadband services subscribers was 2,725,563 as of
December 31, 2003 Operating Expenses.Our total operating expenses for the year ended
December 31, 2003 was Won 1,312,792 million (U.S.$1,101.3 million), a decrease
of Won 83,634 million, compared to total operating expenses of Won 1,396,426
million in 2002. The decrease in operating expenses in 2003 was primarily due
to the exclusion of operating expenses from Dreamline in 2003 as a result of
the dilution of our equity interest in Dreamline in November 2003 and the
exclusion of Dreamline from our group of affiliated companies, offset in part
by increases of Won 35,231 million in interconnection charges primarily due to
an increase in the number of our local telephony services subscribers. Operating Income. Our total operating income for the year ended December
31, 2003 was Won 70,694 (U.S.$59.3 million), an increase of Won 49,266 million,
compared to a total
operating income of Won 21,428 million in 2002. The increase in our total
operating income in 2003 was primarily due to a larger decrease in our
operating expenses than the decrease in our revenues in 2003, as compared to
2002. 34




---



##### Table of Contents



Non-Operating Income.Our non-operating income for the year ended
December 31, 2003 was Won 26,972 million (U.S.$22.6 million), an decrease of Won 43,393 million,
compared to non-operating income of Won 70,365 million in 2002. The decrease
in non-operating income in 2003 was primarily due to decreases in gain on
foreign currency translations and interest income. Our gain on foreign
currency translations decreased by Won 17,045 million from Won 17,064 million
in 2002 to Won 19 million in 2003 primarily due to the depreciation of Korean
Won against U.S. dollars and a decrease in our dollar-denominated liabilities
in 2003. The Korean Won appreciated against U.S. dollars from Won 1,313.50 to
U.S.$1.00 as of December 31, 2001 to Won 1,186.30 to U.S.$1.00 as of December
31, 2002 but the Korean Won slightly depreciated against U.S. dollars to Won
1,192.6 to U.S.$1.00 as of December 31, 2003. Our interest income decreased by
Won 14,296 million from Won 32,761 million in 2002 to Won 18,465 million in
2003, primarily due to a decrease in our interest bearing financial instruments
and the exclusion of Dreamlines interest income in 2003. Non-Operating Expenses.Our non-operating expenses for the year ended
December 31, 2003 were Won 258,578 million (U.S.$216.9 million), an increase of
Won 39,107 million, compared to non-operating expenses of Won 219,471 million
in 2002. The increase in non-operating expenses in 2003 was primarily due to a
one-time Won 61,333 million loss from the write-off of property and equipment
as a result of the discontinuance of service, decrease of customer demand and
deterioration of certain machinery. We also recorded a loss on valuation using
the equity method in the amount of Won 23,142 million in 2003 with respect to
our investment in Dreamline. See Note 8 to our financial statements for more
details. Such increases in non-operating expenses was partly offset by
decreases in interest expenses and asset backed securities payable expenses.
Our interest expenses decreased by Won 30,082 million from Won 169,412 million
in 2002 to Won 139,330 million in 2003, primarily from a decrease in our
borrowings. See Note 14 to our financial statements for a more detailed
analysis of our long-term debt and debentures. Our asset backed securities
payable expense decreased by Won 13,265 million from Won 22,293 million in 2002
to Won 9,028 million in 2003 due to the decrease in the outstanding balance of
asset backed securities issued by Hanafos Securitization Specialty Co., Ltd. Income Taxes.Our statutory income tax rate for 2003 was 29.7%. For the
year ended December 31, 2003, we reported income taxes of Won 302 million
(U.S.$0.25 million), a decrease of Won 781 million, compared to income taxes of
Won 1,083 million in 2002. See Note 21 to our financial statements for a more
detailed analysis of our income taxes and deferred income taxes. Net Loss.Our net loss for the year ended December 31, 2003 was Won
161,299 million (U.S.$135.3 million), an increase of Won 36,274 million,
compared to a net loss of Won 125,025 million in 2002. Such increase was
primarily due to the one-time Won 61,333 million loss from the write-off of
property and equipment, offset in part by an increase in our operating income
of Won 49,266 million. Year ended December 31, 2002 compared to the year ended December 31, 2001 Operating Revenues.Our total revenue for the year ended December 31,
2002 was Won 1,417,854 million, an increase of Won 587,133 million, compared to
total revenue of Won 830,721 million in 2001. The increase in total revenue in 2002 was
primarily due to revenue increases of (i) Won 328,091 million from our
broadband services from Won 641,544 million in 2001 to Won 969,635 million in
2002, (ii) Won 96,135 million from our voice services from Won 114,529 million
in 2001 to Won 210,664 million in 2002, and (iii) Won 94,107 million from our
leased line services from Won 17,706 million in 2001 to Won 111,813 million in
2002. The increase in our broadband services revenues was primarily due to an
increase in the number of our broadband services subscribers from 2,045,196 as
of December 31, 2001 to 2,877,526 as of December 31, 2002. The increase in our
local telephony services revenues was primarily due to an increase in the
number of customers from 332,679 as of December 31, 2001 to 639,530 as of
December 31, 2002. The increase in our leased line services revenues was
primarily due to an increase in
the number of customers from 3,216 as of December 31, 2001 to 5,861 as of
December 31, 2002. 35




---



##### Table of Contents



Operating Expenses.Our total operating expenses for the year ended
December 31, 2002 was Won 1,396,426 million, an increase of Won 395,091
million, compared to total operating expenses of Won 1,001,335 million in 2001.
The increase in operating expenses in 2002 was primarily due to increases of
(i) Won 116,001 million in depreciation expenses, primarily due to our
investment in additional telecommunication equipment and facilities, (ii) Won
82,280 million in telecommunication equipment lease expenses, due primarily to
an increase in payments related to leased fiber optic and cable lines, (iii)
Won 74,030 million in sales commissions paid to our sales agents, primarily
from an increase in the number of our subscribers, (iv) Won 38,974 million in
commissions, primarily from an increase in payments for outsourcing services
and (v) Won 27,745 million in interconnection charges, primarily due to an
increase in the number of our local telephony services subscribers. Operating Income. Our total operating income for the year ended December
31, 2002 was Won 21,428 million, compared to a total operating loss of Won
170,614 million in 2001. We recorded total operating income in 2002 as a
result of a larger increase in our operating revenues than our expenses in
2002, as compared to 2001. Non-Operating Income.Our non-operating income for the year ended
December 31, 2002 was Won 70,365 million, an increase of Won 20,858 million,
compared to non-operating income of Won 49,507 million in 2001. The increase
in non-operating income in 2002 was primarily due to increases in gain on
foreign currency translations and interest income, offset in part by decreases
in gain on valuation of marketable securities and gain on foreign currency
transactions. Our gain on foreign currency translations increased by Won
16,526 million from Won 538 million in 2001 to Won 17,064 million in 2002,
primarily due to the appreciation of Korean Won against U.S. dollars from Won
1,313.50 to U.S.$1.00 as of December 31, 2001 to Won 1,186.30 to U.S.$1.00 as
of December 31, 2002. Our interest income increased by Won 6,255 million from
Won 26,506 million in 2001 to Won 32,761 million in 2002, primarily due to an
increase in our interest bearing financial instruments. Our gain on valuation
of trading securities decreased by 5,273 million from Won 5,278 million in 2001
to Won 5 million in 2002, primarily due to the downturn of Korean securities
market. Our gain on foreign currency transactions decreased by 4,962 million
from Won 6,522 million in 2001 to Won 1,560 million in 2002, primarily due to
the appreciation of Korean Won against U.S. dollars from Won 1,313.50 to
U.S.$1.00 as of December 31, 2001 to a range of Won 1,201.20 ~ 1,316.00 to
U.S.$1.00 as of the period during which we made the foreign currency payments. Non-Operating Expenses.Our non-operating expenses for the year ended
December 31, 2002 were Won 219,471 million, an increase of Won 91,770 million,
compared to non-operating expenses of Won 127,701 million in 2001. The
increase in non-operating expenses in 2002 was
primarily due to increases in interest expenses and asset backed
securities payable expense. Our interest expenses increased by Won 62,181
million from Won 107,231 million in 2001 to Won 169,412 million in 2002,
primarily from an increase in our borrowings. See Note 15 to our financial
statements for a more detailed analysis of our long-term debt and debentures.
Our asset backed securities payable expense increased by Won 18,193 million
from Won 4,100 million in 2001 to Won 22,293 million in 2002, primarily due to
the recognition of the difference between the trade receivables and the
long-term advances received in connection with the asset backed securities
issued by Hanafos Securitization Specialty Co., Ltd. and 1st Dreamline
Securitization Specialty Co., Ltd. See Note 16 to our financial statements for
more information. Income Taxes.Our statutory income tax rate for 2002 was 29.7%. For the
year ended December 31, 2002, we reported income taxes of Won 1,083 million, an
increase of Won 1,048 million, compared to income taxes of Won 35 million in
2001. See Note 21 to our financial statements for a more detailed
analysis of our income taxes and deferred income taxes. 36




---



##### Table of Contents



Net Loss.Our net loss for the year ended December 31, 2002 was Won
125,025 million, a decrease of Won 120,877 million, compared to a net loss of
Won 245,902 million in 2001. Impact of Inflation In view of our operating history, we believe that inflation in Korea has
not had a material impact on our results of operations. Inflation in Korea in
1999, 2000, 2001, 2002 and 2003 was 0.8%, 2.3%, 4.1%, 2.7% and 3.6%
respectively. Impact of Foreign Currency Fluctuations See Item 11Quantitative and Qualitative Disclosures about Market
RiskForeign Currency Risk. Governmental, Economic, Fiscal, Monetary or Political Policies or Factors See Item 3Risk FactorsRisks Related to Korea and Item 10Additional
InformationTaxation. 5.B LIQUIDITY AND CAPITAL RESOURCES In 2003, we reclassified certain of our activities which we historically
classified as cash flow transactions, including capital lease transactions, as
non-cash flow transactions. As a result, our net cash flows used in investing
activities decreased from Won 573,936 million to Won 530,529 million and from
Won 318,132 million to Won 297,606 million, for the years ended December 31,
2001 and 2002, respectively. Our net cash flows provided by financing
activities also decreased from Won 498,008 to Won 454,602 million and from Won
273,818 million to Won 253,292 million, for the years ended December 31, 2001
and 2002, respectively. However, such reclassification did not affect our net
loss or net assets. We had positive cash flows from operating activities of Won 52,473 million
in 2002 and Won 303,035 million in 2003, compared to negative cash flows from
operating activities of Won 34,306 million in 2001. Net cash provided by
operating activities in 2002 and 2003 primarily reflected net loss, adjusted
for depreciation and amortization. Since our inception, we have met our working capital and other capital
requirements principally from equity and debt financings. Net cash provided by
financing activities totaled Won 454,602 million and Won 253,292 million for
the fiscal years ended December 31, 2001 and 2002, respectively, and net cash
used in financing activities totaled Won 135,054 million for the fiscal year
ended December 31, 2003, primarily due to the repayment of long-term debt and
short-term borrowings in 2003. The following is a summary of our major
financing transactions:  
    
    On March 6, 2001, we issued U.S.$100 million zero coupon bonds due
2006 with warrants attached, which resulted in aggregate proceeds of
U.S.$97.4 million. On March 6, 2002, bondholders exercised their put
option and we repaid the bonds in full.
    
    On July 20, 2001, Dreamline, which was our consolidated subsidiary
until 2002, issued U.S.$30 million zero coupon bonds with warrants with
a guaranteed interest rate of 8.0% per annum after
one year from issuance, which resulted aggregate proceeds of Won 38,561
million. On July 22, 2002, bondholders exercised their put option and we
repaid the bonds in full. 37




---



##### Table of Contents




    
    On October 23, 2001, we transferred beneficiary certificates of Won
341,000 million representing our future trade receivables to Hanafos
Securitization Speciality Co., Ltd., a special purpose vehicle
established in Korea, which resulted in aggregate proceeds of Won
309,000 million.
    
    On December 24, 2001, we issued Won 27,800 million convertible
bonds with a coupon interest rate of 1.0% per annum and a guaranteed
interest rate on maturity of 2.0% per annum. On December 24, 2002, we
redeemed all of such convertible bonds.
    
    On February 26, 2002, we issued U.S.$100 million zero coupon bonds
due 2007 with warrants attached, which resulted in aggregate proceeds
of U.S.$97.8 million. Bondholders exercised their put option and we
repaid the bonds in full on September 2, 2003.
    
    On April 18, 2002, we transferred our beneficiary certificates of
Won 226,800 million representing our future receivables to HanaDream
Co., Ltd., a special purpose vehicle established in Korea, which
resulted in aggregate proceeds of Won 207,000 million.
    
    On August 2, 2002, we disposed of all of our shares in Hanaro
Technologies, Inc., our consolidated subsidiary, for Won 1,037 million.
    
    On December 24, 2002, we redeemed convertible bonds issued to Cheil
Jedang and Jae-Hyun Lee on December 24, 2001, for an aggregate amount
of Won 28,080 million.
    
    On September 2, 2003, we issued to SK Telecom commercial papers in
the aggregate amount of Won 120 billion, which resulted in aggregate
proceeds of Won 100 billion. On December 19, 2003, we repaid the
commercial papers in full.
    
    On November 18, 2003, we issued 182,812,500 new shares
(representing an aggregate of 39.6% equity interest) by way of a
private placement to a consortium of investors led by AIG, Newbridge
and TVG, which resulted in aggregate proceeds of Won 585 billion.
    
    On December 15, 2003, we drew down Won 60 billion under a senior
secured credit facility agreement which we entered into with various
financial institutions including
ABN AMRO Bank, N.V., JPMorgan Chase Bank, Korea Development Bank and
Korea Exchange Bank for a term loan facility in the aggregate amount of
Won 660 billion (or equivalent) with a five-year maturity and a revolving
credit facility in the aggregate amount of Won 60 billion. On December
19, 2003 and February 10, 2004, we further drew down Won 100 billion
(comprised of Won 24,952 million and U.S.$63.1 million) and Won 220
billion (comprised of Won 54,895 million and U.S.$138.7 million),
respectively. We repaid the Won 60 billion in full in two installments
of Won 30 billion each on February 11, 2004 and March 15, 2004. We have described each of the above transactions in more detail
further below. We have also satisfied a portion of our capital requirements through
income derived from investments made principally with the proceeds of our
equity investments. Our interest income derived from short-term financial
instruments and gains realized from the sale of short-term investment
securities in 2001, 2002 and 2003 was Won 26,696 million, Won 34,479 million
and Won 18,780 million, respectively. Short-term financial instruments consist
primarily of time deposits, money market deposit accounts and repurchase agreements that invest in short-term highly liquid
securities. These investments generate fixed rates of return. 38




---



##### Table of Contents



As of December 31, 2003, we had outstanding corporate debentures
(excluding the current portion thereof) in the amount of Won 481,753 million.
The creditors include various domestic financial institutions. The term of
such instruments range from two to three years and the interest rates range
from 6.00% to 8.59%. As of December 31, 2003, we had outstanding long-term debt (excluding the
current portion thereof) in the aggregate amount of Won 242,523 million. Of
that amount, 70.0% was denominated in Won and 30.0% was denominated in Dollars.
The Won-denominated long-term debt consisted of amounts borrowed from the
Information Promotion Fund established by the Korean government, general loans
borrowed from various domestic financial institutions, asset backed loans and
syndicated loans borrowed from various financial institutions including ABN
AMRO Bank, N.V., Development Bank of Singapore, JPMorgan Chase Bank, Korea
Development Bank and Korea Exchange Bank. The Information Promotion Fund
consists of amounts paid into government-sponsored funds by Korean
telecommunications companies as required by the terms of telecommunications
licenses. Our debt from the Information Promotion Fund bears interest rates
ranging from 3.58% to 7.25%, which rates are slightly lower than the rates
currently charged by Korean commercial banks. The terms of the loans are for
five years, with principal repaid in installments over the last three years of
such terms (including two-year grace period). Our long-term debt from domestic
financial institutions bears interest rates ranging from 6.99% to 7.60%, with
terms ranging from two to three years. Our asset backed loans bear an interest
rate of 9.23%, with a term of two years. Our syndicated loans bear interest
rates ranging from 7.6% to 8.5% with a term of five years. The
dollar-denominated long-term debt consisted of syndicated loans bearing an
interest of 4.41% with a term of five years. As of December 31, 2003, our
ratio of long-term liabilities to shareholders equity was 47.3% and our ratio
of total liabilities to shareholders equity was 92.6%. On March 6, 2001, we issued zero coupon bonds with warrants in the amount
of U.S.$100.0 million. Each bond was issued with one warrant attached thereto,
which entitles the holder to subscribe our common share at an initial exercise
price of Won 6,500 per common share, subject to certain adjustments. On June
6, 2001, the exercise price of these warrants was adjusted to Won 5,000. The
rights under the warrants are exercisable from and including June 6, 2001 up to
the close of banking business in Seoul on February 6, 2006. On March 6, 2002,
bondholders exercised their put option and we repaid the bonds in full. As of
April 30, 2004, 15,322,680 out
of 24,714,000 warrants were exercised. The warrants are listed on the
Luxembourg Stock Exchange. On July 20, 2001, Dreamline, which was our consolidated subsidiary until
2002, issued U.S.$30 million zero coupon bonds with warrants with a guaranteed
interest rate of 8.0% per annum after one year from issuance. The warrants
entitle the holder to subscribe Dreamline common shares at Won 5,000 per common
share and may be exercised from and including October 20, 2001 until and
including July 13, 2004. On July 22, 2002, bondholders exercised their put
option and we repaid the bonds in full. On December 24, 2001, we issued Won 27,800.0 million convertible bonds
with a coupon interest rate of 1.0% per annum and a guaranteed interest rate on
maturity of 2.0% per annum. The bonds may be converted to our common shares
from December 24, 2002 until December 23, 2004 at a conversion price of Won
5,000 per common share. On December 24, 2002, we redeemed all of such
convertible bonds, for an aggregate amount of Won 28,080 million. On February 26, 2002, we issued U.S.$100.0 million zero coupon bonds with
warrants to subscribe in aggregate for shares of our common stock up to U.S.$15
million at an exercise price of Won 7,388 per
common share, subject to certain adjustments. On May 27, 2002, the
exercise price of these warrants was adjusted to Won 5,977. On August 26, 2002,
there was another adjustment to the exercise price of warrants to Won 5,000 per
share. The rights under the warrants are exercisable from and including May 26,
2002 up to the close of banking business in Seoul on January 26, 2007. On July
28, 2003, bondholders exercised their put option to have their bonds redeemed
on August 26, 2003. We repaid the bonds in full (at 112.2369% of the principal
amount of the bonds) plus U.S.$196,414.57 of interest for delayed redemption on
September 2, 2003. As of April 30, 2004, none of 3,963,600 warrants were
exercised. The warrants are listed on the Luxembourg Stock Exchange. 39




---



##### Table of Contents



On November 14, 2002, we obtained from Korea Exchange Bank, or KEB, a
one-year loan facility of Won 30 billion, at an interest rate of 6.8% per
annum. On November 14, 2003, we repaid the loan in full. On March 20, 2003, we entered into a trust agreement with Korea Real
Estate Investment Trust Co., Ltd., pursuant to which we assigned to Korea Real
Estate Investment Trust, title to our information center at Ilsan-ku,
Koyang-shi, Kyunggi-do, valued at Won 57.5 billion as of the end of March 2003.
Korea Real Estate Investment Trust issued to us beneficiary securities
amounting to Won 65 billion, which we may provide to financial institutions as
collateral for loans from such institutions. On September 2, 2003, we issued to SK Telecom commercial papers in the
aggregate amount of Won 120 billion bearing an interest rate per annum of
5.50%, which resulted in aggregate proceeds of Won 116.8 billion. We used such
proceeds to redeem a part of our U.S.$100.0 million zero coupon bonds issued on
February 26, 2002. On December 19, 2003, we repaid the commercial papers in
full. On November 18, 2003, we issued 182,812,500 new shares (representing an
aggregate of 39.6% equity interest) at Won 3,200 per share by way of a private
placement to a consortium of investors led by AIG, Newbridge and TVG, which
resulted in aggregate proceeds of Won 585 billion. We used such proceeds
primarily to fund our debt service and debt repayment obligations. See Item
10Additional InformationMaterial ContractsInvestment
Agreement between Hanaro Telecom and an Investment Consortium led by AIG,
Newbridge and TVG. On December 15, 2003, we drew down Won 60 billion under a senior secured
credit facility agreement which we entered into with various financial
institutions including ABN AMRO Bank, N.V., Development Bank of Singapore,
JPMorgan Chase Bank, Korea Development Bank and Korea Exchange Bank on November
13, 2003, for a term loan facility in the aggregate amount of Won 660 billion
(or equivalent) with a five-year maturity and a revolving credit facility in
the aggregate amount of Won 60 billion. The Won-denominated long-term debt
portion bears interest rates ranging from 7.6% to 8.5% per annum and the U.S.
dollar denominated long-term debt portion bears an interest rate of 4.41% per
annum. We repaid the Won 60 billion which we drew down on December 15 in two
installments of Won 30 billion each on February 11, 2004 and March 15, 2004.
On December 19, 2003 and February 10, 2004, we further drew down Won 100
billion and Won 220 billion, respectively. We have used such proceeds to fund
our debt service and debt repayment obligations which became due since December
2003. As of April 30, 2004, the outstanding balance of the syndicated loan was
Won 300.0 billion (comprised of Won 79,847 million in Won-denominated long-term
debt and U.S.$201.8 million in U.S. dollar denominated long-term debt). In connection with the above syndicated loan, we have pledged our
buildings as collateral up to Won 531,411 million, certain of our machinery,
the book value of which was Won 1,937,437 million as of September 30, 2003, as
assignable mortgage and certain intellectual property rights as collateral. See
Item 10Additional InformationMaterial ContractsSenior Secured Credit
Facility Agreement
among Hanaro Telecom and various financial institutions for more
information on the terms and conditions of such agreement. As of December 31, 2003, we had in place agreements with Korea Exchange
Bank for the issuance of letters of credit in connection with the procurement
of equipment from foreign suppliers in the aggregate amount of U.S. $0.5
million. As of December 31, 2003, we had no letters of credit issued for our
benefit. These agreements expired without renewal on March 17, 2004. 40




---



##### Table of Contents



As of December 31, 2003, we had overdraft agreements with KorAm Bank with
a maximum line of credit of Won 10,000 million. These agreements expired
without renewal on April 9, 2004. As of December 31, 2003, we had provided four blank promissory notes as
collateral to KDB Capital Corp., Samsung Card Co., Ltd. and LG Card Services
Corp. in connection with our borrowings from and lease agreements with such
financial institutions. It is common practice for Korean companies to issue
blank promissory notes with a maximum note amount to financial institutions as
collateral in credit transactions. In the event a holder of a blank promissory
note attempts to claim an amount in excess of the maximum note amount, the
issuer of such promissory note will be required to pay the entire note amount.
However, in such event, the issuer has a right of indemnification from such
holder with respect to the excess amount. On December 19, 2003, we entered into a foreign currency forward contract
with Korea Development Bank in connection with the senior secured credit
facility agreement dated November 13, 2003, to hedge the exposure to changes in
the foreign currency exchange rate at Won 1,190.0 per U.S.$ against
U.S.$63,065,000. In relation to this forward contract, we recorded Won 173
million of gain on valuation of forward exchange contract for the year ended
December 31, 2003. On February 10, 2004, we entered into a foreign currency swap contract
under which we exchanged an aggregate of Won 161,803,305,279 (Won
116,620,000,000 with Korea Development Bank, Won 21,859,305,279 with Korea
Exchange Bank and Won 23,324,000,000 with Credit Lyonnais Bank) for
U.S.$138,744,045 with a maturity date of November 13, 2008. We also entered
into an interest swap arrangement under which we agreed to pay a 7.60% fixed
rate on the notional principal and receive three month LIBOR + spread of 3.25%. On March 3, 2004, we were provided a U.S.$ 100,000 payment guarantee by
Korea Exchange Bank in connection with the international telephone service
arrangement contract with Singapore Telecommunications. Our capital expenditure on property and equipment in 2003 totaled Won 338
billion, compared to Won 379 billion in 2002 and Won 603 billion in 2001.
Capital expenditures consisted primarily of purchasing and deploying
switchboards, fiber optic cable lines and other telecommunication equipment.
The following table sets forth the amount of our capital expenditures incurred
in 2001, 2002 and 2003: 2001
    
    2002
    
    2003(in billions of Won)Backbone network
    
    
    200.2
    
    
    
    128.5
    
    
    
    111.1Last mile connection
    
    
    348.9
    
    
    
    205.9
    
    
    
    191.7Internet Data Center
    
    
    12.8
    
    
    
    3.1
    
    
    
    4.1Others
    
    
    40.9
    
    
    
    41.3
    
    
    
    30.6Total
    
    
    602.8
    
    
    
    378.8
    
    
    
    337.5
 Our current capital expenditure plan calls for the following expenditures:  
    
    Won 356.5 billion in the year 2004; and
    
    Won 320.2 billion in the year 2005. 41




---



##### Table of Contents



Percentage Break-down of Capital Expenditures Roll-out of
    
    Building Last-
    
    OtherYear
    
    BackboneNetwork
    
    Mile Connections
    
    Expenditures2004 (expected)
    
    
    27
    %
    
    
    55
    %
    
    
    18
    %2005 (expected)
    
    
    23
    %
    
    
    51
    %
    
    
    26
    %
 We, as well as other license holders, are required to make annual
contributions to public research and development funds under the terms of the
licenses granted to us by the Korean government to operate our business. On
May 9, 2002, the MIC announced that, effective from 2002, only the NSPs whose
total voice and leased line services revenue amount for the preceding year was
more than Won 30 billion and that realized a net profit in the preceding year,
are required to make annual payments for the purpose of research and
development in the amount of 0.5% of the total voice and leased line services
revenue, to the extent that the amount of such payment does not exceed the
amount of the net profit for the preceding year. In 2003, we did not realize a
net profit and are not required to make any contribution for 2003 in 2004. Under Korean law, an employee with more than one year of service is
entitled to receive from its company a lump-sum payment upon termination of its
employment, based on the length of service and the rate of pay at the time of
termination. In 2003, we made severance payments of Won 15,556 million. Our
accrued severance indemnities as of December 31, 2003 was Won 23,876 million. At December 31, 2003, we had provided loans to our employees in the amount
of Won 13,396 million for the purchase of our common shares through our
employee stock ownership association. The loans are secured by the shares
purchased. As of December 31, 2003, we had also provided housing loans and
other loans for medical expenses and dependent educational expenses to our
employees in the amount of Won 9,608 million and Won 139 million, respectively.
These loans are secured by accrued severance benefits of the borrowing
employees. As of December 31, 2003, we had not experienced any defaults under
these loans. The loans are provided as a perk to our employees and are not
required by Korean law. Our officers and directors are not eligible for these
loans. Since 2000 until 2002, we had a program pursuant to which we provided
secured or guaranteed interest-free loans to cable network operators. The
terms of each of those loans require repayment after three years from the date
of the loan by equal installments on a quarterly basis for two years. As of
April 30, 2004, we had outstanding interest-free loans to nine cable network
operators in the aggregate amount of Won 3,228 million. The loan agreements
require the cable network operators to use the loan proceeds to upgrade their
systems so that our services can be provided over their networks. The loan
agreements also require the borrower to lease to us its cable network for our
HFC-based Internet access services upon completion of the system upgrade. Until such time as funds are required in accordance with our capital
expenditure plans, substantially all of our funds are held either in bank
deposits, short-term money market instruments, short-term financial instruments
and beneficiary certificates. The following table sets forth the amount of our
funds in short-term financial instruments, beneficiary certificates, commercial
paper and money market funds held by us at the end of each of December 31, 2001, December 31, 2002 and
December 31, 2003. 2001
    
    2002
    
    2003(in millions of Won)Money market funds
    
    
    160,262
    
    
    
    214,100
    
    
    
    Short-term financial investments
    
    
    150,040
    
    
    
    150,499
    
    
    
    219,872Commercial paper
    
    
    
    
    
    
    
    
    
    
    194,234Beneficiary certificates
    
    
    50,586
    
    
    
    17,630
    
    
    
    
 42




---



##### Table of Contents



Historically, we have been unable to generate sufficient cash flow from
operations to meet our operating needs and have principally relied on equity
and debt financings to fund our operations. Although we have started to
achieve operating income since 2002, we cannot guarantee that we will continue
to achieve or increase our operating income. Therefore we expect to continue
to rely primarily on equity and short-term and long-term debt financings to
meet our future working capital and other funding requirements. With the
equity and debt financing we obtained in November 2003, we believe that we have
sufficient working capital to meet our currently anticipated debt repayment,
capital expenditure and debt service requirements and accounts payable in 2004
and 2005 and to implement our short to mid-term business plan on a fully funded
basis. However, in order to maintain our competitive position and continue to
meet the increasing demands for service quality, availability and competitive
pricing, we may need to incur additional capital expenditures on enhancing our
last-mile networks and expanding our subscriber base, or acquire complementary
businesses, develop new products or otherwise respond to changing business
conditions or unanticipated competitive pressures or technological or marketing
hurdles. Our actual future financing requirements and our ability to obtain
additional financing will depend on our future performance, market conditions
and other factors, many of which are beyond our control and cannot be predicted
with certainty. In the event we need additional funds for such purposes, we
cannot assure you that long-term borrowings, vendor financing, or any
alternative financing will be available on favorable terms, or at all. If we
are unable to obtain such financing, we may need to modify, delay or abandon
elements of our business plan, which could have a material adverse effect on
our business, financial condition and results of operations. See
Item 3Key
InformationRisk FactorsAlthough we believe that we have sufficient working
capital to fund our operations and sustain our debt service and debt repayment
obligations in the short-term, we cannot guarantee that we will generate
sufficient cash flow from operations or obtain adequate financing on acceptable
terms or at all to implement our business plan in the mid to long-term. 5.C RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. Our research and development center consists of a technology research team
and a system technology team. We spent approximately Won 17,782 million, Won
11,417 million and Won 9,954 million in 2001, 2002 and 2003, respectively, on
R&D activities. In 2001, 2002 and 2003, our in-house R&D center conducted most
of our R&D activities. We have the following major projects currently in
process: domestic long-distance telephony network management system, regional
HFC last-mile management system, data network management system (DNMS), digital
subscriber line asymmetric multiplexer (DSLAM) network management system,
international telephony network management system, VoIP protocol verification
tool, call data-based VoIP quality management system, HFC subscriber
management system (SuMS) Phase II, mobile number portability (MNP) gateway
management system, telephone card service, telephony authentication, Biz
Ring, domestic long-distance telephony network management system, telephony
card service and international telephony network management system. 5.D TREND INFORMATION Korea, as in most parts of Asia, has seen substantial growth in the number
of Internet users. The government of Korea is supporting this growth as
evidenced in its e-Korea Vision 2006 and Broadband IT Korea, which outlines
the governments plan to prepare Korea for the next information age. The
number of Internet users climbed from approximately 10.9 million as of December
1999 to 29.2 million as of December 2003, according to the Korea Network
Information center. We are targeting Koreas Internet users who demand fast
and stable Internet access services with our high-speed Internet access
services. 43




---



##### Table of Contents



We generate, and expect to continue to generate, most of our operating
revenues from the monthly fees paid by our subscribers for high-speed Internet
access services. We also believe that as our voice services subscriber base
grows, we will also generate more revenues from our voice services. Our operating expenses consist primarily of depreciation expenses, sales
commissions paid to our sales agents, telecommunication equipment lease
expenses and interconnection charges paid to telecommunications service
providers such as SK Telecom and KT. As we have reached
our target business and network coverage, we do not expect substantial
increases in our future operating expenses. However, we expect moderate
increases in interconnection charges resulting generally from increasing voice
traffic. We recorded operating income of Won 21,428 million in 2002 and Won 70,694
million in 2003. Until 2002, the total operating loss resulted from the
significant infrastructure, marketing, technology and other costs incurred in
the development of our services. Although we cannot assure you that we will
continue generating operating profits in the future, we believe that as the
number of subscribers to our services increases, our operating margins will
improve. We generate revenues primarily from the monthly fees paid by our
high-speed Internet access services subscribers, our local telephony services
customers and our leased line services customers. In 2003, we generated
approximately 71.0%, 18.0% and 2.7% of our total revenues from our high-speed
Internet access services, our local telephony services and our leased line
services, respectively. Our ability to generate future revenues will depend on a number of
factors, certain of which are beyond our control. The prices of communications
services and products in general have fallen historically, and may continue to
fall. In order to achieve and maintain profitability, we will need to increase
the number of our subscribers and improve average revenues per user (ARPU) by
offering high-speed Internet access services bundled with telephony services
and other value added services. See Item 3  Key Information  Risk Factors
for a detailed discussion of the risks involved in any investment in our
company. 5.E OFF-BALANCE SHEET ARRANGEMENTS On October 23, 2001, we entered into a Trust Deed with Shinhan Bank, to
establish a trust with assets comprising of our future trade receivables
originating from service fees paid by our subscribers for the period commencing
on October 2001 until April 2004. Shinhan Bank issued to us beneficiary
certificates with a total value of Won 341,000.0 million. On October 23, 2001,
we also entered into an Asset Transfer Agreement with Hanafos Securitization
Speciality Co., Ltd., a special purpose vehicle established in Korea, pursuant
to which we agreed to transfer such beneficiary certificates to Hanafos
Securitization in consideration for Won 309,000.0 million. Hanafos
Securitization issued asset-backed
securities in the aggregate amount of Won 309,000.0 million. We received
Won 9,000.0 million, and third party investors purchased Won 300,000.0 million,
of such securities. Hanafos Securitization remitted the cash proceeds of Won
300,000.0 million to us on October 31, 2001. We recorded Won 309,000 million
as long-term advances received. In connection with this transaction, Hanafos
Securitization entered into an agreement with Shinhan Bank to establish a
credit line of up to Won 200 billion available until April 30, 2004, under
which Shinhan Bank has agreed to advance a loan of an amount up to the credit
limit to Hanafos Securitization if required for payment of expenses related to
the performance of the asset transfer agreement. As of December 31, 2003, the
balance of asset-backed securities payable (current) was Won 32,510 million and
we recorded Won 9,028 million as asset backed securities payable expense for
the year ended December 31, 2003. See Note 16 to our consolidated financial
statements for more information about our sale of future trade receivables. 44




---



##### Table of Contents



On April 18, 2002, we entered into a Trust Deed with Kookmin Bank, to
establish a trust with assets comprising of certain of our future trade
receivables originating from service fees paid by our subscribers for 24 months
commencing from April 2002 until April 2004. Kookmin Bank issued to us
beneficiary certificates with a total face value of Won 226,800.0 million. On
April 18, 2002, we also entered into an Asset Transfer Agreement with HanaDream
Co., Ltd., a special purpose vehicle established in Korea, under which we agreed to transfer
such beneficiary certificates to HanaDream in consideration for Won 207,000.0
million. HanaDream assumed asset-backed loans in the aggregate amount of Won
207,000.0 million. We granted Won 7,000.0 million, and other banks granted Won
200,000.0 million, of such loans. HanaDream remitted the cash proceeds of Won
200,000.0 million to us on April 25, 2002. In relation to the issuance of the
asset-backed loans, we recognize the difference between the trade receivables
and the reduced long-term debt as interest expense. As of December 31, 2003,
the balance of the current portion of the long-term debt relating to this
transaction was Won 25,902 million and we recorded Won 7,538 million as
interest expense for the year ended December 31, 2003. See Note 15 to our
consolidated financial statements. Other than the above, there are no off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources
that is material to investors. 5.F TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS Our contractual obligations, including commitments for future payments
under non-cancelable lease arrangements and short-term and long-term debt
arrangements, are summarized below and are fully disclosed in Notes 13, 15 and
16 to our financial statements. Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    years(in millions of Won)Long-Term Debt
    
    
    344,879
    
    
    
    98,970
    
    
    
    151,538
    
    
    
    94,371
    
    
    
    Debentures
    
    
    691,000
    
    
    
    195,000
    
    
    
    496,000
    
    
    
    
    
    
    
    Capital Lease Obligations1
    
    
    112,000
    
    
    
    63,430
    
    
    
    47,839
    
    
    
    731
    
    
    
    Operating Lease2
    
    
    81,014
    
    
    
    20,730
    
    
    
    40,775
    
    
    
    19,509
    
    
    
    Asset Backed Securities Payable
(trade receivable securitization)
    
    
    32,510
    
    
    
    32,510
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Cash Obligations
    
    
    1,261,403
    
    
    
    410,640
    
    
    
    736,152
    
    
    
    114,611
    
    
    
    
 As explained in Note 25(2), we do not participate in, nor secure,
financings for any unconsolidated, special purpose entities under U.S. GAAP.   1.
    
    We have capital lease agreements with Korea Hewlett Packard Co., LG Card
Services Corp., Samsung Card Co., Ltd., Shinhan Capital, Co., Ltd., Yonhap
Capital Co., Ltd. And Cisco Systems Capital Korea Ltd. for certain machinery
and equipment.2.
    
    We have operating lease agreements with Metropolitan Subway Corp.,
Powercomm, Dacom and KRX Co., Ltd. relating to the rights to use various
underground facilities to house our fiber-optic cable network, leased lines,
telecommunication equipment and automobiles. 45




---



##### Table of Contents



5.G ADDITIONAL INFORMATION Critical Accounting Policies Our financial statements are prepared in accordance with accounting
principles that are generally accepted in Korea. The preparation of these
financial statements requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses as well as the disclosure of
contingent assets and liabilities. Management bases its estimates and judgments
on historical experience and other factors that are believed to be reasonable
under the circumstances. We believe the following represents our critical
accounting polices. Revenue recognition Revenue related to installation of service and sales of customer premises
equipment is recognized when the equipment is delivered and installation is
completed. Our customer activation fees are recorded as revenues when billed
and revenue for local call and high-speed Internet access is recognized monthly
as the services are provided. We recognize revenue from other services
including leased line services when the services are provided in accordance
with the contract terms. Accounting practice and guidance with respect to the accounting treatment
of the above transactions is evolving. Any changes in the accounting treatment
could affect the manner in which we account for revenue and expenses associated
with these transactions in the future. Allowance for doubtful accounts We maintain an allowance for doubtful accounts for estimated losses, which
result from the inability of our customers to make the required payments. We
base our allowance on the likelihood of recoverability of accounts receivable
based on past experience and taking into account current collection trends that
are expected to continue. If economic or specific industry trends worsen beyond
our estimates, actual losses could exceed estimated losses, and we would need
to increase our allowance for doubtful accounts by recording additional
expense. Estimated useful lives of property and equipment We estimate the useful lives of property and equipment in order to
determine the amount of depreciation expense to be recorded during each
reporting period. The useful lives are estimated at the time the asset is
acquired and are based on historical experience with similar assets as well as
taking into account anticipated technological or other changes. If
technological changes were to occur more rapidly
than anticipated or in a different form than anticipated, the useful lives
assigned to these assets may need to be shortened, resulting in the recognition
of increased depreciation expense in future periods. Alternatively, these types
of technological changes could result in the recognition of an impairment
charge to reflect the write-down in value of the asset. We review these types
of assets for impairment annually, or when events or circumstances indicate
that the carrying amount may not be recoverable over the remaining lives of the
assets. Investments in non-listed equity securities We have investments in non-listed equity securities that are stated at
acquisition cost. If we determine that a decline in the net asset value below
the book value of an investee is temporary and recoverable, such unrecognized
valuation loss is reflected as a reduction of shareholders equity. If the net
asset value of an investee declines compared to the acquisition cost and is not
expected to recover, the carrying value of the non-listed equity security is
adjusted to the net asset value, with the resulting valuation loss charged to
current operations. As part of this evaluation, we consider the investees
results of operations, the investees performance forecast and general market
conditions. If economic or specific industry trends worsen beyond the Companys
estimates, valuation losses previously determined to be recoverable may
need to be charged as a valuation loss in current operations. 46




---



##### Table of Contents



Deferred income taxes We calculate our deferred tax assets and liabilities using the enacted tax
rates for the effect of temporary differences between the book and tax bases of
assets and liabilities. If the enacted tax rates change, we would need to
adjust our calculation of deferred tax assets and liabilities. Changes in the
amount of recorded deferred tax assets and liabilities would be recognized as a
change in the provision for income taxes in the period of change, to reflect
the enacted tax rate expected to be in effect when the deferred tax items
reverse. We record deferred tax assets to reflect the expected future tax
benefits to be realized. In determining the appropriate amount, we take into
account the level of expected future taxable income. As of December 31, 2002
and 2003, we did not recognize deferred tax assets for temporary difference and
tax effects of net loss carry forwards due to the uncertainty of the future
realization of the deferred tax benefits. U.S. GAAP Reconciliation The principal differences between Korean GAAP and U.S. GAAP as they relate
to us are the accounting for development costs, the revenue recognition for
activation fee, the treatment of pre-operating expenses, the recognition of the
license fee paid for on our behalf by our major shareholders, the recognition
of detachable stock warrants and the deferred tax effects of these differences.
In addition, under U.S. GAAP, certain subsidiaries, including Dreamline
Corporation and M-commerce Co., Ltd., would be accounted for under the equity
method and special purpose entities would be consolidated. In 2001, we recorded a net loss of Won 244,447 million under U.S. GAAP
compared to a net loss of Won 245,902 million under Korean GAAP, primarily
because of the reconciliation of the licensing cost and the different
accounting treatments of development costs, activation fees and stock
compensation expense. In 2002, we recorded a net loss of Won 162,525 million
under U.S. GAAP compared to a net loss of Won 125,025 million under Korean
GAAP, primarily because of the different accounting treatment of detachable
stock warrants and the different accounting treatment of the scope of
consolidation of special purpose entities except for the GAAP difference
carried over from prior years. In 2003, we recorded a net loss of Won 165,988
million under U.S. GAAP compared to a net loss of Won 161,299 million under
Korean GAAP, primarily because of the different accounting treatment of
detachable stock warrants and the different accounting treatment of
interest capitalization except for the GAAP difference carried over from prior
years. The shareholders equity under U.S. GAAP is lower than under Korean GAAP
by Won 115,909 million and higher by Won 25,393 million at December 31, 2002
and 2003, respectively, primarily as a result of:  
    
    the difference in the presentation of minority interest;
    
    the difference in the treatment of affiliates and special-purpose entity;
    
    the difference in the treatment of loans to employees; 47




---



##### Table of Contents




    
    the difference in the treatment of licensing costs;
    
    the difference in the treatment of detachable stock warrants;
    
    the difference in the treatment of development cost;
    
    the difference in the treatment of activation fees;
    
    the difference in the treatment of goodwill; and
    
    the difference in the treatment of interest capitalization. For further discussion of the principal differences between Korean GAAP
and U.S. GAAP as they relate to us, see Note 25 to the consolidated financial
statements. 48




---



##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6.A DIRECTORS AND SENIOR MANAGEMENT The following table sets out our directors, their age, their position on
the board and audit committee and the shareholder, if any, who nominated them.
Their business addresses are at Shindonga Fire & Marine Insurance Building,
Tae-pyong-ro 2-43, Chung-gu, Seoul, Korea, 100-733. Name
    
    Age
    
    Position
    
    Nominated byChang-Bun Yoon
    
    
    50
    
    
    Chief Executive Officer and Representative
DirectorWilfried Kaffenberger
    
    
    61
    
    
    Non-standing Director
    
    AIG Asian
InfrastructureFund
IIDavid Yeung
    
    
    54
    
    
    Non-standing Director
    
    AIG Asian
Opportunity FundYoung-Woo Nam
    
    
    52
    
    
    Non-standing Director
    
    LGSoon-Ho Hong
    
    
    51
    
    
    Non-standing Director
    
    SamsungPaul Chen
    
    
    39
    
    
    Outside Director
    
    NewbridgeMin Lae Cho
    
    
    50
    
    
    Outside Director
    
    SK TelecomVarun Bery
    
    
    45
    
    
    Outside Director
    
    TVGByung-Moo Park
    
    
    42
    
    
    Outside Director & Member of Audit CommitteeSung Kyou Park
    
    
    65
    
    
    Outside Director & Chairman of
Audit CommitteeSun Woo Kim
    
    
    62
    
    
    Outside Director & Member of Audit Committee
 The following table sets out information on our principal senior executive
officers who are not members of the board of directors. Jong Myung Lee
    
    
    50
    
    
    Senior Executive Vice PresidentSamuel Soon Yub Kwon
    
    
    46
    
    
    Senior Executive Vice PresidentJung Taik Oh
    
    
    47
    
    
    Executive Vice PresidentKyu Seok Oh
    
    
    41
    
    
    Executive Vice PresidentKyoung Lim Yun
    
    
    40
    
    
    Executive Vice PresidentJanice Lee
    
    
    43
    
    
    Executive Vice President and Chief Financial OfficerYoung Ho Cho
    
    
    57
    
    
    Executive Vice PresidentDong Sik Byun
    
    
    44
    
    
    Vice PresidentYoung Wan Cho
    
    
    45
    
    
    Vice PresidentGap Seok Oh
    
    
    47
    
    
    Vice PresidentMatt Lee
    
    
    45
    
    
    Vice PresidentJung Sik Suh
    
    
    34
    
    
    Vice PresidentHyung Jun Song
    
    
    46
    
    
    Vice PresidentGeon Jun Park
    
    
    47
    
    
    Vice PresidentSeung Gil Park
    
    
    50
    
    
    Vice President
 Chang Bun Yoonhas served as a Chief Executive Officer and Representative
Director since August 2003. From April 2000 until March 2003, he served as
President of the Korea Information Society Development Institute (KISDI). From
February 1997 until March 2000, he served as Vice President of
KISDI. From April 1989 until February 1997, he served as director in
charge of Strategy, Policy Development and Trends Analysis at KISDI. From August
1987 until March 1989, he served as Senior Researcher at Korea Institute for
Industrial Economics & Trade. From August 1986 until August 1987, he served as
professor at the University of Houston College of Business Administration. Mr.
Yoon received a bachelor of science in industrial engineering from Seoul
National University in 1978 and masters in business administration from
Columbia University in 1981. He also received a Ph.D. in business
administration from Northwestern University Kellogg School of Management in
1986. 49




---



##### Table of Contents



Wilfried Kaffenbergerhas served as a non-standing Director of Hanaro
Telecom since November 2003. He is currently serving as Managing Director of
Emerging Markets Partnership and as Chief Executive Officer of AIG Asian
Infrastructure Fund II. Prior to joining Emerging Markets Partnership, he was
with International Finance Corporation for over 25 years in various capacities,
including as a Vice President Investment Operations. Mr. Kaffenberger received
a bachelor of science in chemical engineering from Princeton University in 1966
and masters in business administration from Harvard Graduate School of Business
in 1968. Mr. Kaffenberger is serving as a non-standing Director of Hanaro
Telecom as the designee of AIG Asian Infrastructure Fund II to our board of
directors. David Yeunghas served as a non-standing Director of Hanaro Telecom since
November 2003. He is currently serving as Head of AIGs infrastructure
investments in developing markets and as Managing Director of AIG Global
Investment Corp in Hong Kong. Prior to joining AIG in Hong Kong in 1995, Mr.
Yeung was with Bell Canada Enterprise and Northern Telecom managing telecom and
technology investments in North America. Mr. Yeung received a bachelor of
science from Indiana University in 1972 and masters in business administration
from The Graduate School of Business, University of Chicago in 1974. He is a
U.S. certified public accountant as well as a Canadian chartered accountant.
Mr. Yeung is serving as a non-standing Director of Hanaro Telecom as the
designee of AIG Asian Opportunity Fund to our board of directors. Young-Woo Namhas served as a non-standing Director of Hanaro Telecom
since March 2000. From 1996 until 1999, he served as an executive vice
president in charge of corporate administration at LG Information &
Communications, Ltd. In 1995, he also served as a managing director of LG
Information & Communications, Ltd. in charge of finance and public relations.
In 1973, Mr. Nam received a bachelor of arts in business administration from
Seoul National University. He also received masters in international business
from Sogang University in 1992. Mr. Nam is serving as a non-standing Director
of Hanaro Telecom as LGs designee to our board of directors. Soon-Ho Honghas served as a non-standing Director of Hanaro Telecom since
March 2002. From 2001 until 2002, he served as the Executive Vice President in
charge of IMT-2000 System R&D team at Samsung Electronics Co., Ltd. and is
currently the Executive Vice President in charge of Network Business Unit of
Samsung Electronics. Mr. Hong received a bachelor of electronic engineering
from Sogang University. Mr. Hong is serving as a non-standing Director of
Hanaro Telecom as Samsung Electronics designee to our board of directors. Paul Chenhas served as an outside Director of Hanaro Telecom since
November 2003. He is currently a Managing Director of Newbridge Capital based
in Hong Kong and works with the five other partners of Newbridge to spearhead
the firms investment activities across Asia. Mr. Chen played a key role in
Newbridges investments in Hanaro Telecom and Korea First Bank and currently
serves as a Director and Compensation Committee member of Hanaro Telecom and
Director and Audit Committee member of Korea First Bank. Prior to joining
Newbridge in 1996,
Mr. Chen worked in the investment banking division at Morgan Stanley & Co.
in New York and Hong Kong as well as Bankers Trust Company in New York. Mr.
Chen, fluent in Mandarin, received a bachelor of science in applied
economics and business management from Cornell University and masters in
business administration from Harvard Business School. 50




---



##### Table of Contents



Min Lae Chohas served as an outside Director of Hanaro Telecom since
March 2004. In 2001, Mr. Cho served as a non-standing Director of Hanaro
Telecom. He joined SK Telecom in March 1997 and served as a senior vice
president of the Planning and Control Division, the IMT-2000 Business Planning
Division and Strategy and Planning Division respectively at SK Telecom since
July 1998 and is currently the a senior vice president of the Corporate
Relations Division of SK Telecom. From June 1988 until March 1997, he served
as manager, senior manager and director of Korea Mobile Telecom. Mr. Cho
received a bachelor of arts in public administration from Korea National Open
University in 1994 and masters in business administration from Seoul National
University in 1996. Mr. Cho is serving as an outside Director of Hanaro
Telecom as SK Telecoms designee to our board of directors. Varun Beryhas served as an outside Director of Hanaro Telecom since March
2004. In April 1998, he co-founded, and has since served as a Managing Director
of, Telecom Venture Group Limited (TVG). From May 1995 until March 1998, he
served as a Director of the Telecom Group at the Asian Infrastructure Fund.
From September 1992 until May 1995, he served as a Director of the Telecom
Investment Banking Division at Credit Suisse First Boston. From September 1985
until August 1992, he was a management consultant with McKinsey & Co. in New
York and Tokyo. Mr. Bery received a Bachelor of Arts, summa cum laude, from
Yale University in 1981 and a Masters in Business Administration from Harvard
University, where he was a George F. Baker Scholar. Mr. Bery is serving as an
outside Director of Hanaro Telecom as TVGs designee to our board of directors. Byung-Moo Parkhas served as an outside Director and member of the audit
committee of Hanaro Telecom since November 2003 and was re-appointed to such
roles at the annual general meeting of shareholders in March 2004. Since 2003,
he has served as a Managing Director of Newbridge Capital Korean Ltd. From 2000
until 2003, he served as Representative Director of PLENUS Entertainment. From
1995 until 2000, he was a partner of Kim & Chang law firm in Korea. Mr. Park
received a law degree from the Harvard University Law School in 1994 and
masters of laws from Seoul National University in 1998. Mr. Park is serving as
an outside Director of Hanaro Telecom as Newbridges designee to our board of
directors. Sung Kyou Parkhas served as an outside Director and chairman of the audit
committee of Hanaro Telecom since March 2000. From 1987 until 1995, he served
as President of Daewoo Telecom. From 1995 until 1997, he served as
Representative Director and Chief Executive Officer of Daewoo Telecom. From
1998 until 1999, he served as Chairman and Chief Executive Officer of Daewoo
Maghreb S.A. From 1996 until 1998, Dr. Park served as Chairman of
Telecommunications Industry Association of Korea. He received a bachelor of
electrical engineering from MIT. He also received masters in electrical
engineering from Northeastern University in 1966 and a Ph.D. in electrical
engineering from the University of Texas at Austin in 1971. Sun Woo Kimhas served as an outside Director and member of the audit
committee of Hanaro Telecom since March 2003. Since 2000, he has served as a
director of Korea Broadcasting System and is a member of the Korean
Broadcasting Commission. From 1997 until 2001, he was a member of the Advisory
Council on Democratic and Peaceful Unification. Since 1992, he served as an
Executive Director of Pusan Daily. Mr. Kim received a bachelor of arts in
political science from the Seoul National University in 1965 and masters
in business administration from Dankook University in 1983. Jong Myung Leehas served as a Senior Executive Vice President and the
Head of the R&D center of Hanaro Telecom since November 1999, and was the Head
of the IMT-2000 Business Division. He
received a bachelor of science in electronic engineering in 1976 and
masters in electronic engineering in 1978, both from Seoul National University.
He acquired a Ph.D. in electronic engineering from North Carolina University in
1987 and obtained a post-doctorate standing from the University of
Massachusetts in the area of designing DS-CDMA in 1995. 51




---



##### Table of Contents



Samuel Soon Yub Kwonhas served as a Senior Executive Vice President since
December 2003 and Chief Corporate Coordination Officer of Hanaro Telecom since
April 2004. From October 2000 until November 2003, he served as Representative
Director of Hansol iGlobe Co., Ltd. From January 2000 until September 2000, he
served as Vice President of Hansol M.com. From May 1987 until December 1999, he
was an attorney with Paul Wharton & Garrison. Mr. Kwon received a bachelor of
laws from Seoul National University in 1980, masters of laws from the
University of Pennsylvania in 1984 and a Ph.D. in law from Columbia University
in 1987. Jung Taik Ohhas served as a Senior Vice President and the Head of the
Sales Division of Hanaro Telecom since April 2004. From October 1992 until
November 1995, he served as a professor at the National University of
Singapore. From October 1992 until February 1995, he served as the Head of the
Planning Department at Korean Information Society Development Institute
(KISDI). Mr. Oh received a bachelor of economics from Sogang University in
1982, masters in business administration from the University of Michigan in
1986 and a Ph.D. in business administration from the University of Illinois in
1992. Kyu Seok Ohhas served as an Executive Vice President and the Head of the
Corporate Strategy Unit of Hanaro Telecom since April 2004. From December 2001
until December 2003, he served as the Chief of Strategy Development at LG
Telecom. Mr. Oh received a bachelor of economics from Seoul National University
in 1986 and masters in business administration from Seoul National University
in 1988. Kyoung Lim Yunhas served as an Executive Vice President of Hanaro Telecom
in charge of business planning and marketing since February 2004. From January
2000 until February 2004, he served as Vice President of Hanaro Telecom. From
December 1998 until December 1999, he served as a Managing Director of the
Marketing Unit of Hanaro Telecom. He acquired a Ph.D. in management policy in
1997 and a masters degree in management science in 1988 from Korea Advanced
Institute of Science and Technology. He also received a bachelor of arts in
business administration from Seoul National University in 1986. Janice Leehas served as an Executive Vice President and Chief Financial
Officer of Hanaro Telecom since May 2004. From August 2000 until May 2004, she
served as a Vice President of the Finance Department of Volvo Construction
Machinery Korea. From November 1998 until July 2000, she served as Financial
Controller at the U.S. branch of Daewoo Heavy Industry. Ms. Lee received a
bachelor of arts in English from E-hwa Womens University in 1983, masters in
finance from Ohio State University in 1986 and masters in accounting from
Cleveland State University in 1990. Young Ho Chohas served as an Executive Vice President of Hanaro Telecom
since February 2004 and is currently the Head of the Corporate Sales I and
Corporate Business Divisions of Hanaro Telecom. From August 2002 until February
2004, he served as Senior Vice
President of Hanaro Telecom. From August 1997 until August 2002, he served
as an Executive Vice President and Senior Manager of the Sales Division of
Dreamline. From January 1973 until March 1997, he served as a Chief Officer of
the Korean National Intelligence Service. Mr. Cho received a bachelor of
science in electronics from the Korean Military Academy in 1969 and masters in
business administration from Dongguk University in 1981. Dong Sik Byunhas served as a Vice President and is the Head of the
Business Development Unit of Hanaro Telecom since November 2003. From November
2001 to October 2003, he served as Executive Director and Chief Technology
Officer of SK The Contents Company. Mr. Byun received a bachelor of
electronics engineering from Inha University in 1987 and masters in business
administration from Sogang University in 2001. 52




---



##### Table of Contents



Young Wan Chohas served as a Vice President of Hanaro Telecom since
December 2002 and is currently the Head of the Finance Management Unit of
Hanaro Telecom. He is also currently a Senior Vice President and Internal
Auditor of Hanaro T&I, Inc., our subsidiary. From January 2002 until December
2002, he served as a Managing Director and the Head of the Finance Team of
Hanaro Telecom. From April 2000 until December 2001, he served as a Managing
Director and the Head of the Financial Strategy Unit of Hanaro Telecom. From
September 1997 until March 2000, he served as a Senior Manager and the Head of
the Finance Unit of Hanaro Telecom. From January 1985 until September 1997, he
served as a Senior Manager of the Finance Unit of Dacom. From July 1983 until
November 1984, he was employed with Goldstar LG Electronics Inc. (then known as
Goldstar). Mr. Cho received a bachelor of arts in business administration from
Korea University in 1983 and masters in business administration from the
Helsinki School of Economics and Business Administration in 2000. Gap Seok Ohhas served as a Vice President of Hanaro Telecom since
November 2002 and is currently the Head of the Corporate Relations Unit of
Hanaro Telecom. From January 2002 until November 2002, he served as a Managing
Director and the Head of the Sales Planning & Support Team of Hanaro Telecom.
From February 2001 until December 2001, he served as a Managing Director and
the Head of the Corporate Sales I Unit of Hanaro Telecom. From November 1999
until February 2001, he served as a Managing Director and the Head of the
Internet Business Unit of Hanaro Telecom. From July 1983 until November 1999,
he served as a Managing Director and the Head of the External Affairs Unit of
Dacom. Mr. Oh received a bachelor of arts in psychology from Seoul National
University in 1979, masters in business administration from Seoul National
University in 1981 and masters in business administration from the Helsinki
School of Economics and Business Administration in 2001. Matt Leehas served as a Vice President of Hanaro Telecom since November
2001 and the Head of the Metropolitan South branches since January 2003. He
previously served as Vice President of Nokia Networks, Managing Director of
Excel Tech, General Manager of Hyundai Electronics, and Member of Technical
Staff in AT&T Bell Laboratories. Mr. Lee received a bachelor of arts in
mathematics in 1984, masters in mathematics in 1985 and masters in statistics
in 1986 from the University of Illinois, Urbana-Champaign. Jung Sik Suhhas served as a Vice President and the Head of the Finance
Strategy Unit of Hanaro Telecom since April 2004. From September 1995 to July
2003, he served as director of Arthur D. Little Korea, Inc. Mr. Suh received a
bachelor of international economics from Seoul National University in 1992 and
masters in business administration from U.C. Berkeley in 2000. Hyung Jun Songhas served as a Vice President and the Head of the
Management Support Unit of Hanaro Telecom since March 2004. He is also
currently a Senior Vice President and non-
standing Director of Hanaro Realty Development & Management Co., Ltd., our
subsidiary. From January 1982 to October 1997, he served as Manager of the
Business Management team at KEPCO. Mr. Song received a bachelor of electronics
engineering from Hanyang University in 1982 and masters in information and
communication management from New York University in 2000. Geon Jun Parkhas served as a Vice President and the Head of Network
Operations Unit of Hanaro Telecom since March 2004. From December 1992 to October 1997, he served as
Director of Network Cable Planning of Dacom. Mr. Park received a bachelor of
electronics engineering from Ah-ju University in 1983. 53




---



##### Table of Contents



Seung Gil Parkhas served as a Vice President and the Head of broadband
Internet business and the HFC business of Hanaro Telecom since March 2004. He
is also currently a Vice President and non-standing Director of Hanaro Web(n)TV
Co., Ltd., our subsidiary. From December 1997 to May 1999, he served as Head
of the Information and Communication Unit of KEPCO. Mr. Park received a
bachelor of electrical engineering from Jeon-buk University in 1989 and masters
in computer science from Joong-Ang University in 1999. There are no family relationships between our directors and officers. 6.B COMPENSATION We paid an aggregate of Won 845.1 million as compensation during 2003 to
our directors and officers as a group. At the shareholders meeting held on
March 26, 2004, our shareholders authorized payment of amounts up to an
aggregate of Won 2,000.0 million to our directors (excluding officers) as
compensation for the year 2004. We also granted to our directors and executive officers 161,100 stock
options during 2000 under our stock purchase option plan. For a detailed
description of the stock options, as well as the stock purchase option plan,
see Item 6Directors, Senior Management and
EmployeesShare OwnershipStock
Purchase Option Plan. The aggregate amount we set aside or accrued during the year ended
December 31, 2003 to provide retirement and severance benefits for our
directors and executive officers (including our statutory auditor) was Won
1,180 million. During 2003, we paid retirement allowances of Won 2,512 million
to retiring directors and executive officers. 6.C BOARD PRACTICES Board of Directors General.The board of directors has the ultimate responsibility for the
administration of the affairs of Hanaro Telecom. Our Articles of
Incorporation, as currently in effect, provide for a board of directors
comprised of standing directors and non-standing directors, including outside
directors. Non-standing directors have the same rights and duties as those of
standing directors, but are not officers, or otherwise employees, of Hanaro
Telecom. Under the Korean Commercial Code and our Articles of Incorporation,
directors serve a three-year term but if the term ends prior to the date of the
ordinary general meeting of shareholders in the last fiscal year of their term,
the term will be extended until the close of the ordinary general meeting of
shareholders. Our Articles of Incorporation provide for a board of directors
of eleven in total. The directors are elected at a general meeting of
shareholders by a majority of the vote of the shareholders present
or represented, subject to such majority equaling at least one-quarter of
all issued and outstanding shares with voting rights. None of our directors is
party to a service contract with our company that provides for benefits upon
termination of employment. Shareholders Agreement.The major shareholders of our company forming
the investment consortium led by AIG, Newbridge and TVG are parties to a
shareholders agreement governing the terms of their investments in our
company. See Item 7Major Shareholders and Related Party
TransactionsMajor Shareholders for more information with respect to the
beneficial ownership of our common shares by the major shareholders. Wilfried
Kaffenberger, David Yeung, Paul Chen, Varun Bery and Byung Moo Park were
appointed to the board of directors of Hanaro Telecom pursuant to the terms of
the agreement. 54




---



##### Table of Contents



Under the Korean Commercial Code and our board regulations, any director
that has a special interest with respect to the agenda of a board meeting may
not exercise his voting rights in such board meeting. Audit Committee.Under the Securities and Exchange Act, we must
establish an audit committee instead of appointing a statutory internal
auditor. Our Articles of Incorporation provide that the Audit Committee, which
must consist of three or more outside directors, is responsible for examining
internal transactions and potential conflicts of interest and reviewing
accounting and other relevant matters. The Audit Committee has the right to
request the board of directors to convene a shareholders meeting by providing
a document that sets forth the agenda and reasons. Our board of directors established the Audit Committee on March 17, 2000
in accordance with our Articles of Incorporation. Our Audit Committee consists
of three outside directors: Byung Moo Park, Sung Kyu Park and Sun Woo Kim.
Mr. Sung Kyou Park serves as the chairman of the Audit Committee. Outside Directors Our Articles of Incorporation provide that no less than half the total
number of directors must be outside directors, in order to enhance our internal
controls and to protect our investors. The outside directors are appointed
from among those persons who do not have a special relationship with us that
would interfere with the exercise of their independent judgment. Our Articles
of Incorporation prohibit a person who does not have the qualifications under
the Securities and Exchange Act or any other statutes from being appointed as
an outside director, and in the event that an outside director falls under one
of these categories, then he or she will be disqualified from office. Paul Chen, Min Lae Cho, Varun Bery, Byung Moo Park, Sung Kyou Park and Sun
Woo Kim currently serve on the board of directors as outside directors. 6.D EMPLOYEES As of December 31, 2003, we had a total of 1,489 employees and an
additional 119 full-time employees employed on a contractual basis. The
following chart shows the number of permanent employees by functional areas. Number of EmployeesDivision
    
    December 31, 2001
    
    December 31, 2002
    
    December 31, 2003Planning & Management
    
    
    189
    
    
    
    132
    
    
    
    169Information Technology
    
    
    58
    
    
    
    65
    
    
    
    54Internet Division
    
    
    
    
    
    
    115
    
    
    
    105Marketing and Sales
    
    
    458
    
    
    
    480
    
    
    
    565Network and Engineering
    
    
    643
    
    
    
    560
    
    
    
    542Research & Development
    
    
    65
    
    
    
    74
    
    
    
    54Total
    
    
    1,413
    
    
    
    1,426
    
    
    
    1,489
 None of our employees is represented by a labor union. There is an
employee consultative committee consisting of both management and employee
representatives to address any labor issues. We have not experienced any work
stoppages. We consider our relations with employees to be good. 55




---



##### Table of Contents



As with most other Korean companies, our employees are granted wage
increases annually. In addition, we provide other benefits to our employees,
including subsidized housing, medical care and financial assistance with the
education of their children. In accordance with Korean labor laws, employees who terminate their
employment with more than one year of service are entitled to receive a lump
sum payment based on the length of their service and their rate of pay at the
time of leaving our employment. They do not receive a pension annuity from us. As of December 31, 2003, we have provided loans to our employees in the
amount of Won 8,808 million for the purchase of our common shares through our
employee stock ownership association. The loans are secured by the shares
purchased. As of December 31, 2003, we have also provided housing loans to our
employees in the amount of Won 1,382 million. These loans are secured by
accrued severance benefits of the borrowing employees. As of December 31,
2003, we have not experienced any defaults under these loans. The loans are
provided as a benefit to our employees and are not required under Korean law.
Our officers and directors are not eligible for these loans. During 2003, we averaged 42 part-time employees at the end of each month. 6.E SHARE OWNERSHIP No director or member of senior management beneficially owns 1% or more of
our shares on an individual basis. Stock Purchase Option Plan We may, by special resolution of the shareholders, grant stock purchase
options to our officers and employees who have contributed or are qualified to
contribute to the establishment, management and technical innovation of our
company pursuant to our Articles of Incorporation and the Korean Securities and
Exchange Act, exercisable for up to an aggregate of 10% of our total number of
issued and outstanding shares. However, stock purchase options may not be
granted to (1) our largest shareholder or its related parties, (2) any
shareholder or its related parties who owns, directly or indirectly, 10% or
more of our outstanding shares having voting rights or certificates of capital
contribution of paid-in capital, or (3) an officer or employee who becomes a
major shareholder as described in paragraph (2) above upon exercise of the
stock purchase option. According to our Articles of Incorporation, the stock purchase options are
exercisable for our common shares at an exercise price per share determined
according to relevant laws and regulations. The stock purchase option must be
exercised within five years from the third anniversary of the date of the
special resolution of the shareholders granting the stock purchase option. The stock purchase option may be cancelled by a resolution of our board of
directors (1) if the officer or employee holding the option resigns voluntarily
or is discharged from office; (2) if the officer or employee holding the option
by willful misconduct or by negligence inflicts substantial or material damage
to our company, or (3) in the event of the occurrence of any cause for
cancellation of stock purchase options specified in the stock purchase option
agreement between our company and the officer or employee. 56




---



##### Table of Contents



On March 1, 1999, we granted stock purchase options to our then Director,
President and Chief Executive Officer, Mr. Yun-Sik Shin. Mr. Shin resigned
from his offices on March 28, 2003. Until his options are cancelled by a
resolution of our board of directors, Mr. Shin may exercise his options to
purchase 50,000 shares of common shares at the price of Won 5,630 per share
during the period beginning on March 1, 2002 and ending February 27, 2007. On
October 1, 1999, we granted stock options to some of our directors, officers
and statutory internal auditor to purchase 120,000 shares of common shares at
the price of Won 19,910 during the period beginning on October 1, 2002 and
ending on September 30, 2007. The exercise price per share was set at the
minimum price permitted under the working rules of the Korean Securities and
Exchange Act applicable at the time the options were granted. Pursuant to the
working rules of the Korean Securities and Exchange Act, the formula for
determining permissible price for the stock purchase options granted on March
1, 1999 and October 1, 1999 was the higher of (i) the average of the closing
prices of the common shares during a three month period prior to the date of
the special resolution of the shareholders granting the stock purchase option
and (ii) the par value of the common shares. On March 17, 2000, we granted 882 of our employees (including certain
directors and officers), employed by us as of December 31, 1999, stock purchase
options to purchase a total of 1,771,566 common shares at a price of Won 17,750
per share during the period beginning March 18, 2003 and ending March 17, 2008.
We allocated the stock purchase options based on employee seniority and
position. The employees exercise price per share was set at the minimum price
permitted under the amendment of the working rules of the Korean Securities and
Exchange Act, effective from March 15, 2000. Under the price formula currently
in effect, the option price per share shall be the higher of (i) the average of
(x) the weighted average of the closing prices of the common shares during a
two-month period immediately preceding the option granting date, (y) the
weighted average of the closing prices of the common shares during the
one-month period immediately preceding the option granting date, and (z) the
weighted average of closing prices of the common shares during the one-week
period immediately preceding the option granting date, and (ii) the par value
of the common shares. As of December 31, 2003, we had outstanding employee stock options to
purchase a total of 1,595,404 common shares. No stock options were granted at the shareholders meetings held in 2001,
2002, 2003 and 2004. Stock Ownership Association An employee stock ownership association under the Korea Securities and
Exchange Act is an association formed by the employees of a corporation for the
purpose of acquiring and managing stocks issued by such corporation. Only
full-time workers of a corporation may join the employee stock ownership
association and officers elected by a shareholders meeting, shareholders of
such corporation (excluding certain minority shareholders), and part-time
workers are not qualified to become a member of the association. The right to
become a member of the employee stock ownership association must be available
to all full-time employees and the regulations governing the association must
contain certain matters relating to the operation and management of the
association. We established our employee stock ownership association in November 1997. As
of December 31, 2003, 539 employees of Hanaro Telecom were depositing members
of the employee stock ownership association and the association held 2,849,260
shares of our common shares. As of April 30, 2004, 506 employees of Hanaro
Telecom were members of the employee stock ownership association and the
association held 1,490,892 shares of our common shares. 57




---



##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 7.A MAJOR SHAREHOLDERS The following table sets forth information with respect to the beneficial
ownership of our common shares, on a fully diluted basis, as of December 31,
2003, by (1) each person known to us to own beneficially more than five percent
(5%) of our common shares and (2) all of our directors and executive officers
as a group. Shares Beneficially Ownedas of December 31, 2003Name
    
    Number
    
    PercentAIG-Newbridge-TVG Consortium
    
    
    182,812,500
    
    
    
    39.56
    %Dacom and its affiliated companies
    
    
    36,354,777
    
    
    
    8.81
    %Samsung Electronics Co., Ltd. and its affiliated company
    
    
    23,542,281
    
    
    
    5.09
    %SK Telecom Co., Ltd. and its affiliated company
    
    
    8,478,752
    
    
    
    1.83
    %Directors and Executive Officers
    
    
    64,537
    
    
    
    0.014
    %
 The number of shares held by AIG-Newbridge-TVG consortium includes shares
directly held by Newbridge Asia HT, L.P., AIF II NT Ltd., AOF NT, Ltd. and
United Classic Investments limited, five other HT Holdings L.P. companies. As
of December 31, 2003, Newbridge directly owned 49,535,799 common shares, AIF II
NT Ltd. directly owned 38,456,250 common shares, AOF NT, Ltd. directly owned
24,721,875 common shares, United Classic Investments directly owned 20,392,746
common shares and HT Holdings L.P. companies directly owned 49,705,830. The number of shares held by Dacom includes shares directly held by LGEI
Inc. and LG Telecom Co., Ltd. Dacom and the other two companies are members of
the LG chaebol. As of December 31, 2003, Dacom directly owned 19,754,656
common shares, LGEI directly owned 11,175,047 common shares and LG Telecom
directly owned 5,397,575 common shares. The number of shares held by Samsung Electronics includes shares directly
held by Seoul Commtech Co., Ltd. Both companies are members of the Samsung
chaebol. As of December 31, 2003, Samsung Electronics directly owned
23,542,281 common shares and Seoul Commtech directly owned 181,126 common
shares. The number of shares held by SK Telecom includes shares directly held by
SK Engineering & Construction Co., Ltd. Both companies are members of the SK
chaebol. As of December 31, 2003, SK Telecom directly owned 8,220,000 common
shares and SK Engineering & Construction directly owned 258,752 common shares. The following table describes transactions known to Hanaro Telecom through
publicly available information involving holders of over 5% of Hanaro Telecoms
outstanding common stock during the period beginning on January 1, 2001 and
ending on April 30, 2004 that resulted in a change of greater than 1% in the
percentage ownership by that shareholder of Hanaro Telecoms outstanding
shares. Shares Owned
    
    
    
    
    
    
    
    
    
    Shares OwnedPrior to
    
    
    
    
    
    Number of Shares
    
    After theName of Shareholder
    
    Date of Transaction
    
    Transaction
    
    Percentage
    
    Purchased (Sold)
    
    Transaction
    
    PercentageKorea Thrunet Co., Ltd.
    
    June 2000 to
November 2001
    
    
    12,678,866
    
    
    
    4.8
    %
    
    
    (12,678,866
    )
    
    
    
    
    
    
    0
    %AIG-Newbridge-TVG consortium
    
    November 18, 2003
    
    
    0
    
    
    
    0
    %
    
    
    182,812,500
    
    
    
    182,812,500
    
    
    
    39.56
    %SK Telecom Co., Ltd
    
    December 23, 2003
    
    
    15,117,710
    
    
    
    5.41
    %
    
    
    (6,897,710
    )
    
    
    8,220,000
    
    
    
    1.78
    %
 None of Hanaro Telecoms common shares entitles the holder to any
preferential voting rights. 58




---



##### Table of Contents



According to Deutsche Bank, depositary for Hanaro Telecoms ADSs, as of
December 31, 2003, 2,302,312 shares of Hanaro Telecoms common shares were held
in the form of ADRs and there were 1,444 ADR holders of record in the United
States as of February 17, 2004. According to Hanaro Telecoms register of
shareholders, as of December 31, 2003, there were 126,519 holders of common
shares of record worldwide. As of April 30, 2004, there were approximately 14
record holders of Hanaro Telecoms common shares who are nominees in the United
States, whose shareholdings represented approximately 2.1% of the outstanding
common shares on that date. Accordingly, the number of such record holders does
not represent the number of beneficial owners of our common shares in the
United States. We expect that the number of beneficial owners of our common
shares in the United States exceeds 1,000. As of April 1, 2001, we and our Korean affiliates have been designated as
member companies of a business group subject to restrictions on debt
guarantees as well as a business group subject to restrictions on mutual
shareholding by the Korean Fair Trade Commission based on the new criteria
prescribed by the amended Monopoly Regulation and Fair Trade Act. Hanaro Telecom knows of no arrangements the operation of which may at a
later time result in a change of control. 7.B RELATED PARTY TRANSACTION Relationship with AIG-Newbridge-TVG Consortium As of December 31, 2003, AIG-Newbridge-TVG consortium beneficially owned
an aggregate of 39.56% of our outstanding common shares. On November 18, 2003 (the Closing Date), we issued an aggregate of
182,812,500 shares of the common stock of the Company, par value Won 5,000 per
share at the purchase price of Won 3,200 per share (the Investment Shares)
having an aggregate value of Won 585 billion to AIF II NT, Ltd., AIG Asian
Opportunity Fund L.P. and Newbridge Asia HT, L.P., (the Sponsors), and
certain other co-investors designated by the Sponsors (together with the
Sponsors, the Investors) pursuant to an investment agreement dated September
9, 2003 (the Investment Agreement). The Investment Agreement provides that
the Company will not take certain significant corporate actions without the
consent of the Investors so long as the Investors, together with their
affiliates, continue to hold an aggregate of 15% or more of the Companys
outstanding common shares. In connection with the Investment Agreement, we entered into a letter
agreement dated September 9, 2003, providing for the reimbursement of certain
fees and expenses of the Investors incurred in connection with the transactions
under the Investment Agreement. We also entered into an Investors Rights
Agreement with the Investors and a Management Rights Agreement with certain of
the Investors, each dated as of the Closing Date. Investors Rights Agreement Pursuant to the Investors Rights Agreement, we have provided certain
registration rights to the Investors with respect to the Investment Shares. We
have agreed to file with the U.S. Securities and Exchange Commission a shelf
registration statement on Form F-3 covering resales of the Investment
Shares by the holders thereof within 90 days after the written request of the
Investors representative
(made not less than 360 days after the Closing Date). We are not required to
effect and complete more than three such shelf registration statements. In
addition, such holders have certain rights to piggyback on other registration
statements relating to our common shares and the right to cause the Company to
effect up to six demand registrations pursuant to the terms of the Investors
Rights Agreement. The term of this agreement terminates upon the earlier of
(i) the sixth anniversary of the Closing Date or (ii) the date as of which all
of the registrable securities have been sold pursuant to a registration
statement or the holders are permitted to sell their registrable securities
under Rule 144(k) under the Securities Act. 59




---



##### Table of Contents



Management Rights Agreement Pursuant to the Management Rights Agreement, we have granted to certain of
the Investors or their affiliates, certain management rights in Hanaro Telecom
so long as such Investor owns any Investment Shares, including the right to
make proposals, recommendations and suggestions to our board of directors, the
right to discuss our and our subsidiaries business and affairs with our board
of directors, officers and independent accountants, the right to examine our
books, records and documents as may be reasonably requested and the right to be
informed in advance with respect to any significant corporate actions. See Item 10Additional InformationMaterial ContractsInvestment
Agreement between Hanaro Telecom and an Investment Consortium led by AIG,
Newbridge and TVG. Relationship with Dacom As of December 31, 2003, Dacom and its affiliated companies beneficially
owned 8.81% of our common shares. In December 1998, we entered into an interconnection agreement with Dacom,
under which we interconnect to Dacoms domestic and international long-distance
networks. The interconnection charges are based on the standard rates
established by the Korean government. In January 1999, we entered into an
interconnection agreement with respect to the data communications network of
Dacom. In July 2001, we entered into an interconnection agreement with Dacom
with respect to our new local telephony service areas. The interconnection
charges are based on the standard rates established by the Korean government.
In September 2001, we entered into an agreement with Dacom with respect to the
interconnection of telecommunication facilities and the provision of
information, for a term of two years and renewable for another two years in the
absence of any request for an amendment to the agreement by any party. We are a party to an agreement concerning combined billing with Dacom.
Under the agreement, our subscribers that use Dacom for domestic and
international long-distance services receive only one monthly statement for
local, long-distance and international call charges. In addition, we acquired from Dacom an indefeasible right to use two Korea
 Japan international leased lines each supporting a bandwidth capacity of
155Mbps for U.S.$7.28 million in April 2001, three Korea  Asia international
leased lines (half circuits) each supporting a bandwidth capacity of 2Mbps for
approximately U.S.$396.07 million in March 2002, two Korea  Vietnam
international leased lines (half circuits) each supporting a bandwidth capacity
of 2Mbps for approximately Won 159,940,000 in March 2002 and two Korea 
Belgium leased lines (half circuits) each supporting a bandwidth capacity of
2Mbps for approximately Won 236,132,000 in April 2002. We also lease from Dacom office space for our branch offices located in
Pusan, Kwachoen, Youngdeungpo-Ku in Seoul and Namdong-Ku in Inchon. 60




---



##### Table of Contents



Relationship with LG chaebol The LG chaebol includes Dacom, LGEI and LG Telecom and their affiliated
companies. In February 2001, we entered into an interconnection agreement with
LG Telecom under which LG Telecoms personal communications network is
connected to our local telephone network. The interconnection charges are based
on the standard rates established by the Korean government. Pursuant to that
agreement, we entered into a further agreement with LG Telecom in July 2001,
under which LG Telecoms personal communications network is connected to our
local telephone network in the following cities: Jeon-ju, Chang-won/Masan,
Chung-ju, Chun-ahn and Su-chun. In October 2001, we entered into an agreement with LG Telecom on the usage
of telecommunication facilities in accordance with the terms of our Specific
Service Provider License. In December 2001, we acquired 1,035,652 shares of the common stock of LG
Telecom, representing 0.37% of the issued and outstanding shares of LG Telecom,
for Won 5,396 million. Relationship with Samsung chaebol As of December 31, 2003, Samsung Electronics and its affiliated company
beneficially owned 5.13% of our outstanding shares. Relationship with SK chaebol As of December 31, 2003, SK Telecom and its affiliated companies
beneficially owned 1.83% of our outstanding shares. In December 1998 and in
February 2001, we entered into an interconnection agreement with SK Telecom,
under which we interconnect to SK Telecoms mobile telecommunication network
and wireless paging service network. The interconnection charges are based on
the standard rates established by the Korean government. Pursuant to the
February 2001 agreement, we entered into a further agreement with SK Telecom in
July 2001, under which SK Telecoms mobile telecommunication network is
connected to our local telephone network in the following cities: Jeon-ju,
Chang-won/Masan, Chung-ju, Chun-ahn and Su-chun. We also leased our office space of a building in Bundang-Ku, Sungnam from
SKT Corporation for which we paid a rental deposit of Won 2,061.9 million for
five years from May 3, 1999 until May 2, 2004. We expect to execute a new lease
agreement with SKT. Relationship with Major Shareholders In addition to the above, we have entered into other agreements with our
major shareholders and their respective affiliates in the ordinary course of
our business and strategic alliances under which we agree to cooperate on
developing technological, marketing and customer service expertise and
providing additional service offerings. All our transactions with our major
shareholders and their respective affiliates have been on an arms length
basis. Relationship with System Operators As of April 30, 2004, we also owned a 90.91% equity interest in Hanaro
WEB(n)TV, a 7.22% equity interest in Chung-buk Cable System and a 3.0% equity
interest in Chungnam Cable TV Broadcasting, our system operators. 61




---



##### Table of Contents



We have agreements with GS Digital Broadcasting, Korea Cable TV Taegu
Broadcasting, Korea Cable TV Kwangju Broadcasting, Chung-buk Broadcasting and
Hanbat Cable Network pursuant to which we agreed to provide our HFC network to
these system operators and they are responsible for maintaining subscriber
lines and subscriber relationships (including customer service,
trouble-shooting and related services) within those areas where they are
licensed to provide cable broadcasting services. Since 2000, we have a program pursuant to which we provide secured or
guaranteed interest-free loans to cable network operators. The terms of each
of those loans require repayment after three years from the date of the loan by
equal installments on a quarterly basis for two years. As of April 30, 2004,
we had outstanding interest-free loans to nine cable network operators in the
aggregate amount of Won 3,228 million. The loan agreements require the cable
network operators to use the loan proceeds to upgrade their systems so that our
services can be provided over their networks. The loan agreements also require
the borrower to lease to us its cable network for our HFC-based Internet access
services upon completion of the system upgrade. Relationship with Hanaro T&I In January 2002, Hanaro Customer Service and Hanaro Internetdesk, our
subsidiaries, merged to form Hanaro T&I. Prior to the merger, we had an
agreement with Hanaro Customer Service under which we outsourced to it our
customer service business, the scope of which includes customer support,
handling customer complaints, subscription service and other outbound business.
Hanaro T&I has assumed the rights and obligations under this agreement as of
January 2002. We enter into a new outsourcing agreement with Hanaro T&I each
year. Relationship with Hanaro Realty Development & Management In March, 2004, we entered into agreement with Hanaro Realty Development &
Management, our subsidiary, to outsource to it the business of
telecommunication facilities operation and telecommunication lines maintenance
management and related services. The agreement sum is 18.4% of the amount of
monthly revenue generated from the business of hiring or selling equipment in
the provision of telecommunications services to subscribers. The initial term
of such agreement commenced on January 1, 2004 and will expire on December 31,
2004, and is automatically renewable for one year unless a party gives notice
of intention to terminate the agreement at least one month prior to expiration. In March 2004, we entered into an agreement with Hanaro Realty Development
& Management to outsource to it the business of our building management
(including the management of facilities for electricity, systems, prevention of
fire and security) for Won 11,286,312,000 (not including VAT). The initial term
of such agreement commenced on March 1, 2004 and will expire on February 28,
2005, and is automatically renewable for one year unless a party gives notice
of intention to terminate the agreement at least one month prior to expiration.
In March 2004, we also entered into an agreement with Hanaro Realty
Development & Management to outsource to it the business of managing our
Internet Data Center building (including the management of facilities for
electricity, systems, prevention of fire and security) for Won 1,021,404,000
(not including VAT). The initial term of such agreement commenced on March 1,
2004 and will expire on February 28, 2005, and is automatically renewable for
one year unless a party gives notice of intention to terminate the agreement at
least one month prior to expiration. 62




---



##### Table of Contents



Relationship with Hanaro Telecom America In October 2000, we entered into an agreement with Hanaro Telecom America,
our wholly owned subsidiary, to provide international telecommunication services (including
the interconnection of private leased circuit for the international transmission of voice and/or data)
between Korea and U.S. This agreement is effective from October 1, 2000, and
will continue until terminated by either party in accordance with the
agreement. Hanaro Telecom America is responsible for providing to us Internet
connectivity services for connecting the Internet backbone in the U.S., and
co-location services to accommodate our requests for maintenance and management
services. We agreed to pay Hanaro Telecom America interconnection handling and
marketing commissions and consulting charges based on the number of hours
worked and costs incurred. Relationship with Hanaro WEB(n)TV In March 2001, we entered into a strategic alliance agreement with Hanaro
WEB(n)TV, which operates our business of providing HFC network in Kwang-ju
area. Hanaro WEB(n)TVs duties include placing advertisements, customer
service, subscription service, handling complaints, installation of leased
lines, trouble-shooting and network maintenance. We provide computer
equipment, uniform and other facilities necessary for the operation of this
business. The agreement is effective for one year commencing on March 1, 2001,
and is renewable for another year unless terminated by either party for a
material breach under the agreement. We must pay Hanaro WEB(n)TV a fixed fee
on a per subscriber basis, and a monthly maintenance fee calculated as a
percentage of subscriber fees collected in the relevant month, which percentage
varies according to our rating of their service. On March 2, 2004, we entered into a strategic alliance agreement with
Hanaro WEB(n)TV, which operates our business of providing HFC network in those
areas where Hanaro WEB(n)TV is licensed to provide cable broadcasting services.
Hanaro WEB(n)TVs duties include public relations, customer service,
subscription service, handling complaints, installation of leased lines,
trouble-shooting and network maintenance. We provide computer equipment,
uniform and other facilities necessary for the operation of this business. The
term of the agreement is for five years from the date of the agreement (except
that the fee may be renegotiated very year), and is renewable for another five
years unless a party refuses to renew at least one month prior to the
expiration date. We must pay Hanaro WEB(n)TV a fixed fee on a per subscriber
basis, and a monthly maintenance fee calculated as a percentage of subscriber
fees collected in the relevant month, which percentage varies according to our
rating of their service. Under the Korean Broadcasting Act, foreign investors in the aggregate may
not own 49% or more of equity in a cable television service such as Hanaro
WEB(n)TV. Foreign investor for this purpose includes a company whose largest
shareholder is a foreign investor or whose foreign shareholders in the
aggregate own 50% or more of its equity. If a broadcasting business operator
violates the foreign investors equity holding restriction under the
Broadcasting Act, the holders of shares in excess of the legal limitations
cannot exercise voting rights with respect to the shares exceeding such limit,
and the Korean Broadcasting Commission may order the violator or the violators
shareholder to take corrective measures to comply with the legal restrictions
within a grace period of six months. Failure to comply with such order results
in criminal sanction. In addition, the Korean Broadcasting Commission and the
MIC may revoke the license or registration granted to the violating
broadcasting business operator or suspend its business, in whole or in part,
for up to six months. Alternatively, the violator may be subject to an
administrative penalty of up to Won 100 million. Because our largest shareholder, the AIG-Newbridge-TVG consortium, is a
foreign investor, we are a foreign investor of Hanaro WEB(n)TV, under the
Broadcasting Act. Consequently, our 100% ownership of Hanaro WEB(n)TV violates
the Broadcasting Acts foreign investors equity holding restriction. On May
28, 2004, we received from the Korean Broadcasting Commission an order to take
corrective measures within 6 months. We plan to sell our shares in WEB(n)TV to
reduce our equity holding to below 49%. 63




---



##### Table of Contents



Relationship with Dreamline In December 2001, we acquired a 32.2% equity interest in Dreamline and in
January 2002, we entered into an agreement with Dreamline to outsource to it
our subscriber sales business. The scope of the outsourced business includes
management of our subscribers, attracting new subscribers, receipt of
subscriptions and handling other subscription related operations. In April
2002, we also entered into an agreement with Dreamline to outsource to it the
business of managing our marketing channels and regional sales offices and to
provide installation and customer services to our subscribers in our HFC
service areas. The term of each of these agreements is one year, and is
automatically renewable for another year unless a party notifies otherwise at
least one month prior to expiration. See Item 10Additional
InformationMaterial ContractsAgreement for Outsourcing of Business Operation
between Hanaro Telecom and Dreamline and Business Outsourcing Agreement
between Hanaro Telecom and Dreamline for a summary of the terms of the
agreements. We also have an agreement with Dreamline pursuant to which we
agreed to allow Dreamlines use of our brand names, Hanafos, Cytobahn and
Zyttan, effective as of April 1, 2002. See Note 22 to our consolidated financial statements for more information
about our related party transactions. 7.C INTERESTS OF EXPERTS AND COUNSEL Not applicable. 64




---



##### Table of Contents



ITEM 8. FINANCIAL INFORMATION 8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See Item 18Financial Statements and pages F-1 to F-45 following
Glossary. Legal Proceedings On January 25, 2003, the Slammer Worm originating from countries such as
the United States and Australia infected the MS SQL Server 2000 of the
Microsoft Corporation (Microsoft) and disrupted the Internet service between
Microsoft and a number of Internet service providers, including us. As a
result, numerous Internet users experienced outages for five hours and five
minutes on their email servers and websites. We are a party to two legal
proceedings in relation to such outages. On February 25, 2003, with the help of the Green Consumer Network, a
citizen activist group, 7 customers filed a petition with the Korea
Communications Commission (KCC), which is a government agency charged with
the resolution of disputes between telecommunication service carriers and
users. The petitioners claimed damages pursuant to the HanaFOS Service
Agreement, which requires us to pay damages in the event that a customer is not
provided with Internet service for 3 hours or more after the customer has
notified us of the Internet service failure. However, an exception is made in
certain circumstances such as disruption of Internet service caused by a force
majeure, which we believe was the case.The relevant agreement imposed a
penalty of up to three times the actual amount of loss to the Internet user,
which was calculated by multiplying the time for which the Internet service was
not accessible by the average user fee. On October 13, 2003, KCC awarded
damages to the petitioners according to the HanaFOS Service Agreement. KCC,
however, awarded only actual damages for the disruption of service for 5 hours,
without imposing a penalty on us, which resulted in the award amount to be Won
234 ~ Won 354 per petitioner. Because silence on our part renders the case
settled, and an administrative ruling becomes final and binding in the absence
of a challenging suit within 60 days of the parties receipt of the formal
ruling, we filed a challenging suit in the Seoul Central District Court on
December 12, 2003, seeking declaratory judgment that we have no liability
against the petitioners. On April 30, 2003, under the initiative of the Peoples Solidarity for
Participatory Democracy (Chamyeoyundai), the representative citizens coalition
in Korea, 1516 Internet users (out of whom 421 were our customers), 70 Internet
café owners, one Internet café service provider and OhmyNews, Co., Ltd., an
Internet news media business, sued a number of Internet service providers
including us, Microsoft, and the Korean government. The plaintiffs asserted
that Microsoft, the Korean government and the Internet service providers are
liable for violation of the service agreement and the Information Systems Act,
which imposes a duty on the defendants to provide stable Internet service to
prevent disruptions. The plaintiffs also asserted joint and several tort
liability for negligence or willful negligence in maintaining a stable network
system and taking necessary measures to prevent further damages. The
individual Internet users claimed Won 50,000 for their inability to use the
Internet service during the time of the outage, and the Internet
café owners,
the Internet café service provider, and OhmyNews, Co., Ltd. claimed Won
300,000, Won 2 million, and Won 3 million respectively, for their loss of
business and solatium awards. Both of the legal proceedings are currently pending in Seoul Central
District Court. We do not expect that an unfavorable decision in the above
legal proceedings will directly affect our financial condition, as the amount
of damages are fairly small and the absence of class action lawsuits in Korean
law will prevent an expansion of litigation. However, we are not certain
whether the outcome of the above legal proceedings will be in our favor. If we lose, we may face
additional legal actions based on similar grounds by other customers or Internet users, which could
adversely affect our business, financial condition and results of operations. 65




---



##### Table of Contents



There are several other legal proceedings to which we are a party.
However, such pending legal proceedings involve minor claims, none of which is
likely to have a material adverse effect on our business or financial
condition. Dividend Policy Under our Articles of Incorporation, we are permitted to pay dividends to
our shareholders beginning in the first fiscal year in which our aggregate
carried-over loss incurred since the date of commencement of our local
telephony services has been made up in full. We do not expect to pay dividends
for the foreseeable future. In addition, we currently intend to retain any
future earnings to finance our business and to fund growth and, therefore, do
not expect to pay any cash dividends for the foreseeable future. However, if we
declare cash dividends, the dividends will be paid to the depositary for the
ADSs in Won and then converted by the depositary into U.S. dollars. 8.B SIGNIFICANT CHANGES None. 66




---



##### Table of Contents



ITEM 9. THE OFFER AND LISTING 9.A OFFER AND LISTING DETAILS Market Price Information Our common shares are traded on the Korea Securities Dealers Association
Automated Quotation Market (KOSDAQ), under the symbol 033630. Our shares
were listed on KOSDAQ in November 1998. The KOSDAQ market index is computed by taking the aggregate market
capitalization of all companies included in the index as a percentage of the
market capitalization of the base date (July 1, 1996), multiplied by 100. From
January 26, 2004, the base figure has changed to 1000. The most widely followed price index of stocks quoted on stock exchanges
in Korea is the Korea Composite Stock Price Index, or KOSPI, an index of all
equities listed on the Korea Stock Exchange. The KOSPI is computed by
aggregating the market capitalization of all listed companies and (subject to
certain adjustments) by expressing this aggregate as a percentage of the
aggregate market capitalization of all listed companies as of the base date
(January 4, 1980). The following table sets forth, for the periods indicated, (i) the high
and low sales price for our common shares as reported on KOSDAQ, (ii) the
average daily trading volume of our shares, (iii) the highs and lows of the
KOSDAQ Index and (iv) the highs and lows of the KOSPI: Price per share
    
    Averageof our
    
    dailycommon shares
    
    tradingvolume of
    
    KOSDAQ
    
    KOSPIHigh
    
    Low
    
    our shares
    
    High
    
    Low
    
    High
    
    LowFiscal year Ending December 311999
    
    W
    23,500
    
    
    W
    5,200
    
    
    
    1,827,356
    
    
    
    2733.20
    
    
    
    708.70
    
    
    
    1,028.07
    
    
    
    498.422000
    
    
    23,700
    
    
    
    2,210
    
    
    
    2,612,052
    
    
    
    2834.40
    
    
    
    525.80
    
    
    
    1,059.04
    
    
    
    500.602001
    
    
    5,580
    
    
    
    1,930
    
    
    
    6,508,725
    
    
    
    876.50
    
    
    
    460.50
    
    
    
    704.50
    
    
    
    468.762002
    
    
    7,850
    
    
    
    3,120
    
    
    
    5,082,647
    
    
    
    943.00
    
    
    
    436.70
    
    
    
    937.61
    
    
    
    584.042003
    
    
    4,420
    
    
    
    2,100
    
    
    
    6,339,993
    
    
    
    535.00
    
    
    
    346.40
    
    
    
    822.16
    
    
    
    515.24Financial Quarter EndingMarch 31, 2002
    
    W
    7,850
    
    
    W
    5,190
    
    
    
    7,910,470
    
    
    
    943.00
    
    
    
    720.20
    
    
    
    902.46
    
    
    
    708.47June 30, 2002
    
    
    6,790
    
    
    
    4,880
    
    
    
    4,787,824
    
    
    
    884.20
    
    
    
    697.20
    
    
    
    937.61
    
    
    
    795.16September, 2002
    
    
    5,170
    
    
    
    3,400
    
    
    
    3,178,036
    
    
    
    674.50
    
    
    
    467.10
    
    
    
    801.99
    
    
    
    646.42December 31, 2002
    
    
    4,210
    
    
    
    3,120
    
    
    
    4,923,691
    
    
    
    537.80
    
    
    
    436.70
    
    
    
    736.57
    
    
    
    584.04March 31, 2003
    
    
    3,430
    
    
    
    2,100
    
    
    
    3,280,361
    
    
    
    488.50
    
    
    
    346.40
    
    
    
    666.71
    
    
    
    515.24June 30, 2003
    
    
    3,220
    
    
    
    2,340
    
    
    
    6,144,242
    
    
    
    508.60
    
    
    
    382.50
    
    
    
    690.49
    
    
    
    538.56September, 2003
    
    
    4,050
    
    
    
    2,660
    
    
    
    8,441,293
    
    
    
    535.00
    
    
    
    448.50
    
    
    
    767.46
    
    
    
    674.75December 31, 2003
    
    
    4,420
    
    
    
    3,070
    
    
    
    7,506,003
    
    
    
    481.70
    
    
    
    430.90
    
    
    
    822.16
    
    
    
    704.29March 31, 2004
    
    
    3,650
    
    
    
    3,205
    
    
    
    1,956,487
    
    
    
    458.40
    
    
    
    420.28
    
    
    
    907.43
    
    
    
    821.26May 31, 2004
    
    
    3,350
    
    
    
    2,345
    
    
    
    3,068,901
    
    
    
    491.53
    
    
    
    375.75
    
    
    
    936.06
    
    
    
    728.98Month EndingNovember 30, 2003
    
    W
    4,420
    
    
    W
    3,430
    
    
    
    9,372,911
    
    
    
    475.10
    
    
    
    438.10
    
    
    
    813.11
    
    
    
    753.65December 31, 2003
    
    
    3,835
    
    
    
    3,070
    
    
    
    2,546,029
    
    
    
    476.00
    
    
    
    430.90
    
    
    
    822.16
    
    
    
    784.80January 31, 2004
    
    
    3,610
    
    
    
    3,210
    
    
    
    2,732,310
    
    
    
    458.40
    
    
    
    441.45
    
    
    
    869.04
    
    
    
    821.26February 29, 2004
    
    
    3,650
    
    
    
    3,265
    
    
    
    1,844,954
    
    
    
    448.02
    
    
    
    424.57
    
    
    
    884.80
    
    
    
    835.50March 31, 2004
    
    
    3,440
    
    
    
    3,205
    
    
    
    1,423,117
    
    
    
    440.21
    
    
    
    420.28
    
    
    
    907.43
    
    
    
    848.80April 30, 2004
    
    
    3,350
    
    
    
    2,665
    
    
    
    2,344,121
    
    
    
    491.53
    
    
    
    439.00
    
    
    
    936.06
    
    
    
    862.84May 31, 2004
    
    
    2,905
    
    
    
    2,345
    
    
    
    3,831,828
    
    
    
    458.80
    
    
    
    375.75
    
    
    
    867.48
    
    
    
    728.98
 67




---



##### Table of Contents



On June 11, 2004, the sale price of our common shares was Won 2,635 per
share. On June 11, 2004, the closing KOSDAQ Index was 387.76 and the KOSPI was
751.53. As of December 31, 2003, we had 126,537 shareholders of record. Our ADSs are quoted on the Nasdaq National Market under the symbol HANA
since March 29, 2000. The price of our ADSs on Nasdaq as of its close of
trading on June 10, 2004 was U.S.$2.37 per ADS. The table below shows the high
and low closing prices of the ADSs on Nasdaq since listing. AveragePrice per share
    
    dailyof our ADS
    
    tradingvolume ofHigh
    
    Low
    
    our sharesFiscal year Ending December 312000
    
    $
    15.50
    
    
    $
    1.63
    
    
    
    349,2842001
    
    
    4.20
    
    
    
    1.42
    
    
    
    39,9402002
    
    
    5.68
    
    
    
    2.50
    
    
    
    8,8722003
    
    
    3.77
    
    
    
    1.74
    
    
    
    19,768Financial Quarter EndingMarch 31, 2002
    
    $
    5.68
    
    
    $
    3.80
    
    
    
    14,847June 30, 2002
    
    
    5.35
    
    
    
    3.85
    
    
    
    13,298September 30, 2002
    
    
    4.19
    
    
    
    2.78
    
    
    
    4,995December 31, 2002
    
    
    3.24
    
    
    
    2.50
    
    
    
    2,806March 31, 2003
    
    
    2.90
    
    
    
    1.74
    
    
    
    4,067June 30, 2003
    
    
    2.82
    
    
    
    1.90
    
    
    
    2,600September 30, 2003
    
    
    3.23
    
    
    
    2.15
    
    
    
    52,833December 31, 2003
    
    
    3.77
    
    
    
    2.70
    
    
    
    18,567March 31, 2004
    
    
    4.38
    
    
    
    2.65
    
    
    
    85,004May 31, 2004
    
    
    2.87
    
    
    
    2.06
    
    
    
    34,391Month EndingNovember 30, 2003
    
    $
    3.77
    
    
    $
    3.05
    
    
    
    22,578December 31, 2003
    
    
    3.34
    
    
    
    2.70
    
    
    
    20,299January 31, 2004
    
    
    4.38
    
    
    
    3.07
    
    
    
    145,986February 28, 2004
    
    
    3.41
    
    
    
    2.85
    
    
    
    81,584March 31, 2004
    
    
    3.03
    
    
    
    2.65
    
    
    
    32,148April 30, 2004
    
    
    2.87
    
    
    
    2.28
    
    
    
    36,795May 31, 2004
    
    
    2.50
    
    
    
    2.06
    
    
    
    31,867
 9.B PLAN OF DISTRIBUTION Not Applicable. 68




---



##### Table of Contents



9.C MARKETS Our ADSs are quoted on the Nasdaq National Market under the symbol HANA
since March 29, 2000. Our common shares are traded on the KOSDAQ under the
symbol 033630 since November 1998. Description of KOSDAQ The KOSDAQ was launched on July 1, 1996 as an alternative investment
market to the Korea Stock Exchange, the principal stock exchange in Korea.
KOSDAQ is modeled after the Nasdaq National Market; however, unlike Nasdaq,
shares listed on KOSDAQ are traded by KOSDAQ participants and their brokers
through market-makers at a physical exchange located in Seoul, Korea. The
participants also use a central electronic trading system designed to increase
the speed at which orders are matched. The trading hours for the KOSDAQ market
are 9:00 a.m. to 3:00 p.m. Margin trading is not permitted on KOSDAQ and daily
price changes are limited to a range of 12% of the closing price for the
previous trading day. The KOSDAQ market has grown significantly since its inception. As of May
31, 2004, 877 companies were listed on KOSDAQ with an aggregate market
capitalization of Won 31.949 trillion (U.S.$26.8 billion). The average daily
turnover for 2003 was Won 1.1 trillion (U.S.$0.9 billion). Market
capitalization on KOSDAQ is heavily concentrated in the larger companies, with
the top 10 companies comprising approximately 23.48% of total market
capitalization and the top 25 companies comprising approximately 36.64% of
total market capitalization, as of May 31, 2004. Companies listing on KOSDAQ
must meet its listing requirements and register with the Financial Supervisory
Commission of Korea. 9.D SELLING SHAREHOLDERS Not applicable. 9.E DILUTION Not applicable. 9.F EXPENSES OF THE ISSUE Not applicable. 69




---



##### Table of Contents



ITEM 10. ADDITIONAL INFORMATION 10.A SHARE CAPITAL Not applicable. 10.B ARTICLES OF INCORPORATION The section below provides summary information relating to the material
terms of the capital stock of our company and our Articles of Incorporation.
It also includes a brief summary of certain provisions of the Securities and
Exchange Act, the Commercial Code and related laws of Korea, all as currently
in effect. Objectives Article 2 of our Articles of Incorporation states our objectives as
follows:  
    
    to play a leading role in the nations efforts to accomplish a
society of multimedia super-highway telecommunication industry by
efficient performance of telecommunication business;
    
    to establish and operate the nations second basic communication
service network, as a preparation against any national disaster or
calamity, by establishing diversified communication channels and an
automatic recovery system; and
    
    to enhance the improvement of end users convenience and public
welfare. General Currently, we are authorized to issue 700,000,000 shares of stock. Under
our Articles of Incorporation, we are authorized to issue only one class of
stock. Our issued common shares constitute such authorized class of stock. Currently, we have a total of 462,235,180 shares issued and outstanding.
All of the issued and outstanding shares are fully paid and non-assessable and
are in registered form. We may issue additional shares without further
shareholders approval as provided in our Articles of Incorporation. The
unissued shares remain authorized until an amendment to our Articles of
Incorporation changes the status of the authorized shares to unauthorized
shares. We can issue share certificates in denominations of up to 10,000
shares. Our common shares have a par value of Won 5,000 per share. Directors No director who has a special interest in a matter for resolution can
exercise his vote upon such matter. Under the recent amendment of Securities
and Exchange Act, from July 1, 2004, we are prohibited from lending money (or
other equivalent assets) to, or providing security or guaranteeing in favor of
each of our board of directors or each of our major shareholders (including its
specially related person), except in certain circumstances. Currently and
until the new law is in effect, a resolution of the board of directors is
required for borrowing money except as otherwise provided for in separate
regulations under which the Representative Director/President is authorized to
borrow money in an amount not exceeding a certain limit. 70




---



##### Table of Contents



Dividends Under our Articles of Incorporation, we may pay dividends to our
shareholders beginning in the first fiscal year in which our aggregate
carried-over losses incurred since the date of commencement of our local
telephony services have been made up in full. From such fiscal year, we may
distribute dividends to our shareholders in proportion to the number of shares
owned by each shareholder following the approval by the shareholders at an
annual general meeting of shareholders. The shares represented by the ADSs
have the same dividend rights as common shares. We will pay full annual
dividends on shares issued during such fiscal year. We may declare dividends at the annual general meeting of shareholders,
which is held within three months after the end of a fiscal year. Dividends
will be paid shortly after the annual general meeting declaring such dividends.
We may distribute dividends in cash or in shares. However, a dividend in
shares must be distributed at par value. If the market price of the shares is
less than par value, dividends in shares may not exceed one-half of the annual
dividends. We have no obligation to pay any dividend unclaimed for five years
from the payment date. Under the Commercial Code, we may pay an annual dividend only out of the
excess of our net assets, on a non-consolidated basis, over the sum of (1) our
stated capital, (2) the total amount of our capital surplus reserve and legal
reserve accumulated up to the end of the relevant dividend period and (3) the
legal reserve to be set aside for the annual dividend. In addition, we may not
pay an annual dividend unless we have set aside as legal reserve an amount
equal to at least 10% of the cash portion of the annual dividend or unless we
have accumulated a legal reserve of not less than one-half of our stated
capital. We may not use legal reserves to pay cash dividends but may transfer
amounts from legal reserves to reduce an accumulated deficit. Distribution of Free Shares In addition to paying dividends in shares out of our retained or current
earnings, we may also distribute to our shareholders an amount transferred from
our capital surplus or legal reserve to our stated capital in the form of free
shares. We must distribute such free shares to all our shareholders in
proportion to their existing shareholdings. Preemptive Rights and Issuance of Additional Shares We may issue authorized but unissued shares at the times and, unless
otherwise provided in the Commercial Code, on such terms as our board of
directors may determine. We must offer new shares on uniform terms to all
shareholders who have preemptive rights and are listed on our shareholders
register as of the relevant record date. Our shareholders are entitled to subscribe for any newly issued shares in
proportion to the number of shares they own, except that under our Articles of
Incorporation, if the new shares will be (1) issued to the public or to certain
subscribers in accordance with the Securities and Exchange Act, (2) issued by
public offering in accordance with the Securities and Exchange Act, (3) issued
to our employee stock ownership association as provided in the Securities and
Exchange Act, (4) represented by depositary receipts, (5) issued upon the
exercise of stock options which are provided in accordance with relevant
provision of the Securities and Exchange Act, (6) issued to a foreign
telecommunication company pursuant to the foreign investment procedures, or to
a foreign financial or investment company for the purpose of a strategic
alliance relating to our business pursuant to relevant laws and regulations or
(7) issued to domestic strategic investors or financial investors or our
officers or employees up to an amount not exceeding 10% of the then current
total issued and outstanding shares for the purpose of realizing our business
objectives,
including, but not limited to, improving our financial structure and
entering into new business areas, our board of directors may pass a resolution
to issue the new shares to persons other than existing shareholders. 71




---



##### Table of Contents



We must give public notice of preemptive rights regarding new shares and
their transferability at least two weeks before the relevant record date. We
will notify shareholders who are entitled to subscribe for newly issued shares
of the deadline for subscription at least two weeks prior to such deadline. If
a shareholder fails to subscribe by the deadline, the shareholders preemptive
rights will lapse. Our board of directors may determine how to distribute
shares for which preemptive rights have not been exercised and fractional
shares. Under the Securities and Exchange Act, employee stock ownership
associations of the companies that are listed or will be listed on the Korea
Stock Exchange generally have a preemptive right to subscribe for up to 20% of
the shares publicly offered. Although we are not a company whose shares are
listed on the Korea Stock Exchange, we have by our Articles of Incorporation
opted to grant a right of preemption to our employee stock ownership
association on the same terms as are applicable to companies listed on the
Korea Stock Exchange. General Meeting of Shareholders We hold the annual general meeting of shareholders within three months
after the end of each fiscal year. Subject to a board resolution or court
approval, we may hold an extraordinary general meeting of shareholders:  
    
    as necessary;
    
    at the request of holders of an aggregate of 3% or more of our outstanding shares;
    
    at the request of shareholders holding an aggregate of 1.5% or more
of our outstanding shares for at least six months; or
    
    at the request of our audit committee. We must give shareholders written notice setting out the date, place and
agenda of the meeting at least two weeks prior to the general meeting of
shareholders. However, for holders of less than 1% of the total number of
issued and outstanding voting shares, we may give notice by placing not less
than two notices in each of the two daily newspapers published in Seoul, Korea
such as The Korea Daily and Maeil Economic Daily Newspaper, at least two
weeks in advance of the meeting. Shareholders not on the shareholders
register as of the record date are not entitled to receive notice of the
general meeting of shareholders or attend or vote at the meeting. Our shareholders meetings are held in Seoul, Korea. Voting Rights Holders of our shares are entitled to one vote for each share. However,
shares held by us (i.e., treasury shares) or by any corporate entity in which
we have, directly or indirectly, greater than a 10% interest, do not exercise
voting rights. The Commercial Code permits cumulative voting pursuant to which
each share entitles the holder thereof to multiple voting rights equal to the
number of directors to be elected at such time. A holder of shares may
exercise all voting rights with respect to his or her shares
cumulatively to elect one director, unless the Articles of Incorporation
provide otherwise. However, our Articles of Incorporation do not provide for
cumulative voting. 72




---



##### Table of Contents



Our shareholders may adopt resolutions by an affirmative vote of the
voting shares present or represented at the meeting, where the affirmative
votes also represent at least one-fourth of our total voting shares then issued
and outstanding. However, under the Commercial Code and our Articles of
Incorporation, the following matters require approval by the holders of at
least two-thirds of the voting shares present or represented at a meeting,
where the affirmative votes also represent at least one-third of our total
voting shares then issued and outstanding:  
    
    amending our articles of incorporation;
    
    removing a director;
    
    effecting a capital reduction;
    
    effecting any dissolution, merger or consolidation with respect to our company;
    
    transferring all or any significant part of our business;
    
    the acquisition of all of the business of any other company;
    
    the acquisition of a part of the business of any other company,
which significantly affects our companys business;
    
    lease of entire business, delegation of business operations, or the
execution, modification or cancellation of agreements from which
profit/losses shall affect both parties;
    
    issuing new shares at a price below par value; or
    
    any other matters for which a resolution is required under relevant laws and regulations. Shareholders may exercise their voting rights by proxy. Under our
Articles of Incorporation, the person exercising the proxy does not have to be
a shareholder. A person with a proxy must present a document evidencing its
power of attorney in order to exercise such voting rights. Holders of ADRs exercise their voting rights through the ADR depositary.
Subject to the provisions of the deposit agreement, ADR holders are entitled to
instruct the depositary as to how to vote the shares underlying their ADSs. Rights of Dissenting Shareholders In some limited circumstances, including the transfer of all or any
significant part of our business and our merger or consolidation with another
company, dissenting shareholders have the right to require us to purchase their
shares. To exercise this right, shareholders must submit to us a written
notice of their intention to dissent before the applicable general meeting of
shareholders. Within 20 days after the relevant resolution is passed, the
dissenting shareholders must request us in writing to purchase their shares.
We are obligated to purchase the shares of dissenting shareholders within two
months after the expiration of the 20-day period. The purchase price for the
shares is required to be determined through negotiations between the dissenting
shareholders and us. If an agreement on the purchase price for the
shares is not made within 30 days from the date of our receipt of the
dissenting shareholders request, we or such dissenting shareholder may request
a court in Korea to determine the purchase price. Holders of ADSs will not be
able to exercise dissenters rights unless they withdraw the underlying common
shares and become our direct shareholders. 73




---



##### Table of Contents



Register of Shareholders and Record Dates Our transfer agent maintains the register of our shareholders at its
office in Seoul, Korea. It registers transfers of shares on the register of
shareholders on presentation of the share certificates. The record date for annual dividends is December 31 of each year. For the
purpose of determining shareholders entitled to annual dividends, the register
of shareholders may be closed for the period from the day after the record date
to the next annual general meeting of shareholders. Further, for the purpose
of determining the shareholders entitled to some other rights pertaining to the
shares, we may, on at least two weeks public notice, set a record date and/or
close the register of shareholders for not more than three months. The trading
of shares and the delivery of share certificates may continue while the
register of shareholders is closed. Annual Report At least one week before the annual general meeting of shareholders, we
must make our annual report and audited non-consolidated financial statements
available for inspection at our principal office and at all of our branch
offices. In addition, copies of annual reports, the audited consolidated
financial statements and any resolutions adopted at the general meeting of
shareholders will be available to our shareholders. Under the Securities and Exchange Act, we must file with the Financial
Supervisory Commission and Korea Securities Dealers Association (1) an annual
report within 90 days after the end of our fiscal year, (2) a half year report
within 45 days after the end of the first six months of our fiscal year and (3)
quarterly reports within 45 days after the end of the third month and the ninth
month of our fiscal year. Copies of these reports are or will be available for
public inspection at the FSC and the KSDA. Transfer of Shares Under the Commercial Code, the transfer of shares is effected by delivery
of share certificates. However, to assert shareholders rights against us, the
transferee must have his name and address registered on our register of
shareholders. For this purpose, a shareholder is required to file his name,
address and seal or specimen signature with our transfer agent. A non-Korean
shareholder may file a specimen signature in place of a seal, unless he is a
citizen of a country with a sealing system similar to that of Korea. In
addition, a non-resident shareholder must appoint an agent authorized to
receive notices on his behalf in Korea and file a mailing address in Korea.
The above requirement does not apply to the holders of ADSs. Under current regulations, Korean securities companies and banks,
including licensed branches of non-Korean securities companies and banks,
investment management companies, an entity licensed to be engaged in futures
transaction business under the Korean Futures Transaction Law, internationally
recognized foreign custodians and the Korea Securities Depository may act as
agents and provide related services for foreign shareholders. Certain foreign
exchange controls and securities regulations apply to the transfer of shares by
non-residents or non-Koreans. Our transfer agent is Korea Securities Depository, located at 34-6,
Yoido-dong, Youngdeungpo-ku, Seoul, Korea. 74




---



##### Table of Contents



Acquisition of Shares by Hanaro Telecom We may not acquire our own shares except in limited circumstances, such as
reduction in capital and acquisition of our own shares for the purpose of
granting stock purchase options to our officers and employees. Under the
Commercial Code and the Securities and Exchange Act, except in the case of a
reduction of capital (in which case we must retire the shares immediately), we
must resell any shares acquired by us to a third party within a reasonable
time. Notwithstanding the foregoing restrictions, under the Securities and
Exchange Act, we may acquire our own shares through purchases on the KOSDAQ
market or through a tender offer. The aggregate purchase price for the shares
may not exceed the total amount available for distribution of dividends at the
end of the preceding fiscal year less the amounts of dividends and legal
reserves required to be set aside for that fiscal year, subject to certain
procedural requirements. Corporate entities in which we own a 50% or greater equity interest may
not acquire our shares. Liquidation Rights In the event of our liquidation, after payment of all debts, liquidation
expenses and taxes, our remaining assets will be distributed among shareholders
in proportion to their shareholdings. Inspection of Books and Records Under the Commercial Code, any individual shareholder or shareholders
having at least 3% of all outstanding shares (irrespective of voting or
non-voting shares) of a Korean corporation may inspect the books and records of
the corporation. Under the Securities and Exchange Act, any individual
shareholder or shareholders holding an aggregate of 0.1% or more of all
outstanding shares (irrespective of voting or non-voting shares) of a Korean
corporation for at least six months may inspect the books and records of the
corporation. Effect of Korean Law For a description of the effect of relevant Korean laws applicable to
Hanaro Telecom, see Item 4Information on the
CompanyBusiness
OverviewKorean Telecommunications Laws and Regulations, Item 10Additional
InformationExchange Controls and
Item 10Additional InformationTaxationKorean Taxation. 10.C MATERIAL CONTRACTS Agreement for Outsourcing of Business Operation between Hanaro Telecom and
Dreamline In January 2002, we entered into an agreement with Dreamline to outsource
to it our subscriber sales business. The scope of the outsourced business
includes management of our subscribers, attracting new subscribers, receipt of
subscriptions and handling other subscription related operations. We must pay
the following commissions to Dreamline: (i) a subscriber commission of an
amount set out in an attachment to this agreement in the month following
activation of a new subscriber line, (ii) for corporate products, a management
commission of 5% to 10% of the total charges for the current month per product,
(iii) for residential products, a sales promotion commission of 1.5% to 4.5% of
the charges for the net cumulative
number of lines activated, (iv) an optical termination station
subscription commission in the month following the activation of such station
and (v) an automatic transfer commission of Won 1,000 for each subscriber who
requests direct debits of his or her bill. The initial term of this agreement
is one year from the execution date, and is automatically renewable for one
year unless a party notifies otherwise at least one month prior to expiration. 75




---



##### Table of Contents



Business Outsourcing Agreement between Hanaro Telecom and Dreamline On April 1, 2002, we entered into an agreement with Dreamline to outsource
to it the business of managing our marketing channels and regional sales
offices and to provide installation and customer services to our subscribers in
our HFC service areas. The scope of the outsourced business includes acquiring
residential and corporate customers for local telephony and broadband access
services within our HFC service areas, providing installation and customer
services. The calculation of the commissions payable to Dreamline is based on
the type of service provided to the subscribers, the number of subscriber lines
and the amount of subscription fees generated. The initial term of this
agreement is one year, and is automatically renewable for one year unless a
party notifies otherwise at least one month prior to expiration. Agreement for the Transfer of HanaNet Business between Hanaro Telecom and
HanaroDream On March 22, 2002, we entered into an agreement with DreamX.net Co.
(subsequently renamed as HanaroDream Corp.) to transfer to it our HanaNet
portal business-related assets and 20 employees as of March 1, 2002, for a
purchase price of Won 289,312,748, which was subsequently determined by the
parties. Internet Service Agreement between Hanaro Telecom and HanaroDream On March 22, 2002, we entered into an agreement with DreamX.net Co.
(subsequently renamed as HanaroDream Corp.), under which HanaroDream is
required to provide basic on-line services, including personal homepages, free
email services and free contents page for our subscribers via the HanaroDream
portal site, provide customer support and on-line marketing support for us and
manage our www.hanaro.com site, for a total price of Won 1,625,000,000
(exclusive of value-added tax). We are required to pay HanaroDream specified
incentive payments per month based on the ranking of our hananet.net website
(or hanaFOS.com after it is launched in July 2002) in Korea, and the mail
receiving rate of our subscribers. The term of the agreement is three years,
however, the parties have agreed to renegotiate the terms and conditions of the
agreement on an annual basis. Underwriting Agreement between Hanaro Telecom, Bridge Securities, Korea
Development Bank, Daewoo Securities, CJ Investment Trust & Securities and Mirae
Asset Securities On April 24, 2002, we entered into an underwriting agreement with Bridge
Securities, Korea Development Bank, Daewoo Securities, CJ Investment Trust &
Securities and Mirae Asset Securities (collectively, the Underwriters)
pursuant to which the Underwriters agreed to underwrite our issue of
non-guaranteed floating rate notes in the aggregate amount of Won 100 billion
on May 2, 2002. Interest is payable at the rate of 1.95% over the 3-year
Korean Treasury Bond rate. The principal amount of the floating rate notes is
redeemable in lump sum on May 2, 2005. Interest Rate Swap Agreement between Hanaro Telecom and the Industrial Bank of
Korea On April 16, 2002, we entered into an agreement with the Industrial Bank
of Korea regarding an
interest rate swap transaction, under which we agreed to pay interest at a
fixed rate of 7.95% payable quarterly in arrears on the notional amount of Won
100 billion in exchange for interest payable by the Industrial Bank of Korea at
the 3-year Korean Treasury Bond rate on a quarterly basis in arrears commencing
on May 2, 2002 and terminating on May 2, 2005, subject to certain adjustments. 76




---



##### Table of Contents



Kun-Pledge Creation Agreement between Hanaro Telecom and the Industrial Bank of
Korea On April 16, 2002, we entered into an agreement with the Industrial Bank
of Korea to create in favor of the Industrial Bank of Korea, a Kun-pledge over
the deposits in two accounts we have with the Bank to secure all our
obligations arising out of the Interest Rate Swap Agreement dated April 16,
2002. The maximum security amount is Won 9 billion. Real Estate Collateral Trust Agreement between Hanaro Telecom and Korea Real
Estate Investment Trust Co., Ltd. On March 20, 2003, we entered into a trust agreement with Korea Real
Estate Investment Trust Co., Ltd., pursuant to which we assigned to Korea Real
Estate Investment Trust, title to our information center at Ilsan-ku,
Koyang-shi, Kyunggi-do, valued at Won 57.5 billion as of the end of March 2003.
Korea Real Estate Investment Trust issued to us beneficiary securities
amounting to Won 65 billion, which we may provide to financial institutions as
collateral for loans from such institutions. The term of the trust is 2.5 years
from the date of the agreement. Investment Agreement between Hanaro Telecom and an Investment Consortium led by
AIG, Newbridge and TVG On September 9, 2003, we entered into an Investment Agreement with AIF II
NT, Ltd., AIG Asian Opportunity Fund L.P. (which later assigned its rights and
obligations under the Investment Agreement to AOF NT, Ltd.) and Newbridge Asia
HT, L.P., (the Sponsors) providing for, among other things, the issuance by
us and purchase by the Sponsors, together with co-investors designated by the
Sponsors (together, the Investors), of an aggregate of 182,812,500 shares of
the common stock of the Company, par value Won 5,000 per share at the purchase
price of Won 3,200 per share (the Investment Shares) having an aggregate
value of Won 585 billion. Closing occurred on November 18, 2003 (the Closing
Date) upon the satisfaction of certain customary closing conditions, including
the resignation and appointment of certain board members. The Investment
Agreement provides that the Company will not take certain significant corporate
actions without the consent of the Investors so long as the Investors, together
with their affiliates, continue to hold an aggregate of 15% or more of the
Companys outstanding common shares. In connection with the Investment Agreement, we entered into a letter
agreement dated September 9, 2003, providing for the reimbursement of certain
fees and expenses of the Investors incurred in connection with the transactions
under the Investment Agreement. We also entered into an Investors Rights
Agreement with the Investors and a Management Rights Agreement with certain of
the Investors, each dated as of the Closing Date. A summary of each such
agreement is set forth below. Investors Rights Agreement Pursuant to the Investors Rights Agreement, we have provided certain
registration rights to the Investors with respect to the Investment Shares. We
have agreed to file with the U.S. Securities and Exchange Commission a shelf
registration statement on Form F-3 covering resales of the Investment Shares by
the holders thereof within 90 days after the written request of the Investors
representative
(made not less than 360 days after the Closing Date). We are not required to
effect and complete more than three such shelf registration statements. In
addition, such holders have certain rights to piggyback on other registration
statements relating to our common shares and the right to cause the Company to
effect up to six demand registrations pursuant to the terms of the Investors
Rights Agreement. The term of this agreement terminates upon the earlier of
(i) the sixth anniversary of the Closing Date or (ii) the date as of which all
of the registrable securities have been sold pursuant to a registration
statement or the holders are permitted to sell their registrable securities
under Rule 144(k) under the Securities Act. 77




---



##### Table of Contents



Management Rights Agreement Pursuant to the Management Rights Agreement, we have granted to certain of
the Investors or their affiliates, certain management rights in Hanaro Telecom
so long as such Investor owns any Investment Shares, including the right to
make proposals, recommendations and suggestions to our board of directors, the
right to discuss our and our subsidiaries business and affairs with our board
of directors, officers and independent accountants, the right to examine our
books, records and documents as may be reasonably requested and the right to be
informed in advance with respect to any significant corporate actions. Senior Secured Credit Facility Agreement among Hanaro Telecom and various
financial institutions On November 13, 2003, we entered into a Senior Secured Credit Facility
Agreement, as amended by amendment agreements dated December 5, December 9 and
December 11, 2003, with various financial institutions including ABN AMRO Bank,
N.V., BNP Paribas, Chohung Bank, Credit Lyonnais, DBS Bank Ltd., ING Bank N.V.,
JPMorgan Chase Bank, The Korea Development Bank, Korea Exchange Bank, Societe
Generale, Seoul branch and WestLB AG, Hong Kong branch (together, the
Lenders), pursuant to which the Lenders have made available to us: (a) a term
loan facility in the aggregate amount of Won 660 billion (or equivalent)
(Facility A) and (b) a revolving credit facility in the aggregate amount of
Won 60 billion (Facility B). We are to apply all amounts borrowed under
Facility A towards (i) refinancing an existing debt of Won 200 billion from The
Korea Development Bank, and if no such debt remains outstanding, any of our
financial indebtedness having a scheduled final maturity date no later than the
date which is 24 months after the date of this agreement, and (ii) if after
such utilization, our debt cover (that is, the ratio of our consolidated
indebtedness to applicable EBITDA as calculated in accordance with the terms of
this agreement) is less than 2 to 1, general corporate purposes and certain
permitted acquisitions and capital expenditures. We are to apply all amounts
borrowed under Facility B for working capital purposes. We must repay each
Facility A loan in installments commencing 27 months from the date of this
agreement until 60 months from the date of this agreement in accordance with a
repayment schedule. The final maturity date is a day falling 5 years from the
date of this agreement. We must comply with certain financial covenant ratios
including certain minimum EBITDA to interest costs ratios, maximum total debt
to equity ratios, maximum total debt to applicable EBITDA ratios, maximum total
debt ratios, minimum projected cash cover ratio and maximum capital expenditure
requirements. We are also subject to customary covenants including negative
pledge covenants. We also agreed to enter into certain hedging agreements and
certain security documents (as described below) granting effective security in
favor of the relevant lenders over the assets expressed to be charged or
otherwise secured thereby. The events of default under the Senior Secured
Credit Facility Agreement include non-payment, breach of certain covenants,
cross-default on any of our or our subsidiaries financial indebtedness,
insolvency, material adverse change and non-compliance with the provisions of
any security documents entered into in connection with the agreement. Kun-Mortgage Agreement In connection with the Senior Secured Credit Facility Agreement (the
Credit Agreement) described above, on December 9, 2003, we entered into an
agreement with the Lenders and The Korea Development Bank acting as security
agent (the Security Agent) on behalf of the Lenders to grant to the Lenders,
a first priority joint kun-mortgage over certain buildings, land and commercial
facilities to secure the punctual payment, performance and discharge in full
all our obligations arising out of the Credit Agreement (the Secured
Obligations). The maximum mortgage amount is Won 531,411,000,000. The term of
this agreement shall terminate on the date on which all Secured Obligations
shall have been unconditionally and irrevocably paid and discharged in full. 78




---



##### Table of Contents



Restricted Account Kun-Pledge Agreement In connection with the Credit Agreement described above, on December 9,
2003, we entered into an agreement with the Lenders, the Security Agent on
behalf of the Lenders and Korea Exchange Bank as the account agent (the
Account Agent), to pledge by way of first priority kun-pledge certain
accounts to the Lenders and grant in favor of the Lenders a security interest
in all of our right, title and interest, now owned or hereafter acquired, in
and to such accounts and all balances, credits, deposits, monies or other sums
now or hereafter in such accounts and any interest accrued or payable thereon
and the proceeds thereof up to the maximum secured amount of Won
936,000,000,000 for the due and punctual payment, performance and discharge of
the Secured Obligations. Suspense Account Kun-Pledge Agreement In connection with the Credit Agreement described above, on December 9,
2003, we entered into an agreement with the Lenders, the Security Agent on
behalf of the Lenders and the Account Agent, to pledge by way of first priority
kun-pledge a certain account to the Lenders and grant in favor of the Lenders a
security interest in all of our right, title and interest, now owned or
hereafter acquired, in and to such account and all balances, credits, deposits,
monies or other sums now or hereafter in such account and any interest accrued
or payable thereon and the proceeds thereof up to the maximum secured amount of
Won 936,000,000,000 for the due and punctual payment, performance and discharge
of the Secured Obligations. Intellectual Property Kun-Pledge Agreement In connection with the Credit Agreement described above, on December 9,
2003, we entered into an agreement with the Lenders and the Security Agent on
behalf of the Lenders, to pledge by way of first priority kun-pledge certain of
our intellectual property rights (including trademark rights in HTI, N-gene
IDC, Hanafos, HTI N-FOS) to the Lenders and grant in favor of the Lenders a
security interest in all of our right, title and interest, in such intellectual
property rights up to the maximum secured amount of Won 936,000,000,000 for the
due and punctual payment, performance and discharge of the Secured Obligations. Yangdo-Dambo Agreement (Network Systems and Equipment) In connection with the Credit Agreement described above, on December 9,
2003, we entered into an agreement with the Lenders and the Security Agent on
behalf of the Lenders to transfer and collaterally assign to the Lenders
certain network systems and equipment that we own as security for the punctual
payment, performance and discharge in full of the Secured Obligations;
provided, that subject to certain conditions, the Lenders shall hold the title
to such property for the purpose of security only and shall not use, seize or
dispose of such property or take such other action that may affect adversely
our right to use such property for our ordinary business purposes. 79




---



##### Table of Contents



Insurance Assignment Agreement In connection with the Credit Agreement described above, on December 9,
2003, we entered into an agreement with the Lenders and the Security Agent on
behalf of the Lenders to assign to the Lenders all our rights, title and
interest in (i) certain of our policies and contracts of insurance and
reinsurances (the Insurance Policies), including all benefits thereof, (ii)
all claims, returns of premium and other moneys and claims for money due and to
become due under the Insurance Policies, (iii) all of our other rights under or
in respect of the Insurance Policies and (iv) all moneys payable to us under
the Insurance Policies, as security for the punctual payment, performance and
discharge in full of the Secured Obligations. ISDA Agreement between Hanaro Telecom and Korea Development Bank On December 19, 2003, we entered into a foreign currency swap contract
with Korea Development Bank in connection with the senior secured credit
facility agreement described above, to hedge the exposure to changes in the
foreign currency exchange rate at Won 1,190.0 per U.S.$ against
U.S.$63,065,475. ISDA Agreement between Hanaro Telecom and Korea Development Bank, Korea
Exchange Bank and Credit Lyonnais Bank On February 10, 2004, we entered into a foreign currency swap contract
under which we exchanged an aggregate of Won 161,803,305,279 (Won
116,620,000,000 with Korea Development Bank, Won 21,859,305,279 with Korea
Exchange Bank and Won 23,324,000,000 with Credit Lyonnais Bank) for
U.S.$138,744,045 with a maturity date of November 13, 2008. We agreed to pay a
7.60% fixed rate on the notional principal and receive three month LIBOR +
spread of 3.25%. Lease Agreements between Shindonga Fire & Marine Insurance Co. and Hanaro
Telecom On April 30, 2004, we entered into a lease agreement with Shindonga Fire &
Marine Insurance Co. (the lessor) pursuant to which the lessor has agreed to
lease to us seven floors of office premises at the lessors building at
Taepyongro 2-43, Chung-gu comprising a total area of 14,795.34 square meters
for a term of three years commencing April 2004. The amount of the key money
deposit is Won 30,881,433,000 for the term of the lease and the monthly
management fee is Won 113,231,920. We entered into a separate lease agreement
with the lessor for the 15th floor of the same building comprising an area of
685.92 square meters for a key money deposit of Won 145,243,000 for the term of
the lease being three years, a monthly rent of Won 14,524,300 and a monthly
management fee of Won 5,249,490. 10.D EXCHANGE CONTROLS General The Foreign Exchange Transaction Law and the Presidential Decree and
regulations under such Act and Decree (collectively, the Foreign Exchange
Transaction Laws) regulate investment in Korean securities by non-residents
and issuance of securities outside Korea by Korean companies. Under the
Foreign Exchange Transaction Laws, non-residents may invest in Korean
securities only to the extent specifically allowed by such laws or otherwise
permitted by the MOFE. The FSC has also adopted, pursuant to its authority
under the Korean Securities and Exchange Act, regulations that restrict
investment by foreigners in Korean securities. Under the Foreign Exchange Transaction Laws, if the government deems that
certain emergency circumstances, including, but not limited to, extreme
difficulty in stabilizing the balance of payments or substantial disturbance in
the Korean financial and capital markets, are likely to occur, it may impose
any necessary restrictions, such as requiring foreign investors to obtain prior
approval from the MOFE for the acquisition of Korean securities or for the
repatriation of dividends or sales proceeds arising from Korean securities or
from disposition of such securities. 80




---



##### Table of Contents



Reporting Requirements for Holders of Substantial Interests Any person whose direct or beneficial ownership of shares (whether in the
form of shares or ADSs), certificates representing the right to subscribe for
shares and certain equity-related debt securities, such as convertible bonds
and bonds with warrants (collectively, the Equity Securities), together with
the Equity Securities beneficially owned by certain related persons or by any
person acting in concert with such person that account for 5% or more of the
total outstanding Equity Securities, is required to report the status of such
holding to the FSC and the Korea Stock Exchange or the Korea Securities Dealers
Association within five business days after reaching the 5% ownership interest
level. In addition, any change in the ownership interest subsequent to such
report which equals or exceeds 1% of the total outstanding Equity Securities is
required to be reported to the FSC and the Korea Stock Exchange or the Korea
Securities Dealers Association within five business days from the date of such
change. Violation of these reporting requirements may subject a person to criminal
sanctions, such as fines or imprisonment, and may result in a loss of voting
right with respect of the ownership of Equity Securities exceeding 5%.
Furthermore, the FSC may issue an order to dispose of such non-reported Equity
Securities. Restrictions Applicable to ADSs No Korean governmental approval is necessary for the sale and purchase of
ADSs in the secondary market outside Korea or for the withdrawal of shares
underlying ADSs and the delivery inside Korea of shares in connection with such
withdrawal, provided that a foreigner who intends to acquire such shares must
obtain an Investment Registration Card from the Financial Supervisory Service
as described below. The acquisition of such shares by a foreigner must be
reported immediately by the foreigner or his standing proxy in Korea to the
Governor of the Financial Supervisory Service (the Governor). Persons who have acquired shares as a result of the withdrawal of shares
underlying the ADSs may exercise their preemptive rights for new shares,
participate in free distributions and receive dividends on shares without any
further governmental approval. Restrictions Applicable to Shares As a result of amendments to the Foreign Exchange Transaction Laws and FSC
regulations (together, the Investment Rules) adopted in connection with the
stock market opening from January 1992 and after that date, foreigners may
invest, with certain exceptions and subject to certain procedural requirements,
in all shares of Korean companies, whether listed on the Korea Stock Exchange
or registered on KOSDAQ, unless prohibited by specific laws. Foreign investors
may trade shares listed on the Korea Stock Exchange or registered with KOSDAQ
only through the Korea Stock Exchange or KOSDAQ, except in limited
circumstances, including:  
    
    odd-lot trading of shares;
    
    acquisition of shares by exercise of warrant, conversion right
under equity-linked securities or withdrawal right under depositary
receipts issued outside of Korea by a Korean company (Converted
Shares); 81




---



##### Table of Contents




    
    acquisition of shares by foreign companies as a result of merger;
    
    acquisition of shares as a result of inheritance, donation, bequest
or exercise of shareholders rights, including preemptive rights or
rights to participate in free distributions and receive dividends;
    
    acquisition of shares offered and subscribed overseas for listing
on foreign securities exchanges;
    
    over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as
explained below, has been reached or exceeded;
    
    acquisition of underlying shares by an overseas depositary in
relation to the issuance of depositary receipts;
    
    disposition of shares through the exercise of dissenting
shareholders appraisal right;
    
    acquisition of shares by direct investment pursuant to the Foreign
Investment Promotion Act and disposition of shares so acquired;
    
    acquisition or disposition of shares through a tender offer; and
    
    acquisition or disposition of shares through the electronic
over-the-counter market brokerage companies. For over-the-counter transactions of shares between foreigners outside the
Korea Stock Exchange or KOSDAQ for shares with respect to which the limit on
aggregate foreign ownership has been reached or exceeded, a securities company
licensed in Korea must act as an intermediary. Odd-lot trading of shares
outside the Korea Stock Exchange or KOSDAQ must involve a licensed securities
company in Korea as the other party. Foreign investors are prohibited from
engaging in margin transactions by using securities borrowed from securities
companies in Korea with respect to shares that are subject to a foreign
ownership limit. The Investment Rules require a foreign investor who wishes to invest in
shares on the Korea Stock Exchange or KOSDAQ (including Converted Shares) to
register its identity with the FSS prior to making
any such investment; however, such registration requirement does not apply
to foreign investors who acquire Converted Shares with the intention of selling
such Converted Shares within three months from the date of acquisition thereof.
Upon registration, the FSS will issue to the foreign investor an Investment
Registration Card which must be presented each time the foreign investor opens
a brokerage account with a securities company. Foreigners eligible to obtain an
Investment Registration Card include foreign nationals who are individuals
residing abroad for more than six months, foreign governments, foreign
municipal authorities, foreign public institutions, international financial
institutions or similar international organizations, corporations incorporated
under foreign laws and any person in any additional category designated by
decree of the MOFE. All Korean offices of a foreign corporation as a group are
treated as a separate foreigner from the offices of the corporation outside
Korea. However, a foreign corporation or depositary issuing depositary
receipts may obtain one or more Investment Registration Cards in its name in
certain circumstances as described in the relevant regulations. 82




---



##### Table of Contents



Upon a foreign investors purchase of shares through the Korea Stock
Exchange or the KOSDAQ, no separate report by the investor is required because
the Investment Registration Card system is designed to control and oversee
foreign investment through a computer system. However, a foreign investors
acquisition or sale of shares outside the Korea Stock Exchange (as discussed
above) must be reported by the foreign investor or his standing proxy to the
Governor at the time of each such acquisition or sale; provided, however, that
a foreign investor must ensure that any acquisition or sale by it of shares
outside the Korea Stock Exchange or the KOSDAQ, in the case of trades in
connection with a tender offer, odd-lot trading of shares or trades of a class
of shares for which the aggregate foreign ownership limit has been reached or
exceeded, is reported to the Governor by the securities company engaged to
facilitate such transaction. A foreign investor must appoint one or more
standing proxies from among the Korea Securities Depository, foreign exchange
banks (including domestic branches of foreign banks), investment trust
companies, internationally recognized foreign custodians, the entity licensed
to be engaged in futures transaction business under Korean Futures Transaction
Law, and securities companies (including domestic branches of foreign
securities companies) which have obtained a license to act as a standing proxy
to exercise shareholders right, place an order to sell or purchase shares or
perform any matter related to the foregoing activities if the foreign investor
does not perform these activities himself. However, a foreign investor may be
exempted from complying with these standing proxy rules with the approval of
the Governor in cases deemed inevitable by reason of conflict between laws of
Korea and the home country of such foreign investor. Certificates evidencing shares of Korean companies must be kept in custody
with an eligible custodian in Korea. Only foreign exchange banks (including
domestic branches of foreign banks), securities companies (including domestic
branches of foreign securities companies), investment trust companies, entities
licensed to be engaged in futures transaction business under Korean Futures
Transaction Law, internationally recognized foreign custodians and the Korea
Securities Depository are eligible to act as a custodian of shares for a
nonresident or foreign investor. A foreign investor must ensure that his
custodian deposits such shares with the Korea Securities Depository. However,
a foreign investor may be exempted from complying with this deposit requirement
with the approval of the Governor in circumstances where such compliance is
made impracticable, including cases where such compliance would contravene the
laws of the home country of such foreign investor. Under the Investment Rules, with certain exceptions, foreign investors may
acquire shares of a Korean company without being subject to any foreign
investment ceiling. As one such exception, designated public corporations are
subject to a 40% ceiling on the acquisition of shares by foreigners in the
aggregate. Furthermore, an investment by a foreign investor of not less than
10% of the outstanding shares of a Korean company is defined as a direct
foreign investment under the Foreign Investment Promotion Law, which is, in
general, subject to the report to, and acceptance by, the Ministry of
Commerce, Industry and Energy which delegates its authority to Korea
Trade-Investment Promotion Agency, or foreign exchange banks (including
domestic branches of foreign banks) under the relevant regulations. The
acquisition of shares of a Korean company by a foreign investor may also be
subject to certain foreign shareholding restrictions in the event that such
restrictions are prescribed in each specific law which regulates the business
of such Korean company. For example, we are currently subject to a foreign
shareholding ceiling of 49% pursuant to the Telecommunications Business Law. A
foreigner who has acquired shares in excess of such ceiling may not exercise
his voting rights with respect to the shares exceeding such limit, and the MIC
may take corrective action pursuant to the Telecommunications Business Law. Under the Foreign Exchange Transaction Laws, a foreign investor who
intends to acquire shares must designate a foreign exchange bank at which he
must open a foreign currency account and a Won account exclusively for stock
investments. No approval is required for remittance into Korea and deposit of
foreign currency funds in the foreign currency account. Foreign currency funds
may be transferred from the foreign currency account at the time required to
place a deposit for, or settle the purchase price of, a stock purchase
transaction to a Won account opened at a securities company. Funds in the
foreign currency account may be remitted abroad without any governmental
approval. 83




---



##### Table of Contents



Dividends on shares are paid in Won. No governmental approval is required
for foreign investors to receive dividends on, or the Won proceeds of the sale
of, any such shares to be paid, received and retained in Korea. Dividends paid
on, and the Won proceeds of the sale of, any such shares held by a nonresident
of Korea must be deposited either in a Won account with the investors
securities company or his Won account. Funds in the investors Won account may
be transferred to his foreign currency account or withdrawn for local living
expenses up to certain limitations. Funds in the Won account may also be used
for future investment in shares or for payment of the subscription price of new
shares obtained through the exercise of preemptive right. Securities companies (including domestic branches of foreign securities
companies) in Korea are allowed to open foreign currency accounts and Won
accounts with foreign exchange banks exclusively for accommodating foreign
investors stock investments in Korea. Through such accounts, these securities
companies may enter into foreign exchange transactions on a limited basis, such
as conversion of foreign currency funds and Won funds, either as a counterparty
to or on behalf of foreign investors, without such investors having to open
their own accounts with foreign exchange banks. 10.E TAXATION Korean Taxation The following is a summary of the principal Korean tax consequences to
owners of our shares that are non-resident individuals or non-Korean
corporations without a permanent establishment in Korea to which the relevant
income is attributable (non-resident holders). The statements regarding
Korean tax laws set forth below are based on the laws in force and as
interpreted by the Korean taxation authorities as of the date hereof. This
summary is not exhaustive of all possible tax consideration which may apply to
a particular investor, and prospective investors are advised to satisfy
themselves as to the overall tax consequences of the acquisition, ownership and
disposition of our shares, including specifically the tax consequences under
Korean law, the laws of the jurisdiction of which they are resident, and any
tax treaty between Korea and their country of residence, by consulting their
own tax advisors. Dividends on the Shares or ADSs We will deduct Korean withholding tax from dividends paid to you at a rate
of 27.5%. If you are a resident in a country that has entered into a tax
treaty with Korea, you may qualify for a reduced rate of Korean withholding
tax. For example, if you are a qualified resident of the United States for
purposes of the tax treaty between the United States and Korea and you are the
beneficial owner of a dividend, a reduced withholding tax rate of 16.5%,
including local surtax, generally will apply. If you are a beneficial owner of
ADSs, you will generally be entitled to benefits under the tax treaty between
the United States and Korea if you:  
    
    are an individual U.S. resident, a U.S. corporation or a partnership
or trust to the extent your income is subject to taxation in the United
States as the income of a U.S. resident;
    
    are not also a resident of Korea for purposes of the tax treaty
between the United States and Korea;
    
    are not subject to any anti-treaty shopping article that applies in
limited circumstances; and 84




---



##### Table of Contents




    
    do not hold ADSs in connection with the conduct of business in Korea
through a permanent establishment or the performance of independent
personal services in Korea through a fixed base. In order to obtain the benefits of a reduced withholding tax rate under a
tax treaty, you must submit to us, prior to the dividend payment date, such
evidence of tax residence as may be required by the Korean tax authorities.
Evidence of tax residence may be submitted to us through the Korea Securities
Depository. Excess taxes withheld generally are not recoverable even if you
subsequently produce evidence that you were entitled to have tax withheld at a
lower rate. If we distribute to you free shares representing a transfer of certain
capital reserves or asset revaluation reserves into paid-in capital, that
distribution may be subject to Korean tax. Taxation of Capital Gains You are exempt from Korean taxation if you sell through the Korea Stock
Exchange or KOSDAQ less than 25% of our total issued and outstanding shares
that you have owned, together with certain related parties at any time during
the year of sale and the five calendar years before the year of sale, provided
that you are either an individual or you are a corporate entity with no
permanent establishment in Korea (if you are an individual it is irrelevant
whether or not such capital gains are attributable to the permanent
establishment). If you are a resident of the United States for purposes of the
tax treaty between the United States and Korea, you will be exempt from Korean
taxation on the capital gains realized by the disposition of ADSs. Further,
the Korean taxation authorities have issued a tax ruling confirming that
capital gains earned by a non-Korean holder (whether or not it has a permanent
establishment in Korea) from the transfer of ADSs outside of Korea are exempt
from Korean taxation by virtue of the Tax Exemption Limitation Law. If you are subject to tax on capital gains with respect to the sale of
ADSs, or of shares which you acquired as a result of a withdrawal, your gain
will be calculated based on your cost of acquiring the ADSs representing such
shares, although there are no specific Korean tax provisions or rulings on this
issue. In the absence of the application of a tax treaty which exempts or
reduces the rate of tax on capital gains, the amount of Korean tax imposed on
your capital gains will be the lesser of 11% of the gross realization proceeds
and, subject to the production of satisfactory evidence of the acquisition and
transfer costs of the ADSs, 27.5% of the net capital gains. The gain is
calculated as the gross realization proceeds less the acquisition cost and
transfer expenses. If you sell your shares or ADSs, the purchaser or, in the case of the sale
of shares on the Korea Stock Exchange or through a licensed securities company
in Korea, the licensed securities company is required to withhold Korean tax
from the sales price in an amount equal to 11% of the gross realization
proceeds and to make payment thereof to the Korean tax authority, unless you
establish your entitlement to an exemption or lower rate of taxation under an
applicable tax treaty or produce satisfactory evidence of its acquisition and
transfer costs for the ADSs. In order to obtain the benefit of an exemption or
reduced rate of tax pursuant to a tax treaty, you must submit to the purchaser
or the securities company (or through the Korea Securities Depository), as the
case may be, prior to or at the time of payment, such evidence of your tax
residence as the Korean tax authorities may require in support of its claim for
treaty protection. Excess taxes withheld are generally not recoverable even if
you subsequently produce evidence that you were entitled to have taxes withheld
at a lower rate. Because the Korean taxation authorities have issued a tax ruling that the
trading of the ADSs on the Nasdaq National Market will be regarded as the
transfer of the ADSs outside Korea under the Tax Exemption Limitation Law, it
is likely that a non-Korean seller of the ADSs on the Nasdaq National Market
will not be required to make any withholdings as described. 85




---



##### Table of Contents



Inheritance Tax and Gift Tax If you die while holding an ADS or transfer an ADS as a gift, it is
unclear whether, for Korean inheritance and gift tax purposes, you will be
treated as the owner of the shares underlying the ADSs. If you are treated as
the owner of the shares, the heir or the donee (or you, if the donee fails to
pay) will be subject to Korean inheritance or gift tax presently at the rate of
10% to 50%, provided that the value of such ADSs or shares is greater than a
specified amount. Securities Transaction Tax You will not pay a securities transaction tax on your transfer of ADSs.
If you transfer shares, you will be subject to a securities transaction tax at
the rate of 0.15% and an agriculture and fishery special tax at the rate of
0.15% of the sale price of the share when traded on the Korea Stock Exchange.
If you transfer shares through KOSDAQ, you will be subject to a securities
transaction tax at the rate of 0.3% of the sales price of the shares. If your
transfer of shares is not made on the Korea Stock Exchange or KOSDAQ, subject
to certain exceptions, you will be subject to a securities transaction tax at
the rate of 0.5% and will not be subject to an agriculture and fishery special
tax. U.S. Federal Income Tax Considerations The following discussion describes the material U.S. federal income tax
considerations that may be relevant to a holder of our common shares or ADSs
that is a U.S. Holder (as defined below) with respect to the receipt of
distributions on, and the disposition of, common shares or ADSs. This
discussion is based on the Internal Revenue Code of 1986, as amended (the
Code), existing and proposed Treasury regulations, revenue rulings,
administrative interpretations and judicial decisions (all as of the date
hereof and all of which are subject to change, possibly with retroactive
effect, and different interpretations). Except as specifically set forth
herein, this discussion deals only with common shares and ADSs held by a U.S.
Holder as capital assets within the meaning of Section 1221 of the Code. This
discussion does not address all of the tax consequences that may be relevant to
prospective purchasers of common shares or ADSs in light of their particular
circumstances or to persons subject to special tax rules, such as insurance
companies, banks, financial institutions, dealers in securities or foreign
currencies, tax-exempt investors, persons holding common shares or ADSs as a
position in a straddle, as a part of a short-sale, or as part
of a hedging, conversion or other integrated transaction, persons owning,
directly, indirectly or constructively, 10% or more of the voting stock of
Hanaro Telecom or persons whose functional currency (as defined in Section 985
of the Code) is not the U.S. dollar. U.S. Holders should consult with their own
tax advisors regarding the application of the U.S. federal income tax laws to
their particular situations as well as to any additional tax consequences of
purchasing, holding or disposing of common shares or ADSs, including the
applicability and effect of the tax laws of any state, local or foreign
jurisdiction. As used in this section, the term U.S. Holder means a beneficial owner
of a common share or ADS who or that is for U.S. federal income tax purposes
(i) a citizen or individual resident of the United States, (ii) a corporation
or other entity treated as a corporation for U.S. federal income tax purposes
created or organized in or under the laws of the United States or of any state
or political subdivision thereof, (iii) an estate the income of which is
subject to U.S. federal income taxation regardless of its source, or (iv) a
trust if (A) a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust or (B) the trust has a valid
election in effect under applicable U.S. Treasury regulations to be treated as
a U.S. person. 86




---



##### Table of Contents



In general, for U.S. federal income tax purposes, U.S. Holders of ADRs
evidencing ADSs will be treated as the owners of the common shares represented
by the ADSs. Cash Distributions Except as otherwise noted in the passive foreign investment company, or
PFIC, discussion below, to the extent that a distribution on common shares or
ADSs is paid to a U.S. Holder out of our current or accumulated earnings and
profits (as determined for U.S. federal income tax purposes), such distribution
will be includible in the U.S. Holders gross income as foreign source dividend
income in an amount equal to the U.S. dollar value of such distribution
(without reduction for any applicable foreign withholding tax). A corporate
U.S. Holder will not be entitled to a dividends received deduction with respect
to distributions on common shares or ADSs by Hanaro Telecom. Therefore, in the event that any Korean tax is withheld from a
distribution on common shares or ADSs, a U.S. Holder generally will be required
to report gross income in an amount greater than the cash received. However,
subject to certain conditions and limitations (including certain minimum
holding period requirements), the U.S. dollar value of the Korean income taxes,
if any, withheld from a distribution to a U.S. Holder on the common shares or
ADSs may be claimed as a credit against the U.S. Holders U.S. federal income
tax liability. Alternatively, a U.S. Holder may claim a deduction for such
amount of Korean income taxes withheld in a taxable year, but only if such U.S.
Holder does not elect to claim a foreign tax credit in respect of any foreign
taxes paid by it in the taxable year. Dividends on common shares or ADSs
generally will constitute passive income or, in the case of certain U.S.
Holders, financial services income for U.S. foreign tax credit purposes.
Special rules apply to certain individuals whose foreign source income during
the taxable year consists entirely of qualified passive income and whose
creditable foreign taxes paid or accrued during the taxable year do not exceed
$300 ($600 in the case of a joint return). To the extent that the amount of any distribution on the common shares or
ADSs exceeds the current and accumulated earnings and profits of Hanaro Telecom
(as determined for U.S. federal income tax purposes), a U.S. Holders pro rata
share of such excess amount would be treated first as a nontaxable return of
capital that would be applied against and would reduce the U.S. Holders tax
basis in its common shares or ADSs (but not below zero), and then as capital
gain. Distributions in excess of our current and accumulated earnings and
profits (as determined for U.S. federal income tax purposes) generally will not
give rise to foreign source income and a U.S. Holder may be unable to claim a
foreign
tax credit in respect of any foreign withholding tax imposed on such
distributions unless (subject to applicable limitations) the U.S. Holder has
other foreign source income in the appropriate category for foreign tax credit
purposes. The rules relating to foreign tax credits are extremely complex and the
availability of a foreign tax credit depends on numerous factors. Prospective
purchasers of common shares or ADSs should consult their own tax advisors
concerning the application of the U.S. foreign tax credit rules to their
particular situations. The U.S. dollar value of any distribution to a U.S. Holder on common
shares or ADSs that is paid in a foreign currency will be calculated by
reference to the exchange rate in effect at the time the distribution is
received by the U.S. Holder (or a depositary nominee, custodian or other agent
of the U.S. Holder). A U.S. Holder generally should not recognize any foreign
currency gain or loss if such foreign currency is converted into U.S. dollars
on the day received. If a U.S. Holder does not convert such foreign currency
into U.S. dollars on the date of receipt, however, such Holder may recognize
United States source foreign currency gain or loss (which generally will be
taxable as United States source ordinary income or loss) upon a subsequent sale
or other disposition of the foreign currency. 87




---



##### Table of Contents



Sale of Common Shares and ADSs A U.S. Holder generally will recognize gain or loss upon a sale or other
disposition of common shares or ADSs in an amount equal to the difference
between the U.S. dollar value of the amount realized on the sale or other
disposition and the U.S. Holders adjusted tax basis in the common shares or
ADSs. Subject to the PFIC discussion below, such gain or loss generally will
be capital gain or loss and, in the case of certain non-corporate U.S. Holders,
may be subject to U.S. federal income tax at a preferential rate where the U.S.
Holders holding period exceeds one year. Any gain or loss recognized by a
U.S. Holder on a sale or other disposition of common shares or ADSs generally
will be treated as United States source gain or loss for foreign tax credit
purposes. A U.S. Holders ability to deduct capital losses in respect of
common shares and ADSs is subject to limitations. Securities Tax Holders should note that any Korean securities transaction tax will not be
treated as a creditable foreign tax for U.S. federal income tax purposes,
although U.S. Holders may be entitled to deduct such taxes, subject to
applicable limitations under the Code. Passive Foreign Investment Company In general, a foreign corporation is a PFIC for any taxable year in which
(i) 75% or more of its gross income consists of passive income (such as
dividends, interest, rents and royalties) or (ii) 50% or more of the average
quarterly value of its assets consists of assets that produce, or are held for
the production of, passive income. Based on the composition of our income and
valuation of our assets, we were not a PFIC for the year 2003, and we do not
expect to be a PFIC in the future although we can provide no assurance in that
regard. Subject to the discussion of the mark-to-market election below, if we were
a PFIC for any taxable year, a U.S. Holder that held common shares or ADSs in
that taxable year generally would be subject to special rules with respect to
certain excess distributions (as defined in Section 1291 of the Code) made by
us on the common shares or ADSs and with respect to gains from dispositions of
common shares or ADSs. In general, such a U.S. Holder would be required to
allocate such distributions or gains (as the case may be) ratably over its holding period for such common shares or
ADSs. That portion of any such distributions or gains allocated to a prior
taxable year (other than a year prior to the first year in which we were a
PFIC) would be taxed at the highest U.S. federal income tax rate in effect for
such year with respect to ordinary income and the U.S. Holder would be subject
to an interest charge on the resulting tax liability (determined as if such tax
liability had been due with respect to the particular taxable year). That
portion, if any, of such distributions or gains allocated to the taxable year
in which the U.S. Holder received the excess distribution or realized the gain
will be taxed as ordinary income. In certain circumstances, a U.S. Holder, in lieu of being subject to the
PFIC rules discussed above, may make an election to include gain on the stock
of a PFIC as ordinary income under a mark-to-market method provided that such
stock is regularly traded on a qualified exchange. Under current law, the
mark-to-market election may be available to a U.S. Holder since the ADSs are
listed on the Nasdaq National Market, which constitutes a qualified exchange as
designated in the Code. There can be no assurances, however, that the ADSs
have been or will continue to be regularly traded on such exchange. The
common shares are listed on the Korea Securities Dealers Automated Quotation
System Market, which must meet certain trading, listing, financial disclosure
and other requirements to be treated as a qualified exchange under applicable
Treasury regulations for purposes of the mark-to-market election. If such
exchange is treated as a qualified exchange, no assurance can be given that the
shares have been or will continue to be regularly traded for purposes of the
mark-to-market election. 88




---



##### Table of Contents



If a U.S. Holder makes an effective mark-to-market election, the U.S.
Holder will recognize as ordinary income or loss each year an amount equal to
the difference as of the close of the taxable year between the fair market
value of the PFIC shares or ADSs and the U.S. Holders adjusted tax basis in
such shares or ADSs. Losses would be allowed only to the extent of net
mark-to-market gain previously included by the U.S. Holder under the election
for prior taxable years. A U.S. Holders adjusted tax basis in PFIC shares or ADSs will be
increased by the amount of any income inclusion and decreased by the amount of
any deductions under the mark-to-market rules. If a U.S. Holder makes a
mark-to-market election, it will be effective for the taxable year for which
the election is made and all subsequent taxable years unless the shares or ADSs
are no longer regularly traded on a national securities exchange or the
Internal Revenue Service consents to the revocation of the election. A
mark-to-market election is subject to complex and specific rules and
requirements, and U.S. Holders are urged to consult their tax advisors about
the availability of the mark-to-market election and whether making the election
would be advisable in their particular circumstances. If Hanaro Telecom is a PFIC in any year, a U.S. Holder would be required
to make an annual return on Internal Revenue Service Form 8621 regarding
distributions received with respect to the shares or ADSs and any gain realized
from the disposition of the common shares or ADSs. If we determine at the end of any taxable year that we are a PFIC for such
taxable year, we will notify the registered owners of the common shares and
ADSs. We urge you to consult your own tax advisors regarding the consequences
of an investment in a PFIC. Backup Withholding Backup withholding and information reporting requirements may apply to
payments made within the United States of dividends on common shares or ADSs
and to certain payments of proceeds of a sale or redemption of a common share
or ADS paid to a U.S. Holder. Hanaro Telecom, our agent, a broker, the Trustee
or any paying agent, as the case may be, may be required to withhold tax from
any payment that is subject to backup withholding at a current rate of 28%
(subject to reduction in future years) of such
payment if the U.S. Holder fails to furnish the U.S. Holders taxpayer
identification number, to certify that such U.S. Holder is not subject to
backup withholding, or to otherwise comply with the applicable requirements of
the backup withholding rules. Certain U.S. Holders (including, among others,
corporations) are not subject to the backup withholding and information
reporting requirements. Any amounts withheld under the backup withholding
rules from a payment to a U.S. Holder generally may be claimed as a credit
against such U.S. Holders U.S. federal income tax liability, provided that the
required information is furnished to the U.S. Internal Revenue Service. Estate and Gift Tax As discussed in Korean TaxationInheritance Tax and Gift Tax, Korea may
impose an estate tax on a descendent who owns our common shares (and possibly
ADSs), even if the descendent is a non-resident. Subject to certain conditions
and limitations, the amount of any inheritance tax paid to Korea may be
eligible for credit against the amount of U.S. federal estate tax imposed on
the estate of a U.S. Holder. The Korean gift tax generally will not be treated
as a creditable foreign tax for U.S. tax purposes. Prospective purchasers
should consult their personal tax advisors regarding the consequences of the
imposition of the Korean inheritance or gift tax. 89




---



##### Table of Contents



10.F DIVIDENDS AND PAYING AGENTS Not applicable. 10.G STATEMENTS BY EXPERTS Not applicable. 10.H DOCUMENTS ON DISPLAY Hanaro Telecom files annual reports on Form 20-F and reports on Form 6-K
with the SEC. You may read and copy this information at the SECs Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can also
request copies of the documents, upon payment of a duplicating fee, by writing
to the Public Reference Section of the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the Public Reference
Room. The SEC also maintains a website at http://www.sec.gov that contains
reports and other information regarding issuers that file electronically with
the SEC. You may request a copy of these filings, at no cost, by writing or
telephoning us at Shindonga Fire & Marine Insurance Building, Tae-pyong-ro
2-43, Chung-gu, Seoul, Korea, 100-733, Attention: Investor Relations Team,
telephone number: (822) 6266-4319. 10.I SUBSIDIARY INFORMATION Not applicable. 90




---



##### Table of Contents



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in the estimated fair values of our investments. We place our investments with high credit quality issuers. It is our
policy to limit the amount of our credit exposure to any one issuer. We are
adverse to principal loss and seek to preserve our invested funds by limiting
default risk, market risk and reinvestment risk. We mitigate default risk by
investing only in high credit quality securities that we believe to be low risk
and by positioning our portfolio to respond appropriately to a significant
reduction in the credit rating of any investment issuer or guarantor. Interest Rate Risk Our exposure to risk for changes in interest rates relates primarily to
our investments in short-term financial investments, floating rate note (FRN)
and our syndicated loan in foreign currency. Investments in both fixed rate and floating rate interest earning
investments carry some interest rate risk. The fair value of fixed rate
securities may fall due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall.
Partly as a result of this, our future interest income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if we are forced to sell securities, which have fallen in estimated
fair value due to changes in interest rates. Our cash and cash equivalents consist of cash on hand, passbook accounts,
commercial paper and money market deposit accounts. We do not expect any
material loss with respect to our cash and cash equivalents as a result of
interest rate changes, and the estimated fair value of our cash and cash
equivalents approximates original cost. Our short-term financial investments consist of time deposits, money
market deposit accounts and repurchase agreement securities. As our short-term
financial investments are readily convertible to known amounts of cash and have
short maturities, we do not expect material loss with respect to our short-term
financial investments as a result of interest rate changes. We pay floating interest on our FRN and on the U.S. dollar denominated
portion of our syndicated loan. The risk of exposure to variable interest
rates has been hedged by entering into swap contracts with the Industrial Bank
of Korea and Korea Development Bank under which we buy variable interest rate
and pay fixed interest rate. Therefore, we do not expect any material loss
with respect to our FRN or the syndicated loan as a result of interest rate
changes. Foreign Currency Risk Most of our expenses and all of our revenues are incurred in Korean Won,
which is our functional currency. As of December 31, 2003, Won 76.1 billion,
representing 5.8% of our total liability, is denominated in U.S. dollars. Of
this amount, Won 72.7 billion represented the amount outstanding under our
syndicated loan and Won 3.4 billion represented the amount outstanding under an
equipment lease agreement with Hewlett-Packard. 91




---



##### Table of Contents



We currently have no other significant foreign currency denominated
liabilities. Because all of our
revenues are denominated in Won, any significant changes in exchange rates
between the Won and the U.S. dollar will affect us due to the effect of such
changes on the amount of funds required by us to make interest and principal
payments on our U.S. dollar denominated debt. However, on December 19, 2003,
we entered into a foreign currency forward contract with Korea Development Bank
in connection with the syndicated loan to hedge the exposure to changes in the
foreign currency exchange rate and do not expect any material loss with respect
to our syndicated loan as a result of foreign exchange rate changes. Assuming the Won/U.S. dollar exchange rate was initially Won 1,192.0 to
one U.S. dollar, which was the Federal Reserve Bank of New York noon buying
rate as of December 31, 2003, if the Won depreciates against the U.S. dollar by
10% and all other variables are held constant from their levels at December 31,
2003, we estimate that our loss before income taxes resulting from the lease
payments outstanding under the equipment lease agreement with Hewlett-Packard
will be approximately Won 0.3 billion in 2004. 92




---



##### Table of Contents



ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 93




---



##### Table of Contents



PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 14.A to D MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS None. 14.E USE OF PROCEEDS Not applicable. 
 ITEM 15. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. Mr. Chang-Bun Yoon, our Chief
Executive Officer and Representative Director and Ms. Janice Lee, our chief
financial officer, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in the United States Exchange Act Rule
13a-15(e)) as of the end of the period covered by this Form 20-F, have
concluded that, as of such date, our disclosure controls and procedures were
effective to ensure that material information required to be included in our
periodic SEC reports relating to us, is made known to them. (b) Internal Control Over Financial Reporting. There have been no
significant changes in internal control over financial reporting that occurred
during the fiscal year ended December 31, 2003, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting. 
 ITEM 16. [Reserved] 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our Audit Committee consists of three outside directors: Sung Kyou Park,
Sun Woo Kim and Byung Moo Park, each of whom is an independent director as
defined in Rule 4200(15) of the Nasdaq Marketplace Rules. Our board of
directors has determined that Mr. Sung Kyou Park is an audit committee
financial expert as defined Item 16A of Form 20-F, in light of his extensive
experience in management responsibilities for over 10 years, in particular,
experience in actively supervising principal financial officers, controllers,
accounting officer or persons performing similar functions in preparing,
auditing, analyzing and evaluating financial statements of companies. In See
Item 6Directors, Senior Management and Employees for more information on Mr.
Parks educational background, qualifications and work experience. 94




---



##### Table of Contents



ITEM 16B. CODE OF ETHICS In April 2003, we adopted a written code of ethics for our directors,
officers and employees, a copy of an English translation of which is filed
herein as an exhibit. The original Korean version of our code of ethics is
available on our website at www.hanaro.com. There has been no amendment to
such code of ethics since its adoption. 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND EXPENSES Anjin Deloitte LLC (formerly known as Anjin & Co.) has served as our
independent accountants for each of the fiscal years in the three-year period
ended December 31, 2003. The following table presents the aggregate fees for
professional services and other services rendered by Anjin Deloitte LLC to us
in 2002 and 2003: 2002
    
    2003(a) Audit Fees(1)
    
    Won 260 million
    
    Won 286 million(b) Audit-Related Fees(2)
    
    
    
    
    
    
    (c) Tax Fees(3)
    
    
    
    
    
    
    (d) All Other Fees(4)
    
    Won 160 million
    
    Won 65 million
  (1)
    
    Audit Fees consist of aggregate fees billed by Anjin Deloitte LLC in
connection with the audit of our annual financial statements and the
review of our interim financial statements.(2)
    
    Audit-related Fees consist of aggregate fees billed by Anjin
Deloitte LLC for advisory services relating to analyses of multiple
accounting issues (of which there was none for 2002 and 2003).(3)
    
    Tax Fees consists of aggregate fees billed by Anjin Deloitte LLC for
the preparation of income tax return and tax advisory services (of which
there was none for 2002 and 2003).(4)
    
    All Other Fees include fees billed by Anjin Deloitte LLC principally
for due diligence services relating to our call center and accounting
assistance. (e) Our Audit Committee reviews and pre-approves the scope and the cost of
all audit and permissible non-audit services performed by the independent
auditors, other than those for de minimusservices which are approved by the
Audit Committee prior to the completion of the audit. 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. 
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not applicable. 95




---



##### Table of Contents



PART III 
 ITEM 17. FINANCIAL STATEMENTS We have elected to provide the financial statements and related
information specified in Item 18 in lieu of 17. 
 ITEM 18. FINANCIAL STATEMENTS See pages F-1 to F-45 following Glossary. 
 ITEM 19. EXHIBITS Documents filed as exhibits to this annual report: ExhibitNumber
    
    Description1.1
    
    Articles of Incorporation of Hanaro Telecom as amended on March 26, 2004 (English
translation).4.1
    
    Underwriting Agreement dated April 24, 2002, between Hanaro Telecom, Bridge
Securities, Korea Development Bank, Daewoo Securities, CJ Investment Trust &
Securities and Mirae Asset Securities (including English translation).24.2
    
    Interest Rate Swap Agreement dated April 16, 2002, between Hanaro Telecom and the
Industrial Bank of Korea.24.3
    
    Kun-Pledge Creation Agreement dated April 16, 2002, between Hanaro Telecom and the
Industrial Bank of Korea (including English translation).24.4
    
    Trust Deed dated October 23, 2001, between Hanaro Telecom and Shinhan Bank (including
English translation).24.5
    
    Special Terms of the Trust Deed dated October 23, 2001, between Hanaro Telecom and
Shinhan Bank (including English translation).24.6
    
    Amendment to the Special Terms of the Trust Deed dated December 3, 2001, between
Hanaro Telecom and Shinhan Bank (including English translation).24.7
    
    Amendment to the Special Terms of the Trust Deed dated April 9, 2002, between Hanaro
Telecom and Shinhan Bank (including English translation).24.8
    
    Asset Transfer Agreement dated October 23, 2001, between Hanaro Telecom and Hanafos
Securitization Speciality Co., Ltd. (including English translation).24.9
    
    Trust Deed dated April 18, 2002, between Hanaro Telecom and Kookmin Bank (including
English translation).24.10
    
    Asset Transfer Agreement dated April 18, 2002, between Hanaro Telecom and HanaDream
Co., Ltd. (including English translation).24.11
    
    Real Estate Collateral Trust Agreement dated March 20, 2003 between Hanaro Telecom and
Korea Real Estate Investment Trust Co., Ltd (English translation).38.1
    
    List of Hanaro Telecoms significant subsidiaries.11.1
    
    Code of Ethics (English translation).12.1
    
    Section 302 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).12.2
    
    Section 302 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).13.1
    
    Section 906 Certification required by Rule 13a-14(b) and 18 U.S.C. Section 1350.
 96




---



##### Table of Contents



ExhibitNumber
    
    Description14(a).1
    
    Network Service Provider License dated February 12, 2000 (including English
translation).114.(a)2
    
    Network Service Provider License dated August 17, 2000 (including English
translation).114.(a)3
    
    Specific Service Provider License dated June 19, 1998 (including English translation).114.(a)4
    
    Network Operator License Letter dated June 28, 1999 (including English translation).114.(a)5
    
    Public Notice regarding grant of International Telecommunications Certificate from
U.S. Federal Communications Commission dated July 6, 2000.114.(a)6
    
    Letter from Hanaro Telecom to the U.S. Securities and Exchange Commission.214.(a)7
    
    License for Facilities Based Telecommunications Business (Network Service) dated
January 28, 2003 (English translation).3
   1
    
    Previously filed with the annual report on Form 20-F for the fiscal year ended December 31, 2000.2
    
    Previously filed with the annual report on Form 20-F for the fiscal year ended December 31, 2001.3
    
    Previously filed with the annual report on Form 20-F for the fiscal year ended December 31, 2002. 97




---



##### Table of Contents



SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all the requirements for
filing on Form 20-F and has duly caused and authorized the undersigned to
sign this annual report on its behalf. HANARO TELECOM, INC.By:
    /s/ Janice LeeName:
    Janice LeeTitle:
    Executive Vice President/Chief Financial Officer Date: June 16, 2004 98




---



##### Table of Contents



GLOSSARY Set forth below are definitions of some of the terms used in this annual
report. ADSL
    
    Asymmetric Digital Subscriber Line. ADSL is a technology that allows more data to be sent over existing
copper telephone lines. ADSL supports data rates of 1.5 to 9.0 Mbps when receiving data (known as the
downstream rate), and 16 to 640 Kbps when sending data (known as the upstream rate). ADSL requires a
special ADSL modem.ATM
    
    Asynchronous Transfer Mode. ATM is a high bandwidth, low-delay, high-speed transmission technology. ATM is
a communication standard that provides for information transfer in the form of fixed-length cells of 53
bytes each. The ATM format can be used to deliver voice, video and data traffic at varying rates.backbone
    
    A centralized high-speed network that interconnects smaller, independent networks.bandwidth
    
    The number of bits of information which can move over a communication medium in a given amount of time.
Typically measured in Kbps and Mbps.bps
    
    Bits per second. A measure of digital information transmission rates. A rate of one bps can transmit one
bit in a second.cable modem
    
    A modem designed to operate over cable television lines. Because cable lines used by cable television
generally provides much greater bandwidth than telephone lines, a cable modem can be used to achieve faster
access to the world wide web.dedicated line
    
    Telecommunication lines dedicated or reserved for use by particular subscribers along predetermined routes.DSLAM
    
    Digital Subscriber Line Access Multiplexer. DSLAM is a box that sits at the network end of a DSL line which
gathers together all the data to send over the backbone network.Gbps
    
    Gigabits per second. A measure of digital information transmission rates. One Gbps equals 1,000 Mbps, one
million Kbps, or one billion bps.HFC
    
    Hybrid Fiber Coaxial. HFC cable is used in broadband telecommunication systems. HFC can transmit between
500 MHz to 1,000 MHz of bandwidth in both directions.IDC
    
    Internet data center.IMT-2000
    
    International Mobile Telecommunications 2000. IMT-2000, or 3G, is an initiative of the International
Telecommunication Union to unify the diverse second-generation systems in the global wireless industry that
are currently largely incompatible by establishing certain global standards for third-generation systems
that will provide a common air interface capable of offering wireless multimedia service globally at
transmission speeds of up to 348 Kbps on the move and 2 Mbps when stationary or indoors.Internet
    
    A global network connecting millions of computers. More than 100 countries are linked into exchanges of
data, news and opinions.ISP
    
    Internet Service Provider. An ISP is a company that provides access to the Internet. For a monthly fee,
the service provider provides a software package, user name, password and access phone number. Equipped
with a modem, the user can then log on to the Internet and browse the world wide web.Kbps
    
    Kilobits per second. A measure of digital information transmission rates. One Kbps equals 1,000 bps.LAN
    
    Local Area Network. A LAN is a group of computers and associated devices that share a common communications
line and typically share the resources of a single processor or
 i




---



##### Table of Contents



server within a small geographic area (for
example, within an office building). Usually, the server has applications and data storage that are shared
in common by multiple computer users.leased line
    
    A permanent telephone connection between two points set up by a network service provider. Typically, leased
lines are used by businesses to connect geographically distant offices. The fee for the connection is
usually a fixed monthly rate.LMDS
    
    Local Multi-point Distribution System. LMDS is a terrestrial wireless local-loop network that operates
using microwave transmission links to provide a wireless last-mile connection to the subscriber.Mbps
    
    Megabits per second. A measure of digital information transmission rates. One Mbps equals 1,000 Kbps or
one million bps.MIC
    
    Ministry of Information and Communication of Korea.NSP
    
    Network Service Provider.remote terminal
    
    A system that multiplexes voice and data signals into synchronous data streams and transmits them as optical
signals.router
    
    A device that forwards data packets between interconnected network segments.SDH
    
    Synchronous Digital Hierarchy. A set of standard fiber optic based serial standards planned for use with
ATM and other standards.VDSL
    
    Very high bit rate Digital Subscriber Line. VDSL is a technology that allows final delivery of data over
existing copper telephone lines. VDSL supports data rates of up to 52 Mbps when receiving data (known as
the downstream rate).VoIP
    
    Voice over Internet Protocol (that is, voice delivered using the Internet Protocol) is a term used in
Internet Protocol telephony for a set of facilities for managing the delivery of voice information using the
Internet Protocol. This means sending voice information in digital form in discrete packets rather than in
the traditional circuit-committed protocols of the public switched telephone network.WLL
    
    Wireless Local Loop. A local loop using fixed radio access technology to
provide low to medium speed Internet services.
 ii




---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageIndependent Auditors Report of Anjin Deloitte LLC
    
    
    F-2Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003
    
    
    F-5Consolidated Statements of Shareholders Equity for the years ended December 31, 2001,
2002 and 2003
    
    
    F-6Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-11
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of
Hanaro Telecom, Inc.: We have audited the accompanying consolidated balance sheets of Hanaro Telecom,
Inc. and its subsidiaries (collectively referred to as the Company) as of
December 31, 2002 and 2003, and the related consolidated statements of
operations, shareholders equity and cash flows for the years ended December
31, 2001, 2002 and 2003, all expressed in Korean won. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hanaro Telecom, Inc. and its
subsidiaries as of December 31, 2002 and 2003, and the results of their
operations, changes in shareholders equity and their cash flows for the years
ended December 31, 2001, 2002 and 2003 in conformity with financial accounting
standards in the Republic of Korea. The translated amounts in the accompanying financial statements have been
translated into U.S. dollars, solely for the convenience of the reader, on the
basis set forth in Note 2. As explained in Note 18, on November 18, 2003, the Company issued 182,182,500
common shares at W3,200 per share (par value: W5,000) for the specified foreign
investors. The discounts at less than par value, which amounts to W329,062
million, and the issuing cost of W19,111 million were offset against the
existing paid-in capital in excess of par value. Accounting practices used by the Company in preparing the accompanying
financial statements conform with generally accepted accounting principles in
the Republic of Korea, but do not conform with generally accepted accounting
principles in the United States of America. The description of the significant
differences and the reconciliation of net loss and shareholders equity to U.S.
generally accepted accounting principles are set forth in Note 25. /s/ Anjin Deloitte LLC Anjin Deloitte LLC Seoul, Korea
March 23, 2004 F-2




---



##### Table of Contents



HANARO TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2003 Translation intoKorean Won
    
    U.S. Dollars (Note 2)ASSETS
    
    2002
    
    2003
    
    2003(In millions)
    
    (In thousands)CURRENT ASSETS:Cash and cash equivalents (Note 3)
    
    W
    306,118
    
    
    W
    199,548
    
    
    $
    167,406Short-term financial instruments (Notes 4 and 5)
    
    
    150,499
    
    
    
    219,872
    
    
    
    184,456Short-term investment securities (Note 6)
    
    
    18,951
    
    
    
    389
    
    
    
    326Trade receivables, net of allowance for doubtful
accounts of W18,137 million in 2002 and W37,504
million in 2003, and discount on present value of W5
million in 2003
    
    
    229,867
    
    
    
    208,503
    
    
    
    174,919Short-term loans, net of discount on present value of
W189 million in 2002 and W596 million in 2003 (Note 9)
    
    
    7,194
    
    
    
    14,458
    
    
    
    12,129Accounts receivable-other, net of allowance for
doubtful accounts of W3,033 million in 2002 and
W2,899 million in 2003
    
    
    7,032
    
    
    
    2,820
    
    
    
    2,366Accrued income
    
    
    5,319
    
    
    
    6,313
    
    
    
    5,296Prepaid expenses (Note 10)
    
    
    8,980
    
    
    
    21,935
    
    
    
    18,402Prepaid income tax
    
    
    4,458
    
    
    
    2,353
    
    
    
    1,974Advanced payments
    
    
    261
    
    
    
    1,577
    
    
    
    1,323Forward exchange contracts (Note 17)
    
    
    
    
    
    
    173
    
    
    
    145Inventories
    
    
    10,880
    
    
    
    1,295
    
    
    
    1,087749,559
    
    
    
    679,236
    
    
    
    569,829NON-CURRENT ASSETS:Long-term financial instruments (Notes 4 and 5)
    
    
    23
    
    
    
    7
    
    
    
    6Long-term investment securities (Note 7)
    
    
    56,528
    
    
    
    23,764
    
    
    
    19,936Investment securities using the equity method (Note 8)
    
    
    
    
    
    
    9,565
    
    
    
    8,024Long-term trade receivables, net of discount on
present value ofW680 million in 2003 (Note 2)
    
    
    
    
    
    
    1,038
    
    
    
    871Long-term loans, net of discount on present value of
W5,194 million in 2002 and W2,525 million in 2003
(Note 9)
    
    
    48,478
    
    
    
    13,483
    
    
    
    11,311Key-money deposits
    
    
    79,530
    
    
    
    43,928
    
    
    
    36,852Long-term prepaid expenses
    
    
    13,990
    
    
    
    12,893
    
    
    
    10,816Deferred income tax assets (Note 21)
    
    
    181
    
    
    
    232
    
    
    
    195Property and equipment, net (Notes 10, 11, 13 and 24)
    
    
    3,134,314
    
    
    
    2,550,921
    
    
    
    2,140,034Intangibles (Notes 12 and 24)
    
    
    22,182
    
    
    
    51,481
    
    
    
    43,1903,355,226
    
    
    
    2,707,312
    
    
    
    2,271,235Total Assets
    
    W
    4,104,785
    
    
    W
    3,386,548
    
    
    $
    2,841,064
 (continued) F-3




---



##### Table of Contents



HANARO TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) AS OF DECEMBER 31, 2002 AND 2003 Translation intoKorean Won
    
    U.S. Dollars (Note 2)LIABILITIES AND SHAREHOLDERS EQUITY
    
    2002
    
    2003
    
    2003(In millions)
    
    (In thousands)CURRENT LIABILITIES:Trade payables
    
    W
    77,332
    
    
    W
    32,951
    
    
    $
    27,643Other accounts payable
    
    
    181,196
    
    
    
    116,632
    
    
    
    97,846Short-term borrowings (Note 14)
    
    
    63,000
    
    
    
    163,000
    
    
    
    136,745Advances received
    
    
    6,491
    
    
    
    3,321
    
    
    
    2,786Accrued expenses
    
    
    47,922
    
    
    
    59,982
    
    
    
    50,320Withholdings
    
    
    16,182
    
    
    
    21,210
    
    
    
    17,794Income tax payable
    
    
    1,826
    
    
    
    179
    
    
    
    150Current portion of Asset Backed Securities payable
(Note 16)
    
    
    146,024
    
    
    
    32,510
    
    
    
    27,273Current maturities of long-term debt, net of discount
on debentures of W5,249 million in 2002 and W3,476
million in 2003, and accrued interest of W8,246 million
in 2002, and present value discount of W1,698 million
in 2003 (Notes 13 and 15)
    
    
    1,041,343
    
    
    
    352,226
    
    
    
    295,492Forward exchange contracts
    
    
    1,888
    
    
    
    
    
    
    
    Interest swap (Note 17)
    
    
    5,633
    
    
    
    13,058
    
    
    
    10,955Deposits received
    
    
    16,530
    
    
    
    1,781
    
    
    
    1,4941,605,367
    
    
    
    796,850
    
    
    
    668,498LONG-TERM LIABILITIES:Long-term debt, net of current portion (Note 15)
    
    
    213,233
    
    
    
    242,523
    
    
    
    203,459Debentures, net (Note 15)
    
    
    617,647
    
    
    
    481,753
    
    
    
    404,155Long-term obligation under capital lease (Note 13)
    
    
    38,087
    
    
    
    48,570
    
    
    
    40,747Long-term Asset Backed Securities payable (Note 16)
    
    
    72,369
    
    
    
    
    
    
    
    Long-term advances received
    
    
    15,504
    
    
    
    14,315
    
    
    
    12,009Accrued severance indemnities, net (Note 2)
    
    
    24,094
    
    
    
    23,876
    
    
    
    20,030Long-term deposits received
    
    
    2,569
    
    
    
    20,711
    
    
    
    17,376Deferred income tax liabilities (Note 21)
    
    
    417
    
    
    
    47
    
    
    
    39983,920
    
    
    
    831,795
    
    
    
    697,815Total Liabilities
    
    
    2,589,287
    
    
    
    1,628,645
    
    
    
    1,366,313COMMITMENTS
AND CONTINGENCIES (Note 23)SHAREHOLDERS EQUITY (Note 1):Capital stock (Note 18)
    
    
    1,396,613
    
    
    
    2,310,676
    
    
    
    1,938,487Paid-in capital in excess of par value (Note 18)
    
    
    688,951
    
    
    
    340,777
    
    
    
    285,887Other capital surplus
    
    
    807
    
    
    
    (8,557
    )
    
    
    (7,179
    )Accumulated deficit
    
    
    (710,804
    )
    
    
    (871,614
    )
    
    
    (731,220
    )Capital adjustments:Stock compensation (Note 19)
    
    
    4,541
    
    
    
    5,916
    
    
    
    4,963Valuation loss on available-for-sale securities, net
(Note 7)
    
    
    (4,430
    )
    
    
    (6,806
    )
    
    
    (5,710
    )Valuation loss on available-for-sale securities
using the equity method
    
    
    
    
    
    
    (7
    )
    
    
    (6
    )Valuation loss on interest swap (Note 17)
    
    
    (5,633
    )
    
    
    (13,058
    )
    
    
    (10,955
    )Foreign-based operations translation debit
    
    
    (24
    )
    
    
    (22
    )
    
    
    (18
    )Minority interests
    
    
    145,477
    
    
    
    598
    
    
    
    502Total Shareholders Equity
    
    
    1,515,498
    
    
    
    1,757,903
    
    
    
    1,474,751Total Liabilities and Shareholders Equity
    
    W
    4,104,785
    
    
    W
    3,386,548
    
    
    $
    2,841,064
 See accompanying notes to consolidated financial statements. F-4




---



##### Table of Contents



HANARO TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 Translation intoKorean Won
    
    U.S. Dollars (Note 2)2001
    
    2002
    
    2003
    
    2003(In millions, except per share amount)
    
    (In thousands, exceptper share amount)OPERATING REVENUE (Notes 22 and 24)
    
    W
    830,721
    
    
    W
    1,417,854
    
    
    W
    1,383,486
    
    
    $
    1,160,643OPERATING EXPENSES (Note 20)
    
    
    1,001,335
    
    
    
    1,396,426
    
    
    
    1,312,792
    
    
    
    1,101,336OPERATING INCOME (LOSS)
    
    
    (170,614
    )
    
    
    21,428
    
    
    
    70,694
    
    
    
    59,307NON-OPERATING INCOME:Interest income
    
    
    26,506
    
    
    
    32,761
    
    
    
    18,465
    
    
    
    15,491Dividend income
    
    
    98
    
    
    
    2,935
    
    
    
    
    
    
    
    Gain on valuation of trading securities
    
    
    5,278
    
    
    
    5
    
    
    
    
    
    
    
    Gain on disposal of short-term investment securities
    
    
    190
    
    
    
    1,718
    
    
    
    315
    
    
    
    264Gains on disposal of long-term investment securities
    
    
    1,387
    
    
    
    2,658
    
    
    
    145
    
    
    
    122Gain on disposal of property and equipment
    
    
    
    
    
    
    93
    
    
    
    1,102
    
    
    
    924Gain on foreign currency transactions
    
    
    6,522
    
    
    
    1,560
    
    
    
    267
    
    
    
    224Gain on foreign currency translation
    
    
    538
    
    
    
    17,064
    
    
    
    19
    
    
    
    16Gain on early redemption of debentures (Note 15)
    
    
    
    
    
    
    
    
    
    
    870
    
    
    
    730Gain on valuation of forward exchange contract
(Note 17)
    
    
    2,519
    
    
    
    
    
    
    
    173
    
    
    
    145Gain on transaction of forward exchange contract
(Note 17)
    
    
    
    
    
    
    186
    
    
    
    343
    
    
    
    288Gain on disposal of intangible assets
    
    
    
    
    
    
    1,646
    
    
    
    
    
    
    
    Gain on realization of negative goodwill (Note 12)
    
    
    
    
    
    
    3,093
    
    
    
    
    
    
    
    Other
    
    
    6,469
    
    
    
    6,646
    
    
    
    5,273
    
    
    
    4,42449,507
    
    
    
    70,365
    
    
    
    26,972
    
    
    
    22,628NON-OPERATING EXPENSES:Interest expense (Note 15)
    
    
    107,231
    
    
    
    169,412
    
    
    
    139,330
    
    
    
    116,888Asset Backed Securities payable expense (Note 16)
    
    
    4,100
    
    
    
    22,293
    
    
    
    9,028
    
    
    
    7,574Loss on foreign currency transactions
    
    
    4,781
    
    
    
    428
    
    
    
    764
    
    
    
    641Loss on foreign currency translation
    
    
    7,031
    
    
    
    260
    
    
    
    138
    
    
    
    116Loss on disposal of short-term investment securities
    
    
    5
    
    
    
    
    
    
    
    2,117
    
    
    
    1,776Loss on disposal of long-term investment securities
    
    
    
    
    
    
    1,149
    
    
    
    
    
    
    
    Loss on valuation of trading securities
    
    
    
    
    
    
    2,838
    
    
    
    307
    
    
    
    258Impairment loss on short-term investment securities
    
    
    
    
    
    
    600
    
    
    
    940
    
    
    
    789Impairment loss on long-term investment securities
(Note 7)
    
    
    2,115
    
    
    
    6,357
    
    
    
    3,385
    
    
    
    2,840Donations
    
    
    743
    
    
    
    335
    
    
    
    800
    
    
    
    671Loss on early redemption of debentures (Note 15)
    
    
    
    
    
    
    5,072
    
    
    
    308
    
    
    
    258Loss on valuation using the equity method (Note 8)
    
    
    
    
    
    
    
    
    
    
    23,142
    
    
    
    19,414Loss on disposal of property and equipment
    
    
    936
    
    
    
    5,606
    
    
    
    1,326
    
    
    
    1,112Loss on disuse of property and equipment (Note 11)
    
    
    
    
    
    
    
    
    
    
    61,333
    
    
    
    51,454Loss on valuation of forward exchange contract
    
    
    
    
    
    
    1,888
    
    
    
    
    
    
    
    Other (Note 2)
    
    
    759
    
    
    
    3,233
    
    
    
    15,660
    
    
    
    13,137127,701
    
    
    
    219,471
    
    
    
    258,578
    
    
    
    216,928ORDINARY LOSS BEFORE INCOME TAX
    
    
    (248,808
    )
    
    
    (127,678
    )
    
    
    (160,912
    )
    
    
    (134,993
    )INCOME TAX EXPENSE (Note 21)
    
    
    (35
    )
    
    
    (1,083
    )
    
    
    (302
    )
    
    
    (254
    )MINORITY INTEREST SHARE OF LOSS (INCOME)
    
    
    2,941
    
    
    
    3,736
    
    
    
    (85
    )
    
    
    (71
    )NET LOSS
    
    W
    (245,902
    )
    
    W
    (125,025
    )
    
    W
    (161,299
    )
    
    $
    (135,318
    )BASIC AND DILUTED LOSS PER SHARE (Note 2)
    
    W
    (861
    )
    
    W
    (419
    )
    
    W
    (502
    )
    
    $
    (0.42
    )
 See accompanying notes to consolidated financial statements. F-5




---



##### Table of Contents



HANARO TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 Korean Won (In millions)RetainedCommon
    
    Capital
    
    Earnings
    
    Capital
    
    MinorityStock
    
    Surplus
    
    (Deficit)
    
    Adjustments
    
    Interests
    
    TotalBalance at December 31, 2000
    
    W
    1,320,000
    
    
    W
    689,175
    
    
    W
    (343,539
    )
    
    W
    (15
    )
    
    W
    1,457
    
    
    W
    1,667,078Net loss for 2001
    
    
    
    
    
    
    
    
    
    
    (245,902
    )
    
    
    
    
    
    
    (2,047
    )
    
    
    (247,949
    )Deficit  minority interest
    
    
    
    
    
    
    
    
    
    
    (894
    )
    
    
    
    
    
    
    
    
    
    
    (894
    )Effect of changes in
consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147,098
    
    
    
    147,098Effect of changes in ownership
interest
    
    
    
    
    
    
    204
    
    
    
    (29
    )
    
    
    
    
    
    
    559
    
    
    
    734Disposal of investment
securities in subsidiaries
    
    
    
    
    
    
    53
    
    
    
    (1
    )
    
    
    
    
    
    
    31
    
    
    
    83Compensation expense incurred in
connection with stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,088
    
    
    
    
    
    
    
    1,088Gain on valuation of investment
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,151
    
    
    
    
    
    
    
    1,151Foreign-based operations
translation credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Balance at December 31, 2001
    
    
    1,320,000
    
    
    
    689,432
    
    
    
    (590,365
    )
    
    
    2,227
    
    
    
    147,098
    
    
    
    1,568,392Net loss for 2002
    
    
    
    
    
    
    
    
    
    
    (125,025
    )
    
    
    
    
    
    
    (3,736
    )
    
    
    (128,761
    )Issuance of common stock by
exercise of stock warrants
    
    
    76,613
    
    
    
    (390
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,223Effect of changes in
consolidated subsidiaries
    
    
    
    
    
    
    (207
    )
    
    
    4,586
    
    
    
    
    
    
    
    
    
    
    
    4,379Effect of changes in ownership
interest
    
    
    
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    2,115
    
    
    
    2,231Disposal of investment
securities in subsidiaries
    
    
    
    
    
    
    807
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    807Compensation expense incurred in
connection with stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,651
    
    
    
    
    
    
    
    1,651Valuation loss on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,761
    )
    
    
    
    
    
    
    (3,761
    )Loss on valuation of interest
swap (Note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,633
    )
    
    
    
    
    
    
    (5,633
    )Foreign-based operations
translation debit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    (30
    )Balance at December 31, 2002
    
    
    1,396,613
    
    
    
    689,758
    
    
    
    (710,804
    )
    
    
    (5,546
    )
    
    
    145,477
    
    
    
    1,515,498Issuance of common stock
    
    
    914,063
    
    
    
    (348,173
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    565,890Net loss for 2003
    
    
    
    
    
    
    
    
    
    
    (161,299
    )
    
    
    
    
    
    
    85
    
    
    
    (161,214
    )Effect of changes in
consolidated subsidiaries
    
    
    
    
    
    
    (808
    )
    
    
    489
    
    
    
    
    
    
    
    (144,964
    )
    
    
    (145,283
    )Compensation expense incurred in
connection with stock options
(Note 19)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,375
    
    
    
    
    
    
    
    1,375Valuation loss on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,376
    )
    
    
    
    
    
    
    (2,376
    )Valuation loss on
available-for-sale securities
using the equity method
    
    
    
    
    
    
    (8,557
    )
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (8,564
    )Loss on valuation of interest
swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,425
    )
    
    
    
    
    
    
    (7,425
    )Foreign-based operations
translation credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Balance at December 31, 2003
    
    W
    2,310,676
    
    
    W
    332,220
    
    
    W
    (871,614
    )
    
    W
    (13,977
    )
    
    W
    598
    
    
    W
    1,757,903Translation into U.S. Dollars
(In thousands) (Note 2)
    
    $
    1,938,487
    
    
    $
    278,708
    
    
    $
    (731,220
    )
    
    $
    (11,726
    )
    
    $
    502
    
    
    $
    1,474,751
 See accompanying notes to consolidated financial statements. F-6




---



##### Table of Contents



HANARO TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 Translation intoKorean Won
    
    U.S. Dollars (Note 2)2001
    
    2002
    
    2003
    
    2003(In millions)
    
    (In thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    W
    (245,902
    )
    
    W
    (125,025
    )
    
    W
    (161,299
    )
    
    $
    (135,318
    )Addition of expenses not involving cash outflows:Stock compensation expense
    
    
    1,088
    
    
    
    1,651
    
    
    
    1,375
    
    
    
    1,154Provision for severance indemnities
    
    
    12,572
    
    
    
    13,646
    
    
    
    13,444
    
    
    
    11,279Amortization of discount on debentures and
long-term debt
    
    
    7,873
    
    
    
    26,787
    
    
    
    19,265
    
    
    
    16,162Recognition of long-term accrued interest
    
    
    4,700
    
    
    
    8,246
    
    
    
    6,171
    
    
    
    5,177Employee fringe benefits
    
    
    397
    
    
    
    2,070
    
    
    
    944
    
    
    
    792Depreciation and amortization
    
    
    327,498
    
    
    
    433,555
    
    
    
    428,528
    
    
    
    359,503Loss on foreign currency translation
    
    
    7,031
    
    
    
    260
    
    
    
    138
    
    
    
    116Provision for doubtful accounts
    
    
    2,760
    
    
    
    16,589
    
    
    
    25,744
    
    
    
    21,597Loss on valuation of trading securities
    
    
    
    
    
    
    2,838
    
    
    
    307
    
    
    
    258Loss on disposal of property and equipment
    
    
    936
    
    
    
    5,606
    
    
    
    1,326
    
    
    
    1,112Impairment loss on short-term investment securities
    
    
    
    
    
    
    600
    
    
    
    940
    
    
    
    789Impairment loss on long-term investment securities
    
    
    2,115
    
    
    
    6,357
    
    
    
    3,385
    
    
    
    2,840Loss on disposal of short-term investment securities
    
    
    5
    
    
    
    
    
    
    
    2,117
    
    
    
    1,776Loss on disposal of long-term investment securities
    
    
    
    
    
    
    1,134
    
    
    
    
    
    
    
    Loss on valuation using the equity method
    
    
    
    
    
    
    
    
    
    
    23,142
    
    
    
    19,414Loss on disuse of property and equipment
    
    
    
    
    
    
    
    
    
    
    61,333
    
    
    
    51,454Loss on early redemption of debentures
    
    
    
    
    
    
    5,072
    
    
    
    308
    
    
    
    258Loss on valuation of forward exchange contract
    
    
    
    
    
    
    1,888
    
    
    
    
    
    
    
    Minority interest income
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    71Ordinary development cost and other
    
    
    611
    
    
    
    28
    
    
    
    643
    
    
    
    539367,586
    
    
    
    526,327
    
    
    
    589,195
    
    
    
    494,291Deduction of revenues not involving cash inflows:Gain on disposal of short-term investment securities
    
    
    190
    
    
    
    1,718
    
    
    
    315
    
    
    
    264Amortization of present value discount
    
    
    2,116
    
    
    
    3,746
    
    
    
    2,019
    
    
    
    1,694Gain on transaction of forward exchange contract
    
    
    
    
    
    
    186
    
    
    
    343
    
    
    
    288Gain on valuation of trading securities
    
    
    5,278
    
    
    
    5
    
    
    
    
    
    
    
    Gain on valuation of forward exchange contract
    
    
    2,519
    
    
    
    
    
    
    
    173
    
    
    
    145Gain on disposal of property and equipment
    
    
    52
    
    
    
    93
    
    
    
    1,102
    
    
    
    924Gain on disposal of intangibles
    
    
    
    
    
    
    1,646
    
    
    
    
    
    
    
    Gain on disposal of long-term investment securities
    
    
    1,387
    
    
    
    2,658
    
    
    
    145
    
    
    
    122Gain on foreign currency translation
    
    
    115
    
    
    
    17,064
    
    
    
    19
    
    
    
    16Gain on realization of negative goodwill
    
    
    
    
    
    
    3,093
    
    
    
    
    
    
    
    Gain on early redemption of debentures
    
    
    
    
    
    
    
    
    
    
    870
    
    
    
    730Minority interest loss
    
    
    2,941
    
    
    
    3,736
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    22
    
    
    
    57
    
    
    
    4814,598
    
    
    
    33,967
    
    
    
    5,043
    
    
    
    4,231Changes in assets and liabilities resulting from
operations:Increase in trade receivables
    
    
    (53,766
    )
    
    
    (91,397
    )
    
    
    (37,260
    )
    
    
    (31,258
    )Decrease (Increase) in accounts receivable-other
    
    
    (5,230
    )
    
    
    (2,816
    )
    
    
    2,693
    
    
    
    2,259Decrease (Increase) in accrued income
    
    
    6,069
    
    
    
    1,643
    
    
    
    (1,263
    )
    
    
    (1,059
    )Decrease (Increase) in prepaid expenses
    
    
    (2,046
    )
    
    
    22,260
    
    
    
    5,710
    
    
    
    4,790Decrease in prepaid income tax
    
    
    7,459
    
    
    
    1,305
    
    
    
    1,367
    
    
    
    1,147Decrease (Increase) in advanced payments
    
    
    9,382
    
    
    
    (11,860
    )
    
    
    (1,370
    )
    
    
    (1,149
    )Increase in inventories
    
    
    (78,145
    )
    
    
    (55,892
    )
    
    
    (32,217
    )
    
    
    (27,028
    )Decrease in prepaid V.A.T.
    
    
    13,769
    
    
    
    5,905
    
    
    
    
    
    
    
    Decrease (Increase) in forward exchange contract
    
    
    
    
    
    
    2,705
    
    
    
    (1,545
    )
    
    
    (1,296
    )Decrease in long-term prepaid expenses
    
    
    11,941
    
    
    
    6,961
    
    
    
    1,097
    
    
    
    920Decrease (Increase) in deferred income tax assets
    
    
    (72
    )
    
    
    100
    
    
    
    (51
    )
    
    
    (43
    )Decrease in trade payables
    
    
    (14,104
    )
    
    
    (27,016
    )
    
    
    (38,320
    )
    
    
    (32,148
    )
 (continued) F-7




---



##### Table of Contents



HANARO TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 Translation intoKorean Won
    
    U.S. Dollars (Note 2)2001
    
    2002
    
    2003
    
    2003(In millions)
    
    (In thousands)Changes in assets and liabilities resulting from operations:Decrease in other accounts payable
    
    W
    (69,683
    )
    
    W
    (186,839
    )
    
    W
    (28,698
    )
    
    $
    (24,076
    )Increase in advances received
    
    
    16,516
    
    
    
    2,487
    
    
    
    347
    
    
    
    291Increase in accrued expenses
    
    
    8,608
    
    
    
    7,361
    
    
    
    18,512
    
    
    
    15,530Increase (Decrease) in withholdings
    
    
    (267
    )
    
    
    10,365
    
    
    
    7,314
    
    
    
    6,136Increase (Decrease) in income tax payable
    
    
    
    
    
    
    1,749
    
    
    
    (1,436
    )
    
    
    (1,204
    )Decrease in long-term advances received
    
    
    
    
    
    
    
    
    
    
    (1,189
    )
    
    
    (997
    )Increase in deposits received
    
    
    5,714
    
    
    
    7,756
    
    
    
    893
    
    
    
    749Increase (Decrease) in long-term deposits received
    
    
    5,873
    
    
    
    (4,306
    )
    
    
    1,013
    
    
    
    850Increase (Decrease) in deferred income tax liabilities
    
    
    
    
    
    
    407
    
    
    
    (1
    )
    
    
    (1
    )Decrease (Increase) in foreign based operations
translation credit
    
    
    3
    
    
    
    (30
    )
    
    
    2
    
    
    
    2Decrease in payments to National Pension
    
    
    111
    
    
    
    76
    
    
    
    140
    
    
    
    117Payments of severance indemnities
    
    
    (3,524
    )
    
    
    (5,786
    )
    
    
    (15,556
    )
    
    
    (13,050
    )(141,392
    )
    
    
    (314,862
    )
    
    
    (119,818
    )
    
    
    (100,518
    )Net cash flows provided by (used in) operating activities
    
    
    (34,306
    )
    
    
    52,473
    
    
    
    303,035
    
    
    
    254,224CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from disposal of short-term investment securities
    
    
    630
    
    
    
    101,908
    
    
    
    34,143
    
    
    
    28,643Collection of short-term financial instruments
    
    
    502,754
    
    
    
    483,510
    
    
    
    842,882
    
    
    
    707,116Redemption of short-term loans
    
    
    787
    
    
    
    1,150
    
    
    
    6,771
    
    
    
    5,680Redemption of long-term loans
    
    
    332
    
    
    
    16,044
    
    
    
    2,734
    
    
    
    2,294Proceeds from disposal of long-term investment securities
    
    
    3,708
    
    
    
    8,528
    
    
    
    406
    
    
    
    341Withdrawal of long-term financial instruments
    
    
    27,496
    
    
    
    1,220
    
    
    
    
    
    
    
    Refund of key-money deposits
    
    
    192
    
    
    
    16,039
    
    
    
    18,152
    
    
    
    15,228Proceeds from disposal of property and equipment
    
    
    1,329
    
    
    
    4,494
    
    
    
    9,304
    
    
    
    7,805Proceeds from disposal of intangibles
    
    
    
    
    
    
    1,800
    
    
    
    
    
    
    
    Withdrawal of severance insurance deposits
    
    
    84
    
    
    
    1,673
    
    
    
    1,009
    
    
    
    846Acquisition of short-term financial instruments
    
    
    (497,811
    )
    
    
    (484,050
    )
    
    
    (929,616
    )
    
    
    (779,879
    )Purchase of short-term investment securities
    
    
    (30,444
    )
    
    
    (70,098
    )
    
    
    (17,807
    )
    
    
    (14,938
    )Extension of short-term loans
    
    
    (26
    )
    
    
    (572
    )
    
    
    (614
    )
    
    
    (515
    )Purchase of long-term investment securities
    
    
    (56,734
    )
    
    
    (3,348
    )
    
    
    (1,132
    )
    
    
    (949
    )Acquisition of long-term financial instruments
    
    
    (262
    )
    
    
    (85
    )
    
    
    (2
    )
    
    
    (2
    )Extension of long-term loans
    
    
    (1,750
    )
    
    
    (2,854
    )
    
    
    (5,404
    )
    
    
    (4,534
    )Payment of key-money deposits
    
    
    (3,972
    )
    
    
    (9,111
    )
    
    
    (2,324
    )
    
    
    (1,950
    )Acquisition of property and equipment
    
    
    (462,595
    )
    
    
    (342,643
    )
    
    
    (196,053
    )
    
    
    (164,474
    )Payment of intangibles
    
    
    (12,293
    )
    
    
    (18,447
    )
    
    
    (13,118
    )
    
    
    (11,005
    )Payment of severance insurance deposits
    
    
    (1,954
    )
    
    
    (2,764
    )
    
    
    (124
    )
    
    
    (104
    )Net cash flows used in investing activities
    
    
    (530,529
    )
    
    
    (297,606
    )
    
    
    (250,793
    )
    
    
    (210,397
    )
 (continued) F-8




---



##### Table of Contents



HANARO TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 Translation intoKorean Won
    
    U.S. Dollars (Note 2)2001
    
    2002
    
    2003
    
    2003(In millions)
    
    (In thousands)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from short-term borrowings
    
    W
    63,653
    
    
    W
    63,000
    
    
    W
    338,000
    
    
    $
    283,557Proceeds from long-term debt
    
    
    129,306
    
    
    
    236,424
    
    
    
    148,329
    
    
    
    124,437Proceeds from issuance of debentures
    
    
    205,947
    
    
    
    603,972
    
    
    
    261,013
    
    
    
    218,971Proceeds from issuance of common stock
    
    
    
    
    
    
    76,223
    
    
    
    565,889
    
    
    
    474,739Proceeds from Asset Backed Securities
    
    
    309,000
    
    
    
    81,000
    
    
    
    
    
    
    
    Proceeds from long-term deposits received
    
    
    1,209
    
    
    
    
    
    
    
    1,487
    
    
    
    1,247Increase in minority interests
    
    
    794
    
    
    
    702
    
    
    
    
    
    
    
    Repayment of short-term borrowings
    
    
    (111,327
    )
    
    
    (64,695
    )
    
    
    (230,000
    )
    
    
    (192,953
    )Repayment of current portion of long-term debt
    
    
    (141
    )
    
    
    (77,332
    )
    
    
    
    
    
    
    Repayment of long-term debt
    
    
    (86,570
    )
    
    
    (507,548
    )
    
    
    (1,096,800
    )
    
    
    (920,134
    )Decrease in Asset Backed Securities payable
    
    
    (55,900
    )
    
    
    (117,207
    )
    
    
    (122,972
    )
    
    
    (103,164
    )Repayment of bonds with warrants
    
    
    
    
    
    
    (39,348
    )
    
    
    
    
    
    
    Repayment of deposits received
    
    
    (1,369
    )
    
    
    (1,899
    )
    
    
    
    
    
    
    Net cash flows provided by (used in) financing
activities
    
    
    454,602
    
    
    
    253,292
    
    
    
    (135,054
    )
    
    
    (113,300
    )INCREASE (DECREASE) FROM CHANGES IN
CONSOLIDATED SUBSIDIARIES
    
    
    49,868
    
    
    
    (733
    )
    
    
    (23,758
    )
    
    
    (19,931
    )NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    (60,365
    )
    
    
    7,426
    
    
    
    (106,570
    )
    
    
    (89,404
    )CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR
    
    
    359,057
    
    
    
    298,692
    
    
    
    306,118
    
    
    
    256,810CASH AND
CASH EQUIVALENTS, END OF YEAR
    
    W
    298,692
    
    
    W
    306,118
    
    
    W
    199,548
    
    
    $
    167,406
 (continued) F-9




---



##### Table of Contents



HANARO TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Translation intoKorean Won
    
    U.S. Dollars (Note 2)2001
    
    2002
    
    2003
    
    2003(In millions)
    
    (In thousands)CASH PAID FOR INTEREST
    
    W
    101,395
    
    
    W
    143,755
    
    
    W
    125,291
    
    
    $
    105,110CASH REFUNDED (PAID) FOR INCOME TAX
    
    
    7,352
    
    
    
    2,289
    
    
    
    (1,030
    )
    
    
    (864
    )TRANSACTIONS NOT INVOLVING CASH:Transfer of long-term loans to current portion
    
    
    11,146
    
    
    
    6,842
    
    
    
    13,830
    
    
    
    11,602Transfer of inventories to property and equipment
    
    
    94,826
    
    
    
    59,374
    
    
    
    41,801
    
    
    
    35,070Transfer of debentures to current portion
    
    
    181,500
    
    
    
    849,330
    
    
    
    264,688
    
    
    
    222,054Transfer of long-term debt to current portion
    
    
    32,767
    
    
    
    187,454
    
    
    
    103,271
    
    
    
    86,637Transfer of long-term obligation under capital
lease to current portion
    
    
    35,733
    
    
    
    38,376
    
    
    
    87,297
    
    
    
    73,236Transfer of Asset Backed Securities payable to
current portion
    
    
    99,618
    
    
    
    146,024
    
    
    
    32,510
    
    
    
    27,273Recognition of gain (loss) on valuation of
available-for-sale securities as capital
adjustments
    
    
    1,151
    
    
    
    (3,761
    )
    
    
    (3,496
    )
    
    
    2,933Transfer of construction in progress to property
and equipment
    
    
    320,136
    
    
    
    152,918
    
    
    
    125,045
    
    
    
    104,904Transfer of construction in progress to intangibles
    
    
    
    
    
    
    16,429
    
    
    
    
    
    
    
    Increase of long-term loans accompanied by
long-term debt
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    Acquisition of property and equipment under long-term lease obligation
    
    
    43,407
    
    
    
    20,526
    
    
    
    98,230
    
    
    
    82,408Transfer of other current liabilities to long-term
deposits received
    
    
    
    
    
    
    
    
    
    
    17,121
    
    
    
    14,363Transfer of short-term loans to long-term loans
    
    
    
    
    
    
    10,028
    
    
    
    
    
    
    
    
 See accompanying notes to consolidated financial statements. F-10




---



##### Table of Contents



HANARO TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2002 AND 2003 1. GENERAL: (1) Hanaro Telecom, Inc. Hanaro Telecom, Inc. (Hanaro) was incorporated on September 26, 1997 pursuant
to the laws of the Republic of Korea (Korea). Hanaro was formed following
its selection by the Ministry of Information and Communication (MIC) on June
13, 1997 as the second carrier to provide local telephony services in Korea.
On November 11, 1998, Hanaros stock was listed on the Korea Securities Dealers
Automated Quotation System (KOSDAQ). Hanaro issued American Depository
Receipts (ADRs) on April 4, 2000, which are traded on the National
Association of Securities Dealers Automated Quotation System (NASDAQ). Hanaro commenced providing local call and high-speed data access, internet and
multimedia access on April 1, 1999 and is providing services in 80 cities,
including Seoul, Pusan, Ulsan and Incheon, and 52 counties in Korea as of
December 31, 2003. On December 12, 2002, Hanaro received a license to provide
domestic long-distance calls and international calls from the MIC and will
begin to provide the service in 2004. Hanaros headquarters is located in Seocho-Gu, Seoul. Hanaro has 10 domestic
branches. Hanaro has invested in the following companies in order to
facilitate and strengthen its services: Hanaro Telecom America, Inc., Hanaro
Realty Development & Management Co., Ltd., Hanaro Telephone & Internet
Information, Inc. and Dreamline Corporation. As of December 31, 2002 and 2003, the shareholders of Hanaro are as follows: 2002
    
    2003Percentage of
    
    
    
    
    
    Percentage ofNumber of shares
    
    ownership (%)
    
    Number of shares
    
    ownership (%)Newbridge Asia HT, L.P.
    
    
    
    
    
    
    
    
    
    
    49,535,799
    
    
    
    10.72AIF II NT, Ltd.
    
    
    
    
    
    
    
    
    
    
    38,456,250
    
    
    
    8.32AOF NT, Ltd.
    
    
    
    
    
    
    
    
    
    
    24,721,875
    
    
    
    5.35Samsung Electronics Co., Ltd.
    
    
    23,542,281
    
    
    
    8.43
    
    
    
    23,542,281
    
    
    
    5.09United Classic Investment Limited
    
    
    
    
    
    
    
    
    
    
    20,392,746
    
    
    
    4.41Dacom Corporation
    
    
    19,754,656
    
    
    
    7.07
    
    
    
    19,754,656
    
    
    
    4.27HT Holding IX, L.P.
    
    
    
    
    
    
    
    
    
    
    12,818,750
    
    
    
    2.77Daewoo Securities Co., Ltd.
    
    
    12,000,000
    
    
    
    4.30
    
    
    
    12,000,000
    
    
    
    2.60LG Corp.
    
    
    11,175,047
    
    
    
    4.00
    
    
    
    11,175,047
    
    
    
    2.42Employee Stock Ownership
Association
    
    
    2,995,840
    
    
    
    1.07
    
    
    
    2,854,906
    
    
    
    0.62Others
    
    
    209,854,856
    
    
    
    75.13
    
    
    
    246,882,870
    
    
    
    53.43279,322,680
    
    
    
    100.00
    
    
    
    462,135,180
    
    
    
    100.00
 In common with other Asian countries, the economic environment in the Republic
of Korea continues to be volatile. In addition, the Korean government and the
private sector continue to implement structural reforms to historical business
practices including corporate governance. The Company may be either directly
or indirectly affected by these economic conditions and the reform program
described above. The accompanying financial statements reflect managements
assessment of the impact to date of the economic environment on the financial
position and results of operations of the Company. Actual results may differ
materially from managements current assessment. F-11




---



##### Table of Contents



(2) Consolidated Subsidiaries The consolidated financial statements include the accounts of Hanaro and its
controlled subsidiaries (collectively referred to as the Company).
Controlled subsidiaries include majority-owned entities and entities of which
Hanaro owns more than 30 percent of the total outstanding voting stock and is
the largest shareholder. Significant inter-company accounts and transactions
have been eliminated in the consolidation. The ownership percentages disclosed
in the following table relate to the period that such entities were
consolidated. OwnershipYearcontrol was
    
    percentage (%)Subsidiaries
    
    obtained
    
    2002
    
    2003
    
    Primary businessHanaro Realty Development &
Management Co., Ltd.
    
    
    1999
    
    
    
    99.99
    
    
    
    99.99
    
    
    Property management of Hanaro Telecom, Inc.Hanaro Telephone & Internet
Information, Inc.
    
    
    2002
    
    
    
    99.99
    
    
    
    99.99
    
    
    Customer Q & A and serviceHanaro WEB(n)TV
    
    
    2000
    
    
    
    90.91
    
    
    
    90.91
    
    
    Broadcasting & telecommunicationHanaro Telecom America, Inc.
    
    
    2000
    
    
    
    100.00
    
    
    
    100.00
    
    
    Telecommunication service
 Hanaros ownership percentage in Dreamline Corporation decreased from 32.18% to
26.28% due to the third partys investment into Dreamline Corporation on
November 17, 2003. As a result, Dreamline Corporation and its 37.19%-owned
subsidiary, HanaroDream, were excluded from the consolidated financial
statements as of December 31, 2003. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation Hanaro and its domestic subsidiaries maintain their official accounting records
in Korean won and prepare statutory consolidated financial statements in the
Korean language (Hangul) in conformity with the accounting principles generally
accepted in the Republic of Korea (Korean GAAP). Certain accounting
principles applied by the Company that conform with financial accounting
standards and accounting principles in the Republic of Korea may not conform
with generally accepted accounting principles in other countries. Accordingly,
these financial statements are intended for use by those who are informed about
Korean accounting principles and practices. The accompanying financial
statements have been condensed, restructured and translated into English with
certain expanded descriptions from the Korean language financial statements. The U.S. dollar amounts presented in these financial statements were computed
by translating the Korean won into U.S. dollars at the rate of W1,192.00 to
US$1.00, the noon buying rate in the City of New York for cable transfers in
won as certified for customs purposes by the Federal Reserve Bank of New York
on December 31, 2003 solely for the convenience of the reader. This
convenience translation into U.S. dollars should not be construed as
representations that the Korean won amounts have been, could have been, or
could in the future be, converted at this or any other rate of exchange. The significant accounting policies followed by the Company in preparing the
accompanying consolidated financial statements are summarized as follows: Adoption of Newly Effective Statements of Korea Accounting Standards Hanaro and its domestic subsidiaries prepared its financial statements in
accordance with the Statements of Korea Accounting Standards (SKAS), which is
effective from January 1, 2003. The revised accounting standards include SKAS
No.2  Interim Financial Reporting, No.3 
Intangible Assets, No.4 
Revenue Recognition, No.5  Tangible Assets, No.6  Events Occurring After
Balance Sheet Dates, No.7  Capitalization of
Financing Costs, No.8 
Investments in Securities, No.9  Convertible
Securities and No.10 
Inventories. The comparative financial statements were restated applying the
above accounting standards. This restatement does not affect the net loss and
net assets of the prior period. F-12




---



##### Table of Contents



Use of Estimates The preparation of financial statements in accordance with Korean GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. The most
significant estimates and assumptions relate to revenue recognition, allowance
for doubtful accounts, depreciation, investments in non-listed equity
securities and deferred income taxes. Actual results could differ from those
estimates and may affect amounts reported in future periods. Management
believes that the estimates are reasonable. Revenue Recognition Revenue related to installation of service and sale of customer premises
equipment is recognized when equipment is delivered and installation is
completed. Revenue from monthly recurring service is recognized in the month
the service is provided. Cash and Cash Equivalents Cash and cash equivalents consist of bank deposits and short-term money market
instruments that can be easily converted into cash and whose risk of value
fluctuation arising from changes of interest rates is not material. Only
investments with maturities of three months or less at the acquisition date are
included in cash equivalents. Restricted deposits and current portion of
long-term deposits are classified as short-term financial instruments. Short-term Financial Instruments Short-term financial instruments primarily consist of time deposits with
original maturities of less than one year and, money market deposit accounts
and repurchase agreements that invest in short-term highly liquid securities.
Short-term financial instruments are recorded at cost. Interest income on
short-term financial instruments is accrued as earned. Allowance for Doubtful Accounts The allowance for doubtful accounts is provided based on the estimated loss on
uncollectible individual accounts and historical bad debt experience. The increase in the provision and allowance is consistent with the Companys
increase in operating revenues. Changes in allowance for doubtful accounts of trade receivables and accounts
receivable-other for the years ended December 31, 2001, 2002 and 2003 are as
follows (won in millions): Amount2001
    
    2002
    
    2003Beginning of year
    
    W
    1,013
    
    
    W
    5,022
    
    
    W
    21,170Provision
    
    
    2,760
    
    
    
    16,589
    
    
    
    25,059Write-offs
    
    
    (25
    )
    
    
    (440
    )
    
    
    (1,570
    )Changes in consolidated subsidiaries
    
    
    1,274
    
    
    
    (1
    )
    
    
    (4,256
    )End of year
    
    W
    5,022
    
    
    W
    21,170
    
    
    W
    40,403
 The Company reclassified the trade receivables from Onse Telecom into long-term
trade receivables due to the court arrangement of debt and accordingly,
recorded W685 million of the difference between the trade receivables and the
discounted present value as provision for doubtful accounts in 2003. Inventories Inventories consist primarily of modems and local area network equipment to be
leased to customers. Inventories are stated at the lower of cost or net
realizable value, cost being determined by the average cost method. If the net
realizable value of inventories is lower than cost, inventories are adjusted to
net realizable value and the difference between cost and revalued amount is
charged to current operations. F-13




---



##### Table of Contents



Investment Securities Other than those Accounted for Using the Equity Method (1) Classification of Securities At acquisition, the Company classifies securities into one of the three
categories: trading, held-to-maturity or available-for-sale. Trading
securities are those that were acquired principally to generate profits from
short-term fluctuations in prices. Held-to-maturity securities are those with
fixed and determinable payments and fixed maturity that an enterprise has the
positive intent and ability to hold to maturity. Available-for-sale securities
are those not classified as either held-to-maturity or trading securities.
Trading securities are classified as short-term investment securities, whereas
available-for-sale securities and held-to-maturity securities are classified as
long-term investment securities, except for those maturity dates or whose
likelihood of being disposed of are within one year from balance sheet date,
which are classified as short-term investment securities. (2) Valuation of Securities Securities are recognized initially at cost, which includes the market value of
the consideration given and incidental expenses. If the market price of the
consideration given is not available, the market prices of the securities
purchased are used as the basis of measurement. If neither the market price of
the consideration given nor those of the acquired securities are available, the
acquisition cost is measured at the best estimates of its fair value. After initial recognition, held-to-maturity securities are valued at amortized
cost. The difference between their acquisition costs and face values is
amortized over the remaining term of the securities by applying the effective
interest method and added to or subtracted from the acquisition costs and
interest income of the remaining period. Trading securities are valued at fair
value, with unrealized gains or losses included in current operations.
Available-for-sale securities are also valued at fair value, with unrealized
gains or losses included in capital adjustments, until the securities are sold
or if the securities are determined to be impaired and the lump-sum cumulative
amount of capital adjustments are reflected in current operations. However,
available-for-sale securities that are not traded in an active market and whose
fair values cannot be reliably estimated are accounted for at acquisition
costs. For those securities that are traded in an active market (marketable
securities), fair values refer to the quoted market prices, which are measured
as the closing price at the balance sheet date. The fair values of
non-marketable debt securities are measured at the discounted future cash flows
by using the discount rate that appropriately reflects the credit rating of the
issuing entity assessed by a publicly reliable independent credit rating
agency. If application of such measurement method is not feasible, estimates of
the fair values may be made using a reasonable valuation model or quoted market
prices of similar debt securities issued by entities conducting similar
business in similar industries.
Securities are evaluated at each balance sheet date to determine whether there
is any objective evidence of impairment loss. When any such evidence exists,
unless there is a clear counter-evidence that recognition of impairment is
unnecessary, the Company estimates the recoverable amount of the impaired
security and recognizes any impairment loss in current operations. The amount
of impairment loss of held-to-maturity security or non-marketable equity
security is measured as the difference between the recoverable amount and the
carrying amount. The recoverable amount of held-to maturity security is the present value of
expected future cash flows discounted at the securities original effective
interest rate. For available-for-sale debt or equity security stated at fair
value, the amount of impairment loss to be recognized in the current period is
determined by subtracting the amount of impairment loss of debt or equity
security already recognized in prior period from the amount of amortized cost
in excess of the recoverable amount for debt security or from the amount of
acquisition cost in excess of fair value for equity security. For
non-marketable equity securities accounted for at acquisition costs, the
impairment loss is equal to the difference between the recoverable amount and
the carrying amount. If the realizable value subsequently recovers, in case of a security stated at
fair value, the increase in value in recorded in current operations, up to the
amount of the previously recognized impairment loss, while security stated at
amortized cost or acquisition cost, the increase in value is recorded in
current operations, so that its recovered value does not exceed what its
amortized cost would be as of the recovery date if there had been no impairment
loss. F-14




---



##### Table of Contents



(3) Reclassification of Securities When transfers of securities between categories are needed because of changes
in an entitys intention and ability to hold those securities, such transfer is
accounted for as follows: trading securities cannot be reclassified into
available-for-sale and held-to-maturity securities, and vice versa, except when
certain trading securities lose their marketability. Available-for-sale
securities and held-to-maturity securities can be reclassified into each other
after fair value recognition. When held-to-maturity security is classified
into available-for-sale security, the difference between fair value and book
value is recorded as capital adjustments. Whereas, in case available-for-sale
security is reclassified into held-to-maturity security, the difference is
recorded as capital adjustments and amortized using effective interest rate
method for the remaining periods. Investment Securities Using the Equity Method Equity securities held for investments in companies in which the Company is
able to exercise significant influence over the investees are accounted for
using the equity method. The Companys share in net income or net loss of
investees is reflected in current operations. Changes in the retained
earnings, capital surplus or other capital accounts of investees are accounted
for as an adjustment to retained earnings, capital surplus or to capital
adjustments. Valuation of Assets and Liabilities at Present Value Long-term accounts receivable and long-term accounts payable are valued at
their present value as discounted at an appropriate discount rate. Discounts
are amortized using the effective interest rate method and recognized as
interest expense or interest income over the term of the related accounts. Property and Equipment Property and equipment are stated at cost. Expenditures that result in the
enhancement of the value or extension of the useful life of the facilities
involved are capitalized as additions to property and equipment. Depreciation
is computed using the straight-line method based on the estimated useful lives
of the assets as follows: Estimated useful livesBuildings, building facilities and structures
    
    50 yearsMachinery
    
    8 yearsVehicles and other
    
    5~8 years
 Capitalization of Financing Costs Interest expense, discount and other financial charges, including certain
foreign exchange translation gains and losses on borrowings associated with the
manufacture, purchase, or construction of property and equipment, incurred
prior to the completion of the acquisition, were capitalized until the year
ended December 31, 2002, and are no longer capitalized from January 1, 2003 in
compliance with SKAS No. 7. Interest capitalization for the years ended
December 31, 2001 and 2002 are as follows (won in millions): 2001
    
    2002
    
    2003Total interest incurred
    
    W
    112,649
    
    
    W
    173,583
    
    
    W
    139,330Charged to expense
    
    
    (107,231
    )
    
    
    (169,412
    )
    
    
    (139,330
    )Interest capitalized
    
    W
    5,418
    
    
    W
    4,171
    
    
    W
    
 Impairment of Long-Lived Assets Long-lived assets are subject to review for impairment. When the book value of
a long-lived asset exceeds its recoverable value, due to obsolescence, damage
or abrupt decline in market value, the decline in value is deducted from the
assets book value and expensed in the year it occurs. Recoverable value is
the greater of net realizable value or useful value. F-15




---



##### Table of Contents



Leases Lease agreements that include a bargain purchase option, result in the transfer
of ownership by the end of the lease term, have a term equal to at least 75% of
the estimated economic life of the leased property or where the present value
of the minimum lease payments at the beginning of the lease term equals or
exceeds 90% of the fair value of the leased property are accounted for as
financial or capital leases. All other leases are accounted for as operating
leases. Assets and liabilities related to financial leases are recorded as
property and equipment and long-term debt, respectively, and the related
interest is calculated using the effective interest rate method. In respect to
operating leases, the future minimum lease payments are expensed ratably over
the lease term while contingent rentals are expensed as incurred. Intangibles Intangibles are stated at cost, net of amortization. Amortization is computed
using the straight-line method, based on the estimated useful lives of the
assets as described below. Estimated Useful LivesGoodwill
    
    5 yearsIndustrial property rights
    
    5-10 yearsCable line usage rights
    
    15-20 yearsLand rights
    
    20 yearsDevelopment costs
    
    1 year
 Convertible Bonds and Bonds with Warrants The proceeds from issuance of debt securities with detachable warrants are
allocated between the warrants and the debt securities based on their relative
fair values at time of issuance. For debt securities with non-detachable
warrants, the warrants are recorded as the difference between the issuance
amount of debt securities with non-detachable warrants and the reference amount
of debt securities without warrants in similar market. In accordance with SKAS
No.9, the Company did not adjust retroactively the amount of detachable
warrants on bonds issued before December 31, 2002. Interest expense on
convertible bonds and bonds with warrants is recognized using the effective
interest rate, which equalizes the issued amount of bonds to the present value
of the future cash outflow of the bonds. Accordingly, the differences between
accrued interest and interest paid are presented as an addition to the nominal
value of the bonds as a long-term accrued interest account. Discounts on Debentures Discounts on debentures are amortized over the redemption period of the
debentures using the effective interest rate method. Amortization of discounts
is recognized as interest expense. Accrued Severance Indemnities All employees with more than one year of service are entitled to receive a
lump-sum payment upon termination of their employment with the Company, based
on their length of service and rate of pay at the time of termination. The
severance indemnities that would be payable assuming all employees were to
resign amount to W28,027 million and W25,649 million as of December 31, 2002
and 2003, respectively. Before April 1999, the Company and its employees paid 3 percent and 6 percent,
respectively, of monthly pay (as defined) to the National Pension Fund in
accordance with the National Pension Law of Korea. The Company paid half of
the employees 6 percent portion and is paid back at the termination of service
by offsetting the receivable against the severance payments. Such receivables,
with a balance of W295 million and W149 million as of December 31, 2002 and
2003, respectively, are presented as a deduction from accrued severance
indemnities. Starting April 1999, the Company and its employees each pay 4.5
percent of monthly pay to the National Pension Fund under the revised National
Pension Law of Korea. F-16




---



##### Table of Contents



The Company has entered into a severance insurance plan in accordance with the
Labor Standard Law of Korea promulgated in 2000. This plan restricts severance
payments directly to the eligible employees and directors, and meets the
funding requirement for tax deduction purposes. The amount funded under this
severance insurance plan of W3,638 million and W1,624 million as of December
31, 2002 and 2003, respectively, is presented as a deduction from accrued
severance indemnities. Changes in accrued severance indemnities for the years ended December 31, 2001,
2002 and 2003 are as follows (won in millions): Amount2001
    
    2002
    
    2003Beginning of year
    
    W
    10,832
    
    
    W
    21,419
    
    
    W
    28,027Severance payments
    
    
    (3,524
    )
    
    
    (5,786
    )
    
    
    (15,556
    )Provision
    
    
    12,572
    
    
    
    13,646
    
    
    
    15,224Changes in consolidated subsidiaries
    
    
    1,539
    
    
    
    (1,252
    )
    
    
    (2,046
    )21,419
    
    
    
    28,027
    
    
    
    25,649National Pension Fund for employees
    
    
    (371
    )
    
    
    (295
    )
    
    
    (149
    )Severance insurance deposits
    
    
    (3,308
    )
    
    
    (3,638
    )
    
    
    (1,624
    )End of year
    
    W
    17,740
    
    
    W
    24,094
    
    
    W
    23,876
 In 2003, the Company paid retirement bonus amounting to W4,513 million in
addition to the normal severance payment. The retirement bonus was recorded
as non-operating expense-other. Accounting for Foreign Currency Transactions and Translation The Company maintains its accounts in Korean won. Transactions in foreign
currencies are recorded in Korean won based on the prevailing rates of exchange
on the transaction date. Monetary accounts with balances denominated in
foreign currencies are recorded and reported in the accompanying financial
statements at the exchange rates prevailing at the balance sheet date and the
translation gains or losses are reflected in current operations. The balances
have been translated using the rate announced by the Korea Exchange Bank, which
was W1,186.30 and W1,192.60 to US $1.00 at December 31, 2002 and 2003,
respectively. Income Tax The provision for income tax consists of the corporate income tax and resident
surtax currently payable and the changes in deferred income taxes for the year.
The Company recognizes deferred income taxes arising from temporary
differences between amounts reported for financial accounting and income tax
purposes. Deferred income taxes will be offset against those incurred in the
future, if any. Deferred income taxes are recalculated based on the tax rate
in effect at each balance sheet date. Stock Compensation Expense The Company records the difference between the present value of the exercise
price and the stock price at the grant date as compensation expense with a
corresponding credit to the capital adjustment account (using the minimum value
method). The computed deferred compensation expenses are allocated over the
contracted vesting period. When the stock options are exercised with the
issuance of new shares, the difference between the exercise price plus the
stock option cost recorded in the capital adjustment account and the par value
of the new shares issued is recorded as additional paid-in capital. However,
for the stock options granted in 1999, compensation expense was calculated as
the difference between the stock price at year-end and the exercise price
multiplied by the number of stock options (see Note 19). Net Loss Per Share Net loss per share is computed by dividing net loss, by the weighted average
number of common shares outstanding during the period. For comparability, the Company recalculated the weighted average number of
common shares for the years ended December 31, 2001 and 2002 due to the
issuance of new shares in 2003 at lower price than market in accordance with
Interpretation 29-54 of the Financial Accounting Standards in Korea. F-17




---



##### Table of Contents



Basic and diluted loss per share for the years ended December 31, 2001, 2002
and 2003 are computed as follows: Amount2001
    
    2002
    
    2003Net loss (won in millions)
    
    W
    (245,902
    )
    
    W
    (125,025
    )
    
    W
    (161,299
    )Weighted average number of common
shares outstanding (In thousands)
    
    
    285,440
    
    
    
    298,251
    
    
    
    321,310Basic and diluted loss per share (won)
    
    W
    (861
    )
    
    W
    (419
    )
    
    W
    (502
    )
 Bonds with warrants and stock options were not included in computing diluted
loss per share in 2001, 2002 and 2003, respectively, because their effects were
anti-dilutive. Comparative Presentation Certain accounts of prior years financial statements are reclassified to
conform to the current years presentation. This reclassification does not
affect the net losses and net assets of the prior periods. 3. CASH AND CASH EQUIVALENTS: Cash and cash equivalents as of December 31, 2002 and 2003 are as follows (won
in millions): Interest rate per annum (%)
    
    Amount2003
    
    2002
    
    2003Cash on hand
    
    
    
    
    
    W
    14
    
    
    W
    5Passbook accounts
    
    
    0.1
    
    
    
    6,327
    
    
    
    3,797Time deposits
    
    
    
    
    
    
    21,171
    
    
    
    Commercial paper
    
    
    3.3
    
    
    
    
    
    
    
    194,234Money Market Funds
    
    
    
    
    
    
    214,100
    
    
    
    Repurchase agreements
    
    
    
    
    
    
    10,000
    
    
    
    Specified money trust
    
    
    
    
    
    
    42,740
    
    
    
    Fixed interest instruments
    
    
    
    
    
    
    10,000
    
    
    
    Money Market Deposit Account
    
    
    2.5
    
    
    
    1,766
    
    
    
    1,512W
    306,118
    
    
    W
    199,548
 4. SHORT-TERM AND LONG-TERM FINANCIAL INSTRUMENTS:  (1)
    
    Short-term financial instruments as of December 31, 2002 and 2003
are as follows (won in millions): Interest rate per annum (%)
    
    Amount2003
    
    2002
    
    2003Time deposits
    
    
    3.7 ~ 5.0
    
    
    W
    104,476
    
    
    W
    186,120Repurchase agreements
    
    
    3.9 ~ 4.3
    
    
    
    25,067
    
    
    
    7,000Money Market Deposit
Account
    
    
    3.4
    
    
    
    
    
    
    
    26,752Specified money trust
    
    
    
    
    
    
    20,956
    
    
    
    W
    150,499
    
    
    W
    219,872
  (2)
    
    Long-term financial instruments as of December 31, 2002 and 2003 are as follows (won in millions): Interest rate per annum (%)
    
    Amount2003
    
    2002
    
    2003Deposits for checking accounts
    
    
    
    
    
    W
    23
    
    
    W
    7
 F-18




---



##### Table of Contents



5. RESTRICTED DEPOSITS: As of December 31, 2002 and 2003, the following deposits are subject to
withdrawal restrictions as guarantees for debt repayment, severance payments
and other reasons (won in millions): Amount2002
    
    2003Short-term financial instruments:Time deposits
    
    W
    79,749
    
    
    W
    183,520Repurchase agreements
    
    
    14,000
    
    
    
    2,000Money Market Deposit Account
    
    
    
    
    
    
    26,75293,749
    
    
    
    212,272Long-term financial instruments:Deposits for checking accounts
    
    
    23
    
    
    
    7W
    93,772
    
    
    W
    212,279
 6. SHORT-TERM INVESTMENT SECURITIES: Short-term investment securities as of December 31, 2002 and 2003 are as
follows (won in millions): 2002
    
    2003Acquisition cost
    
    Book value
    
    Acquisition cost
    
    Book valueTrading securities:Beneficiary certificates
    
    W
    25,000
    
    
    W
    17,630
    
    
    W
    
    
    
    W
    Money market funds
    
    
    
    
    
    
    
    
    
    
    579
    
    
    
    27325,000
    
    
    
    17,630
    
    
    
    579
    
    
    
    273Held-to-maturity securities:Collateralized bond obligation
    
    
    2,860
    
    
    
    1,140
    
    
    
    1,540
    
    
    
    Government bonds
    
    
    153
    
    
    
    181
    
    
    
    117
    
    
    
    1163,013
    
    
    
    1,321
    
    
    
    1,657
    
    
    
    116W
    28,013
    
    
    W
    18,951
    
    
    W
    2,236
    
    
    W
    389
 7. LONG-TERM INVESTMENT SECURITIES:  (1)
    
    Long-term investment securities as of December 31, 2002 and 2003 consist
of the following (won in millions): 2002
    
    2003Ownership
    
    
    
    
    
    Ownershippercentage (%)
    
    Amount
    
    percentage (%)
    
    AmountAvailable-for-sale securities:Listed equity securities:LG Telecom, Ltd.
    
    
    0.37
    
    
    W
    4,505
    
    
    
    0.37
    
    
    W
    3,764IMRI Co., Ltd.
    
    
    0.63
    
    
    
    64
    
    
    
    0.63
    
    
    
    11Netsecure Technology, Inc.
    
    
    2.35
    
    
    
    166
    
    
    
    2.35
    
    
    
    108C.C.S., Inc.
    
    
    
    
    
    
    
    
    
    
    7.22
    
    
    
    1,8944,735
    
    
    
    
    
    
    
    5,777Non-listed equity securities:Korea Information Assurance, Inc.
    
    
    0.47
    
    
    
    100
    
    
    
    0.47
    
    
    
    100Media Valley, Inc.
    
    
    5.44
    
    
    
    256
    
    
    
    
    
    
    
    C.C.S., Inc.
    
    
    10.00
    
    
    
    4,500
    
    
    
    
    
    
    
    CCR Inc.
    
    
    2.08
    
    
    
    1,780
    
    
    
    2.08
    
    
    
    484Dauinternet, Inc.
    
    
    0.71
    
    
    
    1,100
    
    
    
    0.71
    
    
    
    28Korea Digital Cable Media Center
    
    
    27.23
    
    
    
    550
    
    
    
    12.35
    
    
    
    550Nae-Il Network Co., Ltd. and others
    
    
    
    
    
    
    17,032
    
    
    
    
    
    
    
    3,31025,318
    
    
    
    
    
    
    
    4,472
 F-19




---



##### Table of Contents



2002
    
    2003Ownership
    
    
    
    
    
    Ownershippercentage (%)
    
    Amount
    
    percentage (%)
    
    AmountInvestments in funds:Engineering Benevolent Association
    
    
    0.03
    
    
    W
    14
    
    
    
    0.03
    
    
    W
    14KDBC Hanaro Interventure Fund
    
    
    31.00
    
    
    
    3,100
    
    
    
    31.00
    
    
    
    3,100Dream Venture Fund 1
    
    
    50.00
    
    
    
    3,000
    
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    616,154
    
    
    
    
    
    
    
    3,17536,207
    
    
    
    
    
    
    
    13,424Held-to-maturity securities:Investments in funds:Hana Dream Limited Co.
    
    
    5.00
    
    
    
    1
    
    
    
    5.00
    
    
    
    1Hanafos Securitization Specialty Co., Ltd.
    
    
    2.00
    
    
    
    
    
    
    
    2.00
    
    
    
    1
    
    
    
    
    
    
    
    1Debt securities:Government and municipal bond
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    16G.P.S. Korea Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Hanafos Securitization Specialty Co., Ltd.
    
    
    
    
    
    
    9,000
    
    
    
    
    
    
    
    9,000Best Pool Securitization Specialty Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201New KB STAR Guarantee ABS Specialty Co.,
Ltd.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,120Subordinate bonds owned by Dreamline
Corporation
    
    
    
    
    
    
    11,316
    
    
    
    
    
    
    
    20,320
    
    
    
    
    
    
    
    10,33920,321
    
    
    
    
    
    
    
    10,340W
    56,528
    
    
    
    
    
    
    W
    23,764
  (2)
    
    Listed equity securities as of December 31, 2002 and 2003 are as follows
(won in millions): 2002
    
    2003Acquisition cost
    
    Fair value
    
    Acquisition cost
    
    Fair valueLG Telecom Co., Ltd.
    
    W
    5,396
    
    
    W
    4,505
    
    
    W
    5,396
    
    
    W
    3,764IMRI Co., Ltd.
    
    
    800
    
    
    
    64
    
    
    
    800
    
    
    
    11Netsecure Technology, Inc.
    
    
    1,399
    
    
    
    166
    
    
    
    1,399
    
    
    
    108C.C.S., Inc.
    
    
    
    
    
    
    
    
    
    
    4,740
    
    
    
    1,894W
    7,595
    
    
    W
    4,735
    
    
    W
    12,335
    
    
    W
    5,777
  Above listed equity securities are recorded at market price and the difference
between acquisition cost and fair value is accounted for as capital
adjustments.(3)
    
    Non-listed equity securities as of December 31, 2002 and 2003 are as
follows (won in millions): 2002
    
    2003Book Value
    
    Acquisition cost
    
    Net asset value
    
    Book ValueKorea Information Assurance, Inc.
    
    W
    100
    
    
    W
    100
    
    
    W
    85
    
    
    W
    100Media Valley, Inc.
    
    
    256
    
    
    
    
    
    
    
    
    
    
    
    C.C.S., Inc.
    
    
    4,500
    
    
    
    
    
    
    
    
    
    
    
    CCR Inc.
    
    
    1,780
    
    
    
    1,780
    
    
    
    484
    
    
    
    484Dauinternet, Inc.
    
    
    1,100
    
    
    
    1,100
    
    
    
    28
    
    
    
    28Korea Digital Cable Media Center
    
    
    550
    
    
    
    500
    
    
    
    399
    
    
    
    550Nae-Il Network co., Ltd. and others
    
    
    17,032
    
    
    
    13,261
    
    
    
    2,373
    
    
    
    3,310W
    25,318
    
    
    W
    16,741
    
    
    W
    3,369
    
    
    W
    4,472
 Non-listed equity securities of which net asset value declined and is not
expected to recover were adjusted to net asset value or fair value, with the
valuation loss of W6,357 million and W3,385 million in 2002 and 2003,
respectively, charged to current operations as impairment loss on long-term
investment securities. F-20




---



##### Table of Contents



(4)
    
    Debt securities as of December 31, 2002 and 2003 are as follows (won in
millions): 2002
    
    2003Acquisition cost
    
    Book value
    
    Acquisition cost
    
    Book valueGovernment and municipal bonds:
    
    W
    4
    
    
    W
    4
    
    
    W
    16
    
    
    W
    16Corporate bonds:G.P.S. Korea Inc.
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Subordinate debt investments:Hanafos Securitization
Specialty Co., Ltd.
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000Best Pool Securitization
Specialty Co., Ltd.
    
    
    450
    
    
    
    
    
    
    
    450
    
    
    
    201New KB STAR Guarantee ABS
Specialty Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    1,120
    
    
    
    1,120Subordinate bonds owned by
Dreamline Corporation
    
    
    11,316
    
    
    
    11,316
    
    
    
    
    
    
    
    W
    20,770
    
    
    W
    20,320
    
    
    W
    10,588
    
    
    W
    10,339
 8. INVESTMENT SECURITIES USING THE EQUITY METHOD:  (1)
    
    Investment securities using the equity method as of December 31, 2002 and
2003 are as follows (won in millions): 2002
    
    2003Ownership
    
    
    
    
    
    Ownershippercentage (%)
    
    Book value
    
    percentage (%)
    
    Book valueDreamline Corp.
    
    
    
    
    
    W
    
    
    
    
    26.28
    
    
    W
    9,565
  (2)
    
    Loss on valuation using the equity method for the year ended December 31,
2003 is as follows (won in millions): AmountChanges inAcquisition
    
    Net asset
    
    Beginning
    
    
    
    
    
    consolidated2003
    
    cost
    
    value
    
    of year
    
    Loss(*)
    
    subsidiaries
    
    Book valueDreamline Corp.
    
    W
    39,530
    
    
    W
    24,894
    
    
    W
    
    
    
    W
    (23,142
    )
    
    W
    32,707
    
    
    W
    9,565
 (*) Loss on valuation using the equity method 9. LOANS TO EMPLOYEES: Short-term and long-term loans to employees as of December 31, 2002 and 2003
are as follows (won in millions): Interest perannum (%)
    
    Amount2002
    
    2003Short-term
    
    Long-term
    
    Short-term
    
    Long-termLoans to employees for share ownership
    
    
    
    
    
    W
    
    
    
    W
    16,373
    
    
    W
    8,808
    
    
    W
    4,588Loans to employees for housing
    
    
    2.0
    
    
    
    1,148
    
    
    
    6,740
    
    
    
    1,382
    
    
    
    8,226Other
    
    
    
    
    
    
    109
    
    
    
    99
    
    
    
    98
    
    
    
    411,257
    
    
    
    23,212
    
    
    
    10,288
    
    
    
    12,855Less: discount on present value
    
    
    
    
    
    
    (25
    )
    
    
    (3,357
    )
    
    
    (401
    )
    
    
    (2,069
    )W
    1,232
    
    
    W
    19,855
    
    
    W
    9,887
    
    
    W
    10,786
 F-21




---



##### Table of Contents



10.
    
    PREPAID EXPENSES AND LONG-TERM PREPAID EXPENSES: The acquisition cost of personal computers, which are related to the Companys
PC-PLUS I and II program, are recorded as prepaid expenses at the time of sales
and recognized as expense over the three-year term of the agreement. W27,056
million and W5,836 million are recorded as prepaid expenses as of December 31,
2001 and 2002, respectively.  11.
    
    PROPERTY AND EQUIPMENT: Changes in property and equipment for the years ended December 31, 2002 and
2003 are as follows (won in millions): 2002: AmountChanges inBeginning of
    
    
    
    
    
    
    
    
    
    consolidatedyear
    
    Increase
    
    Decrease
    
    subsidiaries
    
    End of yearLand
    
    W
    153,703
    
    
    W
    4,325
    
    
    W
    
    
    
    W
    (66
    )
    
    W
    157,962Buildings
    
    
    237,251
    
    
    
    19,669
    
    
    
    
    
    
    
    (228
    )
    
    
    256,692Structures
    
    
    3,574
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    3,607Machinery
    
    
    3,193,438
    
    
    
    410,232
    
    
    
    12,943
    
    
    
    (1,184
    )
    
    
    3,589,543Vehicles
    
    
    859
    
    
    
    45
    
    
    
    116
    
    
    
    
    
    
    
    788Other
    
    
    59,538
    
    
    
    2,722
    
    
    
    2,624
    
    
    
    (1,735
    )
    
    
    57,901Construction in progress
    
    
    101,601
    
    
    
    160,315
    
    
    
    176,795
    
    
    
    
    
    
    
    85,121Machinery in transit
    
    
    268
    
    
    
    419
    
    
    
    226
    
    
    
    
    
    
    
    4613,750,232
    
    
    
    597,760
    
    
    
    192,704
    
    
    
    (3,213
    )
    
    
    4,152,075Less: Accumulated depreciationBuildings
    
    
    11,302
    
    
    
    5,328
    
    
    
    
    
    
    
    (17
    )
    
    
    16,613Structures
    
    
    230
    
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    319Machinery
    
    
    570,651
    
    
    
    405,809
    
    
    
    4,241
    
    
    
    (371
    )
    
    
    971,848Vehicles
    
    
    375
    
    
    
    121
    
    
    
    93
    
    
    
    
    
    
    
    403Other
    
    
    21,085
    
    
    
    9,407
    
    
    
    1,342
    
    
    
    (572
    )
    
    
    28,578603,643
    
    
    
    420,754
    
    
    
    5,676
    
    
    
    (960
    )
    
    
    1,017,761W
    3,146,589
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W
    3,134,314
 2003: AmountChanges inBeginning of
    
    
    
    
    
    
    
    
    
    consolidatedyear
    
    Increase
    
    Decrease
    
    subsidiaries
    
    End of yearLand
    
    W
    157,962
    
    
    W
    385
    
    
    W
    70
    
    
    W
    (315
    )
    
    W
    157,962Buildings
    
    
    256,692
    
    
    
    49,593
    
    
    
    163
    
    
    
    (1,373
    )
    
    
    304,749Structures
    
    
    3,607
    
    
    
    2
    
    
    
    
    
    
    
    (3,363
    )
    
    
    246Machinery
    
    
    3,589,543
    
    
    
    342,692
    
    
    
    117,412
    
    
    
    (520,961
    )
    
    
    3,293,862Vehicles
    
    
    788
    
    
    
    33
    
    
    
    283
    
    
    
    (107
    )
    
    
    431Other
    
    
    57,901
    
    
    
    5,619
    
    
    
    611
    
    
    
    (15,900
    )
    
    
    47,009Construction in progress
    
    
    85,121
    
    
    
    64,961
    
    
    
    125,045
    
    
    
    (1,189
    )
    
    
    23,848Machinery in transit
    
    
    461
    
    
    
    69
    
    
    
    469
    
    
    
    
    
    
    
    614,152,075
    
    
    
    463,354
    
    
    
    244,053
    
    
    
    (543,208
    )
    
    
    3,828,168Less: Accumulated depreciationBuildings
    
    
    16,613
    
    
    
    6,548
    
    
    
    9
    
    
    
    (83
    )
    
    
    23,069Structures
    
    
    319
    
    
    
    12
    
    
    
    
    
    
    
    (293
    )
    
    
    38Machinery
    
    
    971,848
    
    
    
    406,957
    
    
    
    47,200
    
    
    
    (103,039
    )
    
    
    1,228,566Vehicles
    
    
    403
    
    
    
    76
    
    
    
    199
    
    
    
    (82
    )
    
    
    198Other
    
    
    28,578
    
    
    
    6,316
    
    
    
    270
    
    
    
    (9,248
    )
    
    
    25,3761,017,761
    
    
    
    419,909
    
    
    
    47,678
    
    
    
    (112,745
    )
    
    
    1,277,247W
    3,134,314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W
    2,550,921
 Depreciable assets are insured for fire and other casualty losses up to
W2,315,810 million and W1,614,632 million as of December 31, 2002 and 2003,
respectively. F-22




---



##### Table of Contents



The market value of the Companys land based on the official price of land
(published by Ministry of Construction and Traffic) is W139,010 million and
W159,855 million as of December 31, 2002 and 2003, respectively. The Company recorded W61,333 million of loss on disuse of property and
equipment in December 2003 due to discontinuance of service, decrease of
customer demand and deterioration of certain machinery.  12.
    
    INTANGIBLES:  (1)
    
    Intangibles as of December 31, 2002 and 2003 are as follows (won in
millions): Amount2002
    
    2003Goodwill
    
    W
    6,742
    
    
    W
    3,287Intellectual proprietary rights
    
    
    111
    
    
    
    15Cable line usage rights
    
    
    39,757
    
    
    
    45,397Development costs
    
    
    999
    
    
    
    2,716Land rights
    
    
    70
    
    
    
    66Other intangibles
    
    
    1,348
    
    
    
    Negative goodwill [Note 12(5)]
    
    
    (26,845
    )
    
    
    W
    22,182
    
    
    W
    51,481
  (2)
    
    Amortization of intangibles for the years ended December 31, 2001, 2002
and 2003 is as follows (won in millions): Amount2001
    
    2002
    
    2003Goodwill
    
    W
    3,751
    
    
    W
    481
    
    
    W
    3,455Intellectual proprietary rights
    
    
    17
    
    
    
    7
    
    
    
    17Cable line usage rights
    
    
    715
    
    
    
    1,825
    
    
    
    2,415Development costs
    
    
    13,990
    
    
    
    6,886
    
    
    
    3,346Land rights
    
    
    4
    
    
    
    4
    
    
    
    4Other
    
    
    309
    
    
    
    510
    
    
    
    W
    18,786
    
    
    W
    9,713
    
    
    W
    9,237
  (3)
    
    Changes in development costs (intangibles) for the years ended December
31, 2001, 2002 and 2003 are as follows (won in millions): Amount2001
    
    2002
    
    2003Beginning of year
    
    W
    7,066
    
    
    W
    3,113
    
    
    W
    999Increase
    
    
    10,649
    
    
    
    6,633
    
    
    
    5,063Amortization
    
    
    (13,990
    )
    
    
    (6,886
    )
    
    
    (3,346
    )Recognition of impairment loss
    
    
    (612
    )
    
    
    
    
    
    
    Changes in consolidated
subsidiaries
    
    
    
    
    
    
    (1,861
    )
    
    
    End of year
    
    W
    3,113
    
    
    W
    999
    
    
    W
    2,716
  (4)
    
    W7,133 million, W4,784 million and W4,891 million of ordinary research
and development costs were charged to expense as incurred for the years
ended December 31, 2001, 2002 and 2003, respectively.(5)
    
    Negative goodwill of W29,938 million accounted for in accordance with the
purchase method on December 24, 2001 was excluded from the Company as of
December 31, 2003 due to the decrease of Hanaros percentage ownership in
Dreamline from 32.18% to 26.28%.Changes in negative goodwill for the years ended December 31, 2001, 2002 and
2003 are as follows (won in millions): F-23




---



##### Table of Contents



Amount2001
    
    2002
    
    2003Beginning of period
    
    W
    
    
    
    W
    29,938
    
    
    W
    26,845Changes in
consolidated
subsidiaries
    
    
    29,938
    
    
    
    
    
    
    
    (26,845
    )Amortization
    
    
    
    
    
    
    (3,093
    )
    
    
    End of year
    
    W
    29,938
    
    
    W
    26,845
    
    
    W
    
  13.
    
    LEASES:(1)
    
    The Company has operating lease agreements for the rights to use various
underground facilities to house its fiber-optic cable network, leased
lines, telecommunication equipments and automobiles with some Metropolitan
Subway Corp., Powercomm Corp., Dacom Corp. and KRX Co., Ltd. The payment
schedule for the operating leases is as follows (won in millions): AmountUnderground facilitiesYear
    
    and leased lines
    
    Automobiles
    
    Total2004
    
    W
    19,934
    
    
    W
    796
    
    
    W
    20,7302005
    
    
    19,934
    
    
    
    771
    
    
    
    20,7052006
    
    
    19,757
    
    
    
    313
    
    
    
    20,0702007
    
    
    19,509
    
    
    
    
    
    
    
    19,509W
    79,134
    
    
    W
    1,880
    
    
    W
    81,014
  (2)
    
    The Company also has capital lease agreements with Korea Hewlett Packard
Co., LG Card Services Corp., Samsung Card Co., Ltd., Shinhan Capital.,
Co., Ltd., Yonhap Capital Co., Ltd., and Cisco Systems Capital Korea Ltd.
for certain machinery and equipment. As of December 31, 2002 and 2003,
the acquisition cost of machinery and equipment under capital lease was
W95,729 million and W193,959 million, respectively, and depreciation
expenses related to the these capital leases for the years ended December
31, 2002 and 2003 amount to W11,071 million and W20,071 million,
respectively.The future annual payments under these capital lease agreements as of
December 31, 2003 are as follows (won in millions and dollar in thousands): Principal
    
    Interest
    
    TotalYear
    
    Korean won
    
    US dollars
    
    Won equivalent
    
    Korean won
    
    US dollars
    
    Won equivalent
    
    lease payments2004
    
    W
    60,171
    
    
    $
    2,733
    
    
    W
    3,259
    
    
    W
    5,778
    
    
    $
    127
    
    
    W
    152
    
    
    W
    69,3602005
    
    
    36,863
    
    
    
    146
    
    
    
    175
    
    
    
    2,040
    
    
    
    3
    
    
    
    4
    
    
    
    39,0822006
    
    
    10,801
    
    
    
    
    
    
    
    
    
    
    
    354
    
    
    
    
    
    
    
    
    
    
    
    11,1552007
    
    
    731
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    754W
    108,566
    
    
    $
    2,879
    
    
    
    3,434
    
    
    W
    8,195
    
    
    $
    130
    
    
    
    156
    
    
    W
    120,351108,566
    
    
    
    
    
    
    
    
    
    
    
    8,195112,000
    
    
    
    
    
    
    
    
    
    
    W
    8,351Less: Current portion
    
    
    
    
    
    
    
    
    
    
    (63,430
    )W
    48,570
  14.
    
    SHORT-TERM BORROWINGS: Short-term borrowings as of December 31, 2002 and 2003 are as follows (won in millions): Interest rateper annum (%)
    
    Amount2003
    
    2002
    
    2003General loans
    
    
    6.00
    
    
    W
    55,000
    
    
    W
    3,000Syndication loans
    
    
    7.60
    
    
    
    
    
    
    
    60,000Issuance of commercial paper
    
    
    5.43
    
    
    
    8,000
    
    
    
    100,000W
    63,000
    
    
    W
    163,000
 F-24




---



##### Table of Contents



15.
    
    LONG-TERM DEBT AND DEBENTURES:(1)
    
    Long-term debt in local currency as of December 31, 2002 and 2003 is as
follows (won in millions): Interest rateper annum (%)
    
    Amount2003
    
    2002
    
    2003Information promotion fund
    
    
    3.58 ~ 7.25
    
    
    W
    180,590
    
    
    W
    163,813General loans
    
    
    6.99 ~ 7.60
    
    
    
    63,984
    
    
    
    55,000Syndication loans
    
    
    7.60 ~ 8.50
    
    
    
    
    
    
    
    24,952Asset backed loan (ABL)
    
    
    
    
    
    
    128,764
    
    
    
    25,902373,338
    
    
    
    269,667Less:
    Current portion
    
    
    
    
    
    
    (164,406
    )
    
    
    (98,970
    )Discount on present value
    
    
    
    
    
    
    
    
    
    
    (844
    )W
    208,932
    
    
    W
    169,853
  On April 18, 2002, the Company transferred the beneficiary certificates
of W 207,000 million for the trust amount of W 226,800 million issued by
Kookmin Bank to Hana Dream Limited Co.(Hanadream) in exchange for the
right to receive certain of the Companys future trade receivables,
which are expected to be incurred from April 2002 to April 2004.
Hanadream issued Asset Backed Loans (ABL) amounting to W 207,000 million
on April 25, 2002, of which the subordinate loan of W7,000 million was
loaned by the Company and W 200,000 million was loaned by the banks.
The proceeds of W200,000 million were remitted to the Company. In
relation to the issuance of ABL, the Company recognizes the difference
between the trade receivables and the reduced long-term debt as interest
expense. The balance of current portion of long-term debt related to
this ABL transaction as of December 31, 2003 amounts to W25,902 million
and, W11,864 million and W7,538 million was recorded as interest expense
for the years ended December 31, 2002 and 2003, respectively.(2)
    
    Long-term debt in foreign currency as of December 31, 2002 and 2003 is as
follows (won in millions, dollar in thousands): Interest rateper annum (%)
    
    US dollars
    
    Won equivalent2003
    
    2002
    
    2003
    
    2002
    
    2003Facility loans
    
    
    
    
    
    $
    17,337
    
    
    $
    
    
    
    W
    20,566
    
    
    W
    Syndication loans
    
    
    4.41
    
    
    
    
    
    
    
    63,065
    
    
    
    
    
    
    
    75,21217,337
    
    
    
    63,065
    
    
    
    20,566
    
    
    
    75,212Less:
    Current portion
    
    
    
    
    
    
    (13,711
    )
    
    
    
    
    
    
    (16,265
    )
    
    
    Discount on
present
value
    
    
    
    
    
    
    
    
    
    
    (2,131
    )
    
    
    
    
    
    
    (2,542
    )$
    3,626
    
    
    $
    60,934
    
    
    W
    4,301
    
    
    W
    72,670
  (3)
    
    Debentures as of December 31, 2002 and 2003 are as follows (won in
millions): Interest rateper annum (%)
    
    AmountDebtor
    
    Category
    
    2003
    
    2002
    
    2003Hanaro
    
    General debentures
    
    
    6.00 ~ 8.59
    
    
    W
    1,133,750
    
    
    W
    691,000Bonds with warrants
    
    
    
    
    
    
    118,630
    
    
    
    (US$100,000
    )
    
    
    Dreamline
    
    General debentures
    
    
    
    
    
    
    208,400
    
    
    
    1,460,780
    
    
    
    691,000Less:
    Current portion
    
    
    
    
    
    
    
    
    
    
    (821,530
    )
    
    
    (195,000
    )Discount on debentures
    
    
    
    
    
    
    
    
    
    
    (21,603
    )
    
    
    (14,247
    )W
    617,647
    
    
    W
    481,753
  (4)
    
    On February 26, 2002, Hanaro issued bonds with stock warrants (18th
debenture) with a zero coupon interest rate and a guaranteed interest
rate on maturity of 8.0% for the purpose of early repayment of the 13th
bonds with stock warrants. The warrants on the bonds with stock warrants
is 15% or US$ 15,000 thousands and may be exercised from May 26, 2002 to
January 26, 2007. The exercise price is W5,000 at an exchange rate of
W1,321.20 to US$1.00 and the exercise price is scheduled to change
quarterly based on the market price of the related stock. F-25




---



##### Table of Contents



The above bonds with stock warrants have a right to require early repayment
on August 26, 2003 at 112.2% of the principal of the bonds with stock
warrants. Hanaro recorded W8,246 million of accrued interest for possible
early repayment as a current liability as of December 31, 2002. On
September 2, 2003, the Company early repaid 18th bonds with warrants and
recorded W870 million of gain on early redemption of debentures.On March 6, 2002 and July 22, 2002, Hanaro and Dreamline repaid the full
amount of the 13th and the 25th bonds with warrants, respectively, and
recognized a loss on early redemption of W4,265 million and W807 million,
respectively, for the year ended December 31, 2002.As of December 31, 2003, US$ 62,000 thousand (15,322,680 shares) has been
exercised and US$ 38,000 thousand (9,391,320 shares) remains unexercised for
the 13th debenture (bonds with stock warrants).During 2003, the Company early repaid W20,000 million of 1st debenture to
reduce interest expense burden and recorded W308 million of loss on early
redemption of debentures.(5)
    
    On December 10, 2003, the Company entered into the syndication loan
agreement with Development Bank of Singapore, JP Morgan Chase, ABN Amro,
Korea Exchange Bank, Korea Development Bank and other financial
institutions. The loan amount approximates to W720 billion (won currency
loan of W224,684 million and US$ currency loan of US$416,232 thousand),
which includes term loan of W660 billion with a maturity of five years and
revolving loan of W60 billion. The outstanding balance of this
syndication loan as of December 31, 2003 is W160,164 million (short-term
borrowings of W60,000 million, long-term debt in local currency of W24,952
million and long-term debt in foreign currency of W75,212 million).In relation to the above syndication loan, the Companys buildings are
pledged as collateral up to W531,411 million; machinery, of which book value
is W1,937,437 million as of September 30, 2003, are provided as assignable
mortgage; and some intellectual property rights are pledged as collateral.(6)
    
    The schedule of principal payments of debentures and long-term debt
(excluding capital lease obligations explained in Note 13) as of December
31, 2003 is as follows (won in millions and dollar in thousands): Long-term debt inLong-term debt
    
    foreign currencyYear
    
    Debentures
    
    in local currency
    
    U.S. dollar
    
    Won equivalent
    
    Total2004
    
    W
    195,000
    
    
    W
    98,970
    
    
    $
    
    
    
    W
    
    
    
    W
    293,9702005
    
    
    306,000
    
    
    
    95,233
    
    
    
    
    
    
    
    
    
    
    
    401,2332006
    
    
    190,000
    
    
    
    45,023
    
    
    
    9,460
    
    
    
    11,282
    
    
    
    246,3052007
    
    
    
    
    
    
    17,986
    
    
    
    25,226
    
    
    
    30,085
    
    
    
    48,0712008
    
    
    
    
    
    
    12,455
    
    
    
    28,379
    
    
    
    33,845
    
    
    
    46,300W
    691,000
    
    
    W
    269,667
    
    
    $
    63,065
    
    
    W
    75,212
    
    
    W
    1,035,879
  (7)
    
    Other than collateral provided to the syndication loan consortium
described in the Note 15 (5), property and equipment of W142,956 million,
short-term financial instruments of W78,620 million and investment
securities of W3,000 million are pledged as collateral for short-term
borrowings, long-term debt and debentures as of December 31, 2003.(8)
    
    According to the covenants, debentures of 17-1st, 17-2nd, 19-1st, 19-2nd,
20th, and 21st require the Company to keep the debt ratio lower than 250
percent ~ 300 percent and the Company should not dispose its property and
equipment of more than the amount of W750 billion ~W1,000 billion in each
fiscal year.   F-26




---



##### Table of Contents



16.
    
    ASSET BACKED SECURITIES PAYABLE: In October 2001, the Company transferred the beneficiary certificates of
W309,000 million for the trust amount of W341,000 million issued by a trustee
bank to Hanafos Securitization Speciality Co., Ltd. (Hanafos) in exchange for
the right to receive certain of the Companys future trade receivables, which
are expected to be incurred from October 2001 to April 2004. Hanafos then
issued Asset Backed Securities (ABS) amounting to W309,000 million on October
31, 2001, of which a subordinate debt investment of W9,000 million was
purchased by the Company and W300,000 million was purchased by third party
investors. The proceeds of W300,000 million from the issuance of ABS by
Hanafos were remitted to the Company. In relation to the issuance of ABS, the
balance of Asset Backed Securities payable (current) as of December 31, 2003
amounts to W32,510 million and, W4,100 million, W18,382 million and W9,028
million were recorded as Asset Backed Securities payable expense for the years
ended December 31, 2001, 2002 and 2003, respectively. In May 2002, Dreamline transferred the beneficiary certificates of W93,500
million issued by a trustee bank to 1st Dreamline Securitization Speciality
Co., Ltd. (DSS) in exchange for the right to receive certain of the Companys
future trade receivables, which are expected to be incurred from June 2002 to
May 2005. DSS then issued Asset Backed Securities (ABS) amounting to W82,500
million on May 16, 2002, of which a subordinate debt investment of W1,500
million was purchased by the Company and W81,000 million was purchased by third
party investors. The proceeds of W81,000 million from the issuance of ABS by
DSS was remitted to the Company. As described in Note 1(2), Dreamline was
excluded from the Company as of December 31, 2003 and W3,911 million was
recorded as Asset Backed Securities payable expense for the year ended December
31, 2002.  17.
    
    DERIVATIVES:(1)
    
    Swap Contract
With reference to the Companys issuance of the 20th debenture (Floating
Rate Note) and syndication loan in foreign currency, the Company entered
into a swap contract (fixed interest rate) with Industrial Bank of Korea
(IBK) and Korea Development Bank (KDB) to hedge the risk of floating
interest rates. In relation to the valuation of this swap contract, the
Company recorded W5,633 million and W13,058 million of valuation loss as
capital adjustments and liability as of December 31, 2002 and 2003,
respectively (won in millions and dollar in thousands). Valuation losson interest swapFinancial institution
    
    Contract period
    
    Floating rate (%)
    
    Fixed rate (%)
    
    Contract amount
    
    2002
    
    2003IBK
    
    2002.5 ~ 2005.5
    
    Government bond
    
    
    9.90
    
    
    W 100,000
    
    W 5,633
    
    W
    4,419rate+1.95KDB
    
    2003.12 ~ 2008.11
    
    LIBOR+3.25
    
    
    7.72
    
    
    US$   63,065
    
    
    
    
    8,639W 5,633
    
    W
    13,058
  (2)
    
    Forward Exchange Contract
On December 19, 2003, the Company entered into a foreign currency forward
contract, relating to syndication loan in foreign currency, with Korea
Development Bank to hedge the exposure to changes in the foreign currency
exchange rate at W1,190.0 per US$ against US$ 63,065 thousand. In relation
to this forward contract, the Company recorded W173 million of gain on
valuation of forward exchange contract for the year ended December 31, 2003.On July 3, 2002, the Company entered into a foreign currency forward contract
with Woori Bank to hedge the exposure to changes in the foreign currency
exchange rate, in case of early repayment of bonds with stock warrants
denominated in foreign currency. In relation to this contract, the Company
recorded W1,888 million of loss on valuation of forward exchange contract and
W343 million of gain on forward exchange transaction for the years ended
December 31, 2002 and 2003, respectively.The Company recorded W2,519 million of gain on valuation of forward exchange
contract and W186 million of gain on transaction of forward exchange contract
occurred by early repayment of 13th debenture for the years ended December
31, 2001 and 2002, respectively. F-27




---



##### Table of Contents



18.
    
    SHAREHOLDERS EQUITY:(1)
    
    Capital Stock
The Company has authorized 700,000,000 shares of W5,000 par value, of which
462,135,180 shares have been issued as of December 31, 2003(2)
    
    The Company issued American Depository Shares based on 24,000 thousand
common shares as authorized by the Board of Directors on March 29, 2000.
Cash proceeds of W120,000 million were recorded as common stock and
W278,797 million cash proceeds in excess of par value, net of common stock
issuance costs, were recorded as capital surplus.(3)
    
    On November 18, 2003, the Company issued 182,182,500 common shares at
W3,200 per share (par value: W5,000) for the specified foreign investors.
The discounts at less than par value, which amounts to W329,062 million,
and the issuing cost of W19,111 million were offset against the existing
paid-in capital in excess of par value.19.
    
    STOCK OPTION PLAN: The Company entered into stock option agreements with the Chief Executive
Officer, senior managers and employees of the Company. The details of the
stock options granted as of December 31, 2003 are as follows (won in millions): Grant Date
    
    Employee
    
    Number of shares
    
    Exercise price/share
    
    Methods
    
    Exercise period1999. 3. 1
    
    Ex-CEO
    
    
    50,000
    
    
    W
    5,630
    
    
    New stock issue
    
    
    2002.3.1~2007.2.281999.10. 1
    
    Senior managers
    
    
    120,000
    
    
    
    19,910
    
    
    New stock issue
    
    
    2002.10.1~2007.9.302000. 3.17
    
    Senior managers & employees
    
    
    1,551,153
    
    
    
    17,750
    
    
    New stock issue
    
    
    2003.3.18~2008.3.17
 The Company values stock options granted based on the minimum value method (see
Note 2). Total compensation expense of W8,062 million was allocated over the
vesting period and the compensation expense charged to operations for the year
ended December 31, 2003 is W1,375 million. In relation to the stock options granted in 1999, the Company did not recognize
compensation expense, which was calculated as the difference between the stock
price at year-end and the exercise price multiplied by the number of stock
options, due to downward movement of the stock price. Had the compensation cost for the Companys stock option plans, which were
granted in 2000, been determined based on the fair value method at the grant
dates for awards, the Companys ordinary loss, net loss, ordinary loss per
share and net loss per share would have been reduced as follows (won in
millions, except per share amount): 2001
    
    2002
    
    2003Ordinary loss
    
    W
    251,103
    
    
    W
    130,060
    
    
    W
    162,657Net loss
    
    W
    248,198
    
    
    W
    127,406
    
    
    W
    163,044Ordinary loss per share
    
    W
    880
    
    
    W
    436
    
    
    W
    506Net loss per share
    
    W
    870
    
    
    W
    427
    
    
    W
    507
 The fair value of the option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000: dividend yield of nil, expected volatility
of 93.8 percent, risk-free interest rate of 9.0 percent, expected exercise
lives of 3 to 7 years and expected forfeitures per year of 3%. Total
compensation cost based on the fair value method was calculated as W18,389
million. F-28




---



##### Table of Contents



20.
    
    OPERATING EXPENSES: Significant accounts of operating expenses for the years ended December 31,
2001, 2002 and 2003 are as follows (won in millions): Amount2001
    
    2002
    
    2003Salaries and wages
    
    W
    81,487
    
    
    W
    97,715
    
    
    W
    92,370Provision for severance indemnities
    
    
    11,388
    
    
    
    11,959
    
    
    
    13,444Welfare
    
    
    18,795
    
    
    
    22,274
    
    
    
    19,380Rent
    
    
    2,669
    
    
    
    19,624
    
    
    
    14,746Depreciation
    
    
    307,761
    
    
    
    423,762
    
    
    
    419,291Advertising
    
    
    40,032
    
    
    
    42,487
    
    
    
    27,457Ordinary research and development cost
    
    
    7,133
    
    
    
    4,784
    
    
    
    4,891Utilities
    
    
    13,505
    
    
    
    17,578
    
    
    
    19,487Telecommunication equipment lease expenses
    
    
    106,587
    
    
    
    188,867
    
    
    
    165,716Bad debt
    
    
    2,760
    
    
    
    13,690
    
    
    
    25,744Maintenance
    
    
    40,307
    
    
    
    46,274
    
    
    
    42,583Selling expenses
    
    
    47,090
    
    
    
    47,259
    
    
    
    6,408Sales commissions
    
    
    146,306
    
    
    
    220,336
    
    
    
    195,997Interconnection charges
    
    
    68,138
    
    
    
    95,883
    
    
    
    131,114Commissions
    
    
    44,900
    
    
    
    83,874
    
    
    
    70,859Outsourcing services
    
    
    15,539
    
    
    
    15,607
    
    
    
    20,519Amortization
    
    
    18,786
    
    
    
    9,713
    
    
    
    9,237Other
    
    
    28,152
    
    
    
    34,740
    
    
    
    33,549W
    1,001,335
    
    
    W
    1,396,426
    
    
    W
    1,312,792
  21.
    
    INCOME TAX AND DEFERRED INCOME TAXES: Income Tax The statutory corporate income tax rate (including resident surtax) applicable
to the Company is approximately 30.8 % in 2001 and 29.7% in 2002 and 2003.
Income tax is calculated as follows (won in millions): Amount2001
    
    2002
    
    2003Income taxes currently payable
    
    W
    107
    
    
    W
    578
    
    
    W
    341Changes in temporary differences
    
    
    (72
    )
    
    
    505
    
    
    
    (39
    )Income tax expense
    
    W
    35
    
    
    W
    1,083
    
    
    W
    302
 Deferred Income Taxes Deferred income taxes reflect the tax effects on prior years tax losses, tax
credits, and temporary differences between the carrying amount of assets and
liabilities for financial accounting purposes and the amounts used for income
tax purposes. F-29




---



##### Table of Contents



Accumulated temporary differences and deferred taxes as of December 31, 2002
and 2003 are as follows (won in millions): Amount2002
    
    2003Accrued severance indemnities
    
    W
    14,876
    
    
    W
    16,796Valuation loss on marketable securities
    
    
    7,370
    
    
    
    307Bad debts
    
    
    17,807
    
    
    
    37,851Present value discount
    
    
    4,195
    
    
    
    (1,963
    )Valuation loss on investment securities
    
    
    10,430
    
    
    
    13,809Long-term accrued interest
    
    
    8,246
    
    
    
    Forward contracts
    
    
    
    
    
    
    (173
    )Valuation loss on investment securities using
the equity method
    
    
    
    
    
    
    21,400Loss on disuse of property and equipment
    
    
    
    
    
    
    61,333Accrued income
    
    
    (5,314
    )
    
    
    (6,313
    )Depreciation
    
    
    210
    
    
    
    259Severance insurance deposits and other
    
    
    942
    
    
    
    (1,155
    )58,762
    
    
    
    142,151Loss carryforward
    
    
    653,567
    
    
    
    659,846Less: Temporary differences excluded
    
    
    (713,123
    )
    
    
    (801,373
    )(794
    )
    
    
    624Tax rate (%)
    
    
    29.7
    
    
    
    29.7Deferred income tax assets (liabilities), net
    
    W
    (236
    )
    
    W
    185
  As of December 31, 2002 and 2003, Hanaro did not recognize deferred income
tax assets for temporary differences due to the uncertainty of future
realization of the deferred tax benefits.22.
    
    RELATED PARTY TRANSACTIONS:(1)
    
    Significant transactions between Hanaro and its subsidiaries during 2002
and 2003 are as follows (won in millions): 2002 Revenue
    
    Expenses
    
    Key-money deposits
    
    PayablesHanaro Realty Development &
Management Co., Ltd.
    
    W
    53
    
    
    W
    14,278
    
    
    W
    1,412
    
    
    W
    1,652Hanaro Telephone & Internet
Information, Inc.
    
    
    122
    
    
    
    27,165
    
    
    
    122
    
    
    
    2,702Hanaro Technologies, Inc.
    
    
    11
    
    
    
    9,562
    
    
    
    
    
    
    
    Hanaro WEB(n)TV
    
    
    138
    
    
    
    5,567
    
    
    
    189
    
    
    
    8Dreamline Corporation
    
    
    2,773
    
    
    
    3,401
    
    
    
    28
    
    
    
    429Hanaro Telecom America, Inc.
    
    
    
    
    
    
    11,502
    
    
    
    
    
    
    
    925Hanaro Dream, Inc.
    
    
    4,884
    
    
    
    24,330
    
    
    
    172
    
    
    
    6,992W
    7,981
    
    
    W
    95,805
    
    
    W
    1,923
    
    
    W
    12,708
 2003 Revenue
    
    Expenses
    
    Key-money deposits
    
    PayablesHanaro Realty Development &
Management Co., Ltd.
    
    W
    166
    
    
    W
    20,153
    
    
    W
    1,522
    
    
    W
    1,809Hanaro Telephone & Internet
Information, Inc.
    
    
    106
    
    
    
    28,881
    
    
    
    102
    
    
    
    1,958Hanaro Web(n)TV
    
    
    150
    
    
    
    3,153
    
    
    
    223
    
    
    
    9Hanaro Telecom America, Inc.
    
    
    
    
    
    
    6,987
    
    
    
    
    
    
    
    623Dreamline Corporation
    
    
    3,368
    
    
    
    8,646
    
    
    
    1,404
    
    
    
    469Hanaro Dream, Inc.
    
    
    6,013
    
    
    
    20,198
    
    
    
    583
    
    
    
    2,574W
    9,803
    
    
    W
    88,018
    
    
    W
    3,834
    
    
    W
    7,442
 F-30




---



##### Table of Contents



(2)
    
    Transactions with shareholders for the years ended December 31, 2002 and
2003 are as follows (won in millions):Revenues: AmountTransaction
    
    2002
    
    2003Samsung
    
    Service fee
    
    W
    4,565
    
    
    W
    44Dacom
    
    
    
    
    17,202
    
    
    
    18,320SK Telecom
    
    
    
    
    9,804
    
    
    
    9,239Onse Telecom
    
    
    
    
    9,768
    
    
    LG
    
    
    
    
    2,272
    
    
    
    2,669W
    43,611
    
    
    W
    30,272
  Purchases: AmountTransaction
    
    2002
    
    2003Samsung
    
    Purchase of machinery and equipment, other
    
    W
    19,995
    
    
    W
    7,285Dacom
    
    R&D expenses and other
    
    
    50,955
    
    
    
    31,831SK Telecom
    
    Interconnection charges, other
    
    
    26,787
    
    
    
    38,236Onse Telecom
    
    Rental fee for submarine cable
    
    
    6,233
    
    
    LG
    
    Purchase of machinery and equipment, other
    
    
    22,799
    
    
    
    20,371W
    126,769
    
    
    W
    97,723
  Balances with shareholders as of December 31, 2002 and 2003 are as follows
(won in millions): Assets
    
    Liabilities2002
    
    2003
    
    2002
    
    2003Samsung
    
    W
    
    
    
    W
    
    
    
    W
    12,324
    
    
    W
    5,156Dacom
    
    
    
    
    
    
    
    
    
    
    1,391
    
    
    
    308SK Telecom
    
    
    754
    
    
    
    783
    
    
    
    
    
    
    
    6,889Onse Telecom
    
    
    
    
    
    
    
    
    
    
    624
    
    
    
    LG
    
    
    271
    
    
    
    234
    
    
    
    5,865
    
    
    
    4,593W
    1,025
    
    
    W
    1,017
    
    
    W
    20,204
    
    
    W
    16,946
  23.
    
    COMMITMENTS AND CONTINGENCIES:(1)
    
    The Company has been provided US$ 500 thousand of payment guarantees by
the Korea Exchange Bank in connection with the issuance of letters of
credit.(2)
    
    The Company has provided four blank promissory notes as collateral to KDB
Capital Corp., LG Card Services Corp. and Samsung Card Co., Ltd. in
connection with its borrowings and lease agreements.(3)
    
    As of December 31, 2003, the Company has overdraft agreements with KorAm
Bank with a maximum line of credit of W10,000 million. F-31




---



##### Table of Contents



24.
    
    SEGMENT INFORMATION: The Companys reportable segments are strategic business units that offer
different products and services. The segments are managed separately based on
the difference in products and services, technology and marketing strategies.
The Company has three reportable operating segments; voice services, lease line
and broadband services. Voice services include all services provided to fixed
line customers, including local services. Lease line services consist of the
leasing of dedicated fiber optic lines over which customers transmit voice and
data. Broadband services include high-speed data transmission services over
Asymmetrical Digital Subscriber Line (ADSL), hybrid fiber coaxial (HFC) cable
lines and internet access services. The operations of all other operating
segments, which fall below the reporting thresholds, are included in the other
segment below and include entities providing real estate management services
and customer services. The accounting policies of the segments are the same as
those described in Note 2. Segment information for the years ended December 31, 2001, 2002 and 2003 is as
follows (won in millions): 2001
    
    Voice
    
    Leased Line
    
    Broadband
    
    Others
    
    TotalRevenue
    
    W
    114,529
    
    
    W
    17,706
    
    
    W
    641,544
    
    
    W
    56,942
    
    
    W
    830,721Operating loss
    
    
    24,986
    
    
    
    4,558
    
    
    
    117,745
    
    
    
    23,325
    
    
    
    170,614Tangible and intangible assets
    
    
    295,534
    
    
    
    375,647
    
    
    
    2,330,975
    
    
    
    145,376
    
    
    
    3,147,532Capital expenditures and
advanced payments for
property and equipment
    
    
    73,113
    
    
    
    2,391
    
    
    
    490,226
    
    
    
    46,676
    
    
    
    612,406Depreciation and amortization
    
    
    35,024
    
    
    
    11,096
    
    
    
    263,509
    
    
    
    16,918
    
    
    
    326,547
 2002
    
    Voice
    
    Leased Line
    
    Broadband
    
    Others
    
    TotalRevenue
    
    W
    210,664
    
    
    W
    111,813
    
    
    W
    969,635
    
    
    W
    125,742
    
    
    W
    1,417,854Operating income (loss)
    
    
    (12,822
    )
    
    
    7,498
    
    
    
    29,094
    
    
    
    (2,342
    )
    
    
    21,428Tangible and intangible assets
    
    
    161,178
    
    
    
    311,798
    
    
    
    2,519,596
    
    
    
    163,925
    
    
    
    3,156,497Capital expenditures and
advanced payments for
property and equipment
    
    
    77,827
    
    
    
    56,703
    
    
    
    285,878
    
    
    
    35,000
    
    
    
    455,408Depreciation and amortization
    
    
    46,969
    
    
    
    37,540
    
    
    
    311,733
    
    
    
    37,233
    
    
    
    433,475
 2003
    
    Voice
    
    Leased Line
    
    Broadband
    
    Others
    
    TotalRevenue
    
    W
    248,964
    
    
    W
    37,992
    
    
    W
    982,693
    
    
    W
    113,837
    
    
    W
    1,383,486Operating income (loss)
    
    
    (8,577
    )
    
    
    4,986
    
    
    
    118,937
    
    
    
    (44,652
    )
    
    
    70,694Tangible and intangible assets
    
    
    558,446
    
    
    
    16,652
    
    
    
    1,743,778
    
    
    
    283,526
    
    
    
    2,602,402Capital expenditures and
advanced payments for
property and equipment
    
    
    56,581
    
    
    
    6,064
    
    
    
    245,711
    
    
    
    42,603
    
    
    
    350,959Depreciation and amortization
    
    
    60,298
    
    
    
    5,657
    
    
    
    315,208
    
    
    
    47,365
    
    
    
    428,528
 Capital expenditures and advanced payments for property and equipment include
increase of property and equipment by capital lease obligation, which is
W43,407 million, W20,526 million and W98,230 million for the years ended
December 31, 2001, 2002 and 2003, respectively.  25.
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES: Accounting practices used by the Company in preparing the accompanying
financial statements conform with accounting principles generally accepted in
the Republic of Korea (Korean GAAP), but do not conform with accounting
principles generally accepted in the United States of America (U.S. GAAP).
The significant differences applicable to the Company are described below.
Other differences do not have a significant effect on either net loss or
shareholders equity. F-32




---



##### Table of Contents



(1)
    
    Companies Included in the Consolidation Under Korean GAAP, all majority-owned subsidiaries and entities of which the
Company owns more than 30% of total outstanding voting stock and is the largest
stockholder are included in the consolidation. Under U.S. GAAP, entities of
which the Company owns twenty to fifty percent of total outstanding voting
stock are not consolidated; rather those entities should be accounted for under
the equity method. Accordingly, Dreamline Corporation (Dreamline), of which Hanaro owns 32.18 %
and Hanarodream Inc. (Hanarodream), a 42.14%-owned subsidiary of Dreamline,
were excluded from consolidation under U.S. GAAP; rather Dreamline and
Hanarodream were accounted for under the equity method as of December 31, 2002. Summarized combined financial information of Dreamline and Hanarodream as of
and for the year ended December 31, 2002, which is included in the consolidated
financial statements under Korean GAAP, is as follows (won in millions): Current assets
    
    W
    75,120Non-current assets
    
    
    505,350Total assets
    
    W
    580,470Current liabilities
    
    W
    284,523Non-current liabilities
    
    
    82,824Total liabilities
    
    W
    367,347Net assets
    
    W
    213,123Operating revenue
    
    W
    192,934Operating income
    
    
    16,417Net loss
    
    
    6,523
  (2)
    
    Consolidation of Special-Purpose Entities (SPE) Under Korean GAAP, Hanafos and Hanadream, the SPEs described in Notes 15(1) and
16, are excluded from the consolidation as Hanaro does not have control over
the SPEs management and operations. Under U.S. GAAP, the operations of Hanadream and Hanafos are included in the
consolidation of the Company in accordance with Statement of Financial
Accounting Statements (SFAS) No.140- Accounting for Transfer and Servicing
of Financial Assets and Extinguishments of Liabilities since the asset
transfers were not qualified as a true sale. Summarized financial information of Hanafos and Hanadream as of and for the
years ended December 31, 2002 and 2003 is as follows: Korean won2002
    
    2003(In millions)Current assets
    
    W
    41,236
    
    
    W
    42,314Non-current assets
    
    
    284,858
    
    
    
    58,201Total assets
    
    W
    326,094
    
    
    W
    100,515Current liabilities
    
    W
    227,682
    
    
    W
    86,104Non-current liabilities
    
    
    99,720
    
    
    
    17,417Total liabilities
    
    W
    327,402
    
    
    W
    103,521Net assets
    
    W
    (1,308
    )
    
    W
    (3,006
    )Operating revenue
    
    W
    28,425
    
    
    W
    15,742Operating loss
    
    
    (2,325
    )
    
    
    (2,566
    )Net loss
    
    
    (1,333
    )
    
    
    (1,697
    )
 F-33




---



##### Table of Contents



(3)
    
    Accrued Severance Benefits Under the Korean labor law, employees with more than one year of service are
entitled to receive a lump sum payment upon voluntary or involuntary
termination of their employment. The amount of the benefit is based on the
terminated employees length of employment and rate of pay prior to
termination. Korean GAAP requires that a company record the vested benefit
obligation at the balance sheet date assuming all employees were to terminate
their employment as of that date. The change in the vested benefit obligation
during the year is recorded as the current years severance expense. The severance benefits program in the Republic of Korea is similar to a defined
benefit plan in the United States. Generally, in the United States, plan
assets are maintained by an independent trustee and therefore, the benefit
obligation is recorded net of plan assets, while in Korea, the Company records
the plan assets in its financial statements. Under U.S. GAAP, for employee benefit plans with the characteristics of the
Korean plans, if the assumption for salary progression is less than the
assumption for the discount rate, it is acceptable to assume that the vested
benefit obligation is larger than the present value of the projected benefit
obligation and the Company may record a pension liability equal to the vested
benefit obligation at the balance sheet date. Under these circumstances, the
periodic pension expense is equal to the change in the vested benefit
obligation during the year and there is no significant difference between
Korean GAAP and U.S. GAAP. The Companys management believes that the
liability and expense recorded under Korean GAAP in the accompanying financial
statements do not differ from that required under U.S. GAAP.  (4)
    
    Licensing Cost In August 1997, the Companys shareholders (members of the Consortium
Agreement) collectively paid W45,000 million to the Ministry of Information
and Communication (MIC) representing a one-time charge to obtain a perpetual
license to provide fixed-link local telephone service on a nationwide basis in
Korea. Under Korean GAAP, such fees paid by the major shareholders on behalf
of the Company are not required to be recorded. Under U.S. GAAP, such
transaction is a capital contribution by the shareholders. Under U.S. GAAP,
the license was capitalized as an intangible asset and amortized over its
estimated economic useful life of 20 years. In connection with the adoption
of SFAS No. 142 [See Note 25(8)], licensing cost is deemed to have an
indefinite life. A deferred tax liability calculated using the Companys
statutory income tax rate of 29.7% has also been recorded, as the license
asset has no tax basis to the Company.  (5)
    
    Interest Capitalization As explained in Note 2, under Korean GAAP, starting from January 1, 2003,
interest expense is no longer capitalized. However, under U. S. GAAP, the
Companys policy is to capitalize interest in the amount that would have
theoretically been avoided had expenditures not been made for assets which
require a period of time to get them ready for their intended uses.  (6)
    
    Investment Securities Under Korean GAAP, securities are classified into one of the three categories:
trading, held-to-maturity or available-for-sale. Trading securities are those
that were acquired principally to generate profits from short-term fluctuations
in prices. Held-to-maturity securities are those with fixed and determinable
payments and fixed maturity that an enterprise has the positive intent and
ability to hold to maturity. Available-for-sale securities are those not
classified as either held-to-maturity or trading securities. Trading
securities are classified as short-term investment securities, whereas
available-for-sale securities and held-to-maturity securities are classified as
long-term investment securities, except for those maturity dates or whose
likelihood of being disposed of are within one year from balance sheet date,
which are classified as short-term investment securities. Under U.S.GAAP,
investment securities are classified into three categories and are accounted
for as follows: F-34




---



##### Table of Contents



(i)
    
    Debt securities that a company has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.(ii)
    
    Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with the unrealized gains and
losses included in current operations.(iii)
    
    Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with the unrealized gains and
losses excluded from income and reported as a separate component of
shareholders equity. Under Korean GAAP, securities are recognized initially at cost, which includes
the market value of the consideration given and incidental expenses.
Held-to-maturity securities, after initial recognition, are valued at amortized
cost. Trading securities are valued at fair value, with unrealized gains or
losses included in current operations. Available-for-sale securities are also
valued at fair value, with unrealized gains or losses included in capital
adjustments, until the securities are sold or if the securities are determined
to be impaired and the lump-sum cumulative amount of capital adjustments are
reflected in current operations. Securities are evaluated at each balance
sheet date to determine whether there is any objective evidence of impairment
loss. When any such evidence exists, unless there is a clear counter-evidence
that recognition of impairment is unnecessary, the Company estimates the
recoverable amount of the impaired security and recognizes any impairment loss
in current operations. The amount of impairment loss of held-to-maturity
security or non-marketable equity security is measured as the difference
between the recoverable amount and the carrying amount. Accounting for
impairment under U.S.GAAP is substantially the same under Korean GAAP. Information included in short-term and long-term investment securities as of
December 31, 2002 and 2003 is as follows: Korean wonUnrealized gains
    
    Unrealized lossesAcquisition
    
    Over 12
    
    Under 12
    
    Over 12
    
    Under 122002:
    
    cost
    
    Months
    
    months
    
    Months
    
    months
    
    Fair value(In millions)(1)
    Short-term investment securitiesTrading securities
    
    W
    25,000
    
    
    W
    
    
    
    W
    
    
    
    W
    4,532
    
    
    W
    2,838
    
    
    W
    17,630Debt securities
    
    
    3,013
    
    
    
    23
    
    
    
    5
    
    
    
    1,120
    
    
    
    600
    
    
    
    1,32128,013
    
    
    
    23
    
    
    
    5
    
    
    
    5,652
    
    
    
    3,438
    
    
    
    18,951(2)
    Long-term investment securitiesAvailable-for-sale securities
    
    
    48,773
    
    
    
    2,541
    
    
    
    
    
    
    
    3,349
    
    
    
    11,758
    
    
    
    36,207Debt securities
    
    
    20,770
    
    
    
    
    
    
    
    
    
    
    
    450
    
    
    
    
    
    
    
    20,32069,543
    
    
    
    2,541
    
    
    
    
    
    
    
    3,799
    
    
    
    11,758
    
    
    
    56,527W
    97,556
    
    
    W
    2,564
    
    
    W
    5
    
    
    W
    9,451
    
    
    W
    15,196
    
    
    W
    75,478
 Korean wonUnrealized gains
    
    Unrealized lossesAcquisition
    
    Over 12
    
    Under 12
    
    Over 12
    
    Under 122003:
    
    cost
    
    Months
    
    months
    
    Months
    
    months
    
    Fair value(In millions)(1)
    Short-term investment
securitiesTrading securities
    
    W
    580
    
    
    W
    
    
    
    W
    
    
    
    W
    
    
    
    W
    307
    
    
    W
    273Debt securities
    
    
    1,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    940
    
    
    
    1161,636
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,247
    
    
    
    389(2)
    Long-term investmentAvailable-for-sale securities
    
    
    32,251
    
    
    
    2,541
    
    
    
    
    
    
    
    14,285
    
    
    
    7,083
    
    
    
    13,424Debt securities
    
    
    10,588
    
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    
    
    
    
    10,33942,839
    
    
    
    2,541
    
    
    
    
    
    
    
    14,534
    
    
    
    7,083
    
    
    
    23,763W
    44,475
    
    
    W
    2,541
    
    
    W
    
    
    
    W
    14,534
    
    
    W
    8,330
    
    
    W
    24,152
  (7)
    
    Development Costs Development costs are deferred under Korean GAAP. Under U.S.GAAP,
development costs are charged to expenses when incurred and are classified
as operating expenses. F-35




---



##### Table of Contents



(8)
    
    Goodwill and Other Intangibles Under Korean GAAP, all intangibles including goodwill are amortized over
their estimated useful lives and an impairment loss is recognized when their
carrying amount exceeds their fair value. Under U.S. GAAP, following the introduction of SFAS No. 142- Goodwill and
Intangible Assets, intangible assets with finite lives continue to be
amortized over their useful economic lives. Goodwill and intangible assets
with indefinite lives are not amortized, but tested for impairment, at least
annually, in accordance with SFAS No.142. The Companys intangible assets with finite lives and intangible assets with
indefinite lives including goodwill explained in Note 12 as of December 31,
2002 and 2003 are as follows: Intangible assets with finite lives
    
    Intellectual proprietary rightsCable line usage rightsLand rightOtherIntangible assets with indefinite lives
    
    GoodwillLicensing cost  [see Note 25 (4)]
 The following table reconciles reported net loss under U.S. GAAP to adjusted
net loss, which excludes amortization expense related to goodwill and
indefinite-life intangibles, assuming the adoption of SFAS No. 142 had
occurred on January 1 of each year presented: Korean Won2001
    
    2002
    
    2003(In millions)Reported net loss under U.S. GAAP
    
    W
    (244,447
    )
    
    W
    (162,525
    )
    
    W
    (165,988
    )Add: Amortization, net of tax
    
    
    3,751
    
    
    
    
    
    
    
    Adjusted net loss
    
    W
    (240,696
    )
    
    W
    (162,525
    )
    
    W
    (165,988
    )
  (9)
    
    Bonds with Stock Warrants Under Korean GAAP, for the detachable warrants on bonds issued before
December 31, 2002, all the proceeds from the issuance of bonds with stock
warrants are accounted for as debt securities, regardless of whether the
warrants are detachable or non-detachable. However, the proceeds from
issuance of debt securities with detachable warrants from January 1, 2003
are allocated between the warrants and the debt securities based on their
relative fair values at time of issuance. For debt securities with
non-detachable warrants, the warrants are recorded as the difference between
the issuance amount of debt securities with non-detachable warrants and the
reference amount of debt securities without warrants in similar market. Under U.S.GAAP, the proceeds from the issuance of bonds with detachable
stock warrants are allocated between the debt securities and the warrants
based on their relative fair values at the time of issuance. The portion
allocated to warrants is accounted for as paid-in capital.  (10)
    
    Stock Compensation Expense Under Korean GAAP, the difference between the present value of the exercise
price and the stock price at the grant date is recorded as compensation expense
with a corresponding credit to the capital adjustment account (using the
minimum value method). Under U.S. GAAP, as permissible under SFAS No.123- Accounting for Stock Based
Compensation, the Company accounts for stock options, granted in 1999, in
accordance with the methodology prescribed under Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, which
recognizes compensation cost based on the intrinsic value of the equity award. F-36




---



##### Table of Contents



In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No.148  Accounting for Stock-Based CompensationTransition and Disclosurean
amendment of FASB Statement No.123. SFAS No.148 provides alternative methods
of transition for a voluntary change to fair value-based methods of accounting
for stock-based employee compensation. The Statement also amends the
disclosure requirements of SFAS No.123 to require prominent disclosures about
the method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The provisions of the Statement are
effective for financial statements for fiscal years ending after December 15,
2002. In adopting SFAS No. 148, the Company adopted the modified prospective method
in order to voluntarily change to the fair-value based method of accounting for
stock-based employee compensation and as a result, the compensation cost
recognized in 2002 under U.S. GAAP is the same as what would have been
recognized had the recognition provisions of SFAS No. 123 been applied from its
original effective date. Results for prior years are not restated and the
effects of accounting transition are as follows: Korean Won2001
    
    2002
    
    2003(In millions)Reported net loss under U.S. GAAP
    
    W
    (244,447
    )
    
    W
    (162,525
    )
    
    W
    (165,988
    )Add: Stock-based employee
compensation expense included in
reported net loss
    
    
    
    
    
    
    2,890
    
    
    
    Deduct: Stock-based employee
compensation expense determined
under fair value based method
for all awards
    
    
    (1,088
    )
    
    
    
    
    
    
    Adjusted net loss under U.S. GAAP
    
    W
    (245,535
    )
    
    W
    (159,635
    )
    
    W
    (165,988
    )
 A summary of status of Hanaros stock option plans as of December 31, 2001,
2002 and 2003, and the changes during the years ended on those dates are
presented below. 2001
    
    2002
    
    2003Weighted-average
    
    
    
    
    
    Weighted-average
    
    
    
    
    
    Weighted-averageShares
    
    exercise price
    
    Shares
    
    exercise price
    
    Shares
    
    exercise priceOutstanding at beginning
of year
    
    
    1,941,566
    
    
    W
    17,571
    
    
    
    1,810,642
    
    
    W
    17,558
    
    
    
    1,810,642
    
    
    W
    17,558Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    (130,924
    )
    
    
    17,750
    
    
    
    
    
    
    
    
    
    
    
    (89,489
    )
    
    
    Outstanding at end of year
    
    
    1,810,642
    
    
    
    17,558
    
    
    
    1,810,642
    
    
    
    17,558
    
    
    
    1,721,153
    
    
    
    17,558Options exercisable at
year-end
    
    
    
    
    
    
    
    
    
    
    170,000
    
    
    
    
    
    
    
    1,721,153Weighted-average fair
value of
options granted during
the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The following table summarizes information about Hanaros stock options as of
December 31, 2003. Weighted-averageremainingNumber of
    
    contractual life
    
    Weighted-averageRanges of exercise price
    
    options outstanding
    
    (years)
    
    exercise priceW5,630
    
    
    50,000
    
    
    
    0.7
    
    
    W
    5,630W17,750 to W19,910
    
    
    1,671,153
    
    
    
    1.7
    
    
    
    17,905W5,630 to W19,910
    
    
    1,721,153
    
    
    
    1.7
    
    
    
    17,549
  (11)
    
    Interest Rate Swap The Company has entered into interest rate swap contracts in order to hedge
the exposure to variability in cash flows from a forecasted transaction of
floating rate notes. Under Korean GAAP, the Company records the valuation
loss as capital adjustment. Under U.S. GAAP, SFAS No. 133Accounting for Derivatives instruments and
Hedging Activities, for a derivative designated as hedging the exposure to
variability in expected future cash flows that is attributable to a
particular risk, the effective portion is reported in other comprehensive
income and the ineffective portion is reported in earnings. F-37




---



##### Table of Contents



(12)
    
    Deferred Income Taxes Under Korean GAAP, deferred tax assets and liabilities are presented in the
balance sheet as a single and non-current amount. Under U.S. GAAP, deferred tax assets and liabilities are separated into their
current and non-current portions based on the classification of the related
asset or liability for financial reporting purposes.  (13)
    
    Loans to Employees Under Korean GAAP, loans to employees for purposes of purchasing the Companys
common stock are recorded as assets. Under U.S. GAAP, such transactions are
recorded as a reduction in shareholders equity.  (14)
    
    Advanced Payments Under Korean GAAP, advanced payments, which relate to purchases of property and
equipment, are included in current assets. Under U.S. GAAP, such advanced
payments are included in non-current assets.  (15)
    
    Revenue Recognition Under Korean GAAP, activation fees and service installation service fees are
recorded as revenues when billed and the related direct incremental acquisition
cost are expensed as incurred. Under U.S. GAAP, such amount should be deferred and recognized over the period
of customer relationship.  (16)
    
    Minority Interests in Consolidated Subsidiaries Under Korean GAAP, minority interests in consolidated subsidiaries is presented
as a component of shareholders
equity in the consolidated balance sheets. Under U.S. GAAP, minority interests
in consolidated subsidiaries are not included in shareholders equity; rather,
it is presented between liability and shareholders equity in the consolidated
balance sheets.  (17)
    
    Comprehensive Income Under Korean GAAP, there is no requirement to present comprehensive income.
Under U.S. GAAP, effective for fiscal years beginning after December 15, 1997,
comprehensive income and its components must be presented in the financial
statements. Comprehensive income includes all changes in shareholders equity
during a period except those resulting from investment by, or distribution to,
owners, including certain items not included in the current years results of
operations. Comprehensive loss for the years ended December 31, 2001, 2002 and 2003 is
summarized as follows: Korean Won2001
    
    2002
    
    2003(In millions)Net loss as adjusted in accordance with U.S. GAAP
    
    W
    (244,447
    )
    
    W
    (162,525
    )
    
    W
    (165,988
    )Other comprehensive income (loss), net of tax:Unrealized gains (losses) on investments
    
    
    1,151
    
    
    
    (3,761
    )
    
    
    (2,383
    )Foreign-based operations translation credit (debit)
    
    
    3
    
    
    
    (30
    )
    
    
    2Interest rate swap
    
    
    
    
    
    
    (5,633
    )
    
    
    (7,425
    )Comprehensive loss as adjusted in accordance with
U.S. GAAP
    
    W
    (243,293
    )
    
    W
    (171,949
    )
    
    W
    (175,794
    )
 F-38




---



##### Table of Contents



(18)
    
    Statements of Cash Flows Statements of cash flows for the years ended December 31, 2001, 2002 and 2003
under Korean GAAP do not include cash flows of Hanafos and Hanadream, which are
included in the consolidation under U.S. GAAP. Under Korean GAAP, cash flows from restricted deposits, refundable deposits and
intangible assets are reported as investing activities. Under U.S. GAAP, these
items are reported as operating activities. Summarized cash flows data by
operating, investing and financing activities in accordance with U.S. GAAP for
the years ended December 31, 2001, 2002 and 2003 are set out below. Korean Won2001
    
    2002
    
    2003(In millions)Net cash provided by (used in):Operating activities
    
    W
    (9,323
    )
    
    W
    (64,496
    )
    
    W
    293,080Investing activities
    
    
    (538,750
    )
    
    
    (260,360
    )
    
    
    (256,719
    )Financing activities
    
    
    496,221
    
    
    
    341,966
    
    
    
    (118,106
    )Decrease due to changes in consolidated
subsidiaries
    
    
    (32
    )
    
    
    (700
    )
    
    
    Increase (decrease) in cash and cash equivalents
    
    
    (51,884
    )
    
    
    16,410
    
    
    
    (81,745
    )Cash and cash equivalents, beginning of year
    
    
    359,057
    
    
    
    307,173
    
    
    
    323,583Cash and cash equivalents, end of year
    
    W
    307,173
    
    
    W
    323,583
    
    
    W
    241,838
  (19)
    
    Recently Issued Accounting Pronouncements Effective January 1, 2003, the Company adopted SFAS No. 143Accounting for
Asset Retirement Obligations, which provides the accounting for the cost of
legal obligations associated with the retirement of long-lived assets. SFAS
No. 143 requires that companies recognize the fair value of a liability for
asset retirement obligations in the period in which the obligations are
incurred and capitalize that amount as part of the book value of the long-lived
asset and expense using a systematic and rational method over the assets
useful life. The Company adopted this statement effective January 1, 2003. The
adoption of this statement did not have a significant impact on the financial
condition or results of operations. In April 2002, the FASB issued SFAS No. 145Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 is effective for fiscal years beginning and certain transactions
entered into after May 15, 2002. SFAS No. 145 requires gains and losses from
the extinguishment of debt be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30. Previously, FASB Statement No. 4
generally required all gains and losses from debt extinguished prior to
maturity to be classified as an extraordinary item in the statement of
operations. APB Opinion No. 30 requires that to qualify as an extraordinary
item, the underlying event or transaction should possess a high degree of
abnormality and be of a type clearly unrelated to, or incidentally related to,
the ordinary activities of the Company, and would not reasonably be expected to
recur in the foreseeable future. The adoption of this statement did not have a
significant impact on the financial conditions or result of operations. In June 2002, the FASB issued SFAS No. 146Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for financial statements
where exit or disposal activities are initiated after December 31, 2002. This
statement nullifies EITF Issue 94-3- Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity, which
allowed recognition of a liability for exit and disposal activities upon
managements intent to exit or dispose of an activity. This statement requires
that a liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. On January 1, 2003, the Company
adopted this statement. The adoption of this statement did not have a
significant impact on the financial condition or results of operations. In November 2002, FASB Interpretation (FIN) No. 45Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others was issued. The interpretation provides guidance on
the guarantors accounting and disclosure requirements for guarantees,
including indirect guarantees of indebtedness of others. The Company has
adopted the disclosure requirements of the interpretation as of December 31,
2002. The accounting guidelines are applicable to guarantees issued after
December 31, 2002 and require that the Company records a liability at the fair
value of such guarantees in the balance sheet. The adoption of this
interpretation did not have a significant impact on the financial condition or
results of operations. F-39




---



##### Table of Contents



In May 2003, the FASB issued SFAS No. 150Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
provides guidance on how an entity classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
is effective for financial instruments entered into, or monitored after, May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company has not entered into any
material financial instruments meeting the liability recognition requirements
of SFAS No. 150. Therefore, the adoption of this statement did not have a
significant impact on the financial condition or results of operations. In January and December 2003, the FASB issued and then revised FIN
No. 46Consolidation of Variable Interest Entities, which is effective
immediately for all variable interest entities created after January 31, 2003.
Fin No. 46 must be applied for the first fiscal year or interim period ending
after March 15, 2004 for variable interest entities or the first quarter of
2004. FIN No. 46 requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among the parties involved. A primary beneficiary
absorbs the majority of the entitys losses or receives a majority of the
entitys residual returns, if they occur, or both. Where it is reasonably
possible that the information about the variable interest entity relationships
must be disclosed or consolidated, the Company must disclose the nature,
purpose, size and activity of the variable interest entity and the maximum
exposure to loss as a result of the Companys involvement with the variable
interest entity in all financial statements issued after January 31, 2003. The
Company does not expect that the adoption of FIN No. 46 will require
consolidation of any significant unconsolidated entities. In April 2003, the FASB issued SFAS No. 149Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. In particular, this statement clarifies the circumstances
in which a contract with an initial net investment meets the characteristics of
a derivative, clarifies when a derivative contains a financial component,
amends the definition of an underlying to conform it to language used in FASB
Interpretation No. 45, and amends certain other existing pronouncements. SFAS
No. 149 is applied prospectively to all contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. However, the provisions of this statement that relate to SFAS 133
Implementation Issues, which have been effective for fiscal quarters beginning
prior to June 15, 2003, continue to be applied in accordance with their
respective effective dates. The adoption of this statement did not have a
significant impact on the financial statements.  (20)
    
    Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.  (i)
    
    Cash and cash equivalents, short-term investment securities, short-term
borrowings:
The carrying amount approximates fair value because of the nature or short
maturity of those instruments.(ii)
    
    Other investments:
The fair value of market-traded investments is estimated based on the
quoted market prices for those or similar investments. For other investments
for which there are no quoted market prices, a reasonable estimate of fair
value could not be made without incurring excessive costs. Additional
information pertinent to the fair value of unquoted investments is provided
below.(iii)
    
    Long-term debt and debentures:
The fair values of long-term debt and debentures are estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered for the debt of the same remaining maturities. F-40




---



##### Table of Contents



The estimated fair values of the Companys financial instruments as of December
31 are summarized as follows: Korean Won2002
    
    2003Carrying amount
    
    Fair value
    
    Carrying amount
    
    Fair value(In millions)Cash and cash equivalents and short-term
investment securities
    
    W
    325,069
    
    
    W
    325,069
    
    
    W
    199,937
    
    
    W
    199,937Short-term financial instruments
    
    
    150,499
    
    
    
    150,499
    
    
    
    219,872
    
    
    
    219,872Long-term financial instruments
    
    
    23
    
    
    
    23
    
    
    
    7
    
    
    
    7Long-term investment securities:Practicable to estimate fair value
    
    
    25,055
    
    
    
    25,055
    
    
    
    16,116
    
    
    
    16,116Not practicable
    
    
    31,473
    
    
    
    N/A
    
    
    
    7,648
    
    
    
    N/AShort-term borrowings
    
    
    63,000
    
    
    
    63,000
    
    
    
    163,000
    
    
    
    163,000Long-term debt, including current portion
    
    
    393,904
    
    
    
    400,734
    
    
    
    339,795
    
    
    
    342,307Debentures, including current portion
    
    
    1,442,174
    
    
    
    1,464,691
    
    
    
    673,277
    
    
    
    678,257Long-term obligations under capital
lease, including current portion
    
    
    74,232
    
    
    
    73,718
    
    
    
    112,000
    
    
    
    109,528Interest rate swap
    
    
    5,633
    
    
    
    5,633
    
    
    
    13,058
    
    
    
    13,058
  (21)
    
    Segment Information Under U.S. GAAP, companies report segment information based on the way
management disaggregates the company for making operating decisions. Each of
the Companys consolidated subsidiaries is an operating segment in accordance
with SFAS No. 131Disclosures about Segments of an Enterprise and Related
Information. The Companys reportable segments are strategic business units
that offer different products and services. The segments are managed
separately based on the difference in products and services, technology and
marketing strategies. The Company has three reportable operating segments:
voice services, lease line and broadband services. Voice services include all
services provided to fixed line customers, including local services. Lease
line services consist of the leasing of dedicated fiber optic lines over which
customers transmit voice and data. Broadband services include high-speed data
transmission services over Asymmetrical Digital Subscriber Line (ADSL), hybrid
fiber coaxial (HFC) cable lines and internet access services. The operations
of all other operating segments are included in the other segment, which
include entities providing real estate management services and customer
services. The accounting policies of the segments are the same as those described in Note
2, Summary of Significant Accounting Policies and Note 25 Reconciliation to
Accounting Principles Generally Accepted in the United States. The Company
evaluates performance based on operating income or loss before income tax. There are no revenues from transactions with a single external customer that
amount to 10 percent or more of the consolidated revenues of the Company. F-41




---



##### Table of Contents



(22) Effect on Net Loss and Shareholders Equity The approximate effects of the significant adjustments to net loss and
shareholders equity, that are required if U.S.GAAP were applied instead of
Korean GAAP, are summarized as follows: Translation intoKorean Won
    
    U.S. Dollars (Note 2)2001
    
    2002
    
    2003
    
    2003(In millions, except per share amount)
    
    (In thousands, except pershare amount)Net loss under Korean GAAP
    
    W
    (245,902
    )
    
    W
    (125,025
    )
    
    W
    (161,299
    )
    
    $
    (135,318
    )Adjustments:Amortization of licensing cost paid
by shareholders
    
    
    (2,250
    )
    
    
    
    
    
    
    
    
    
    
    Development costs
    
    
    4,962
    
    
    
    252
    
    
    
    (1,717
    )
    
    
    (1,440
    )Interest capitalization
    
    
    
    
    
    
    
    
    
    
    3,168
    
    
    
    2,658Stock compensation expense
    
    
    1,088
    
    
    
    (2,890
    )
    
    
    
    
    
    
    Revenue recognition
    
    
    346
    
    
    
    346
    
    
    
    346
    
    
    
    290Bonds with stock warrants
    
    
    (4,039
    )
    
    
    (37,328
    )
    
    
    (7,066
    )
    
    
    (5,928
    )Changes in consolidated subsidiaries
    
    
    877
    
    
    
    6
    
    
    
    
    
    
    
    Consolidation of SPE
    
    
    471
    
    
    
    1,689
    
    
    
    155
    
    
    
    130Amortization of goodwill
    
    
    
    
    
    
    425
    
    
    
    425
    
    
    
    356Deferred tax effect of current
years U.S.GAAP adjustments
    
    
    (432
    )
    
    
    11,084
    
    
    
    1,393
    
    
    
    1,169Valuation allowance against
deferred tax assets created by
U.S.GAAP adjustments
    
    
    432
    
    
    
    (11,084
    )
    
    
    (1,393
    )
    
    
    (1,169
    )1,455
    
    
    
    (37,500
    )
    
    
    (4,689
    )
    
    
    (3,934
    )Net loss under U.S.GAAP
    
    W
    (244,447
    )
    
    W
    (162,525
    )
    
    W
    (165,988
    )
    
    $
    (139,252
    )Basic and diluted loss per share under
U.S.GAAP (in Korean won and U.S.
dollars)
    
    W
    (856
    )
    
    W
    (545
    )
    
    W
    (517
    )
    
    $
    (0.43
    )Shareholders equity under Korean GAAP
    
    W
    1,568,392
    
    
    W
    1,515,498
    
    
    W
    1,757,903
    
    
    $
    1,474,751Adjustments:Licensing cost paid by shareholders
    
    W
    35,250
    
    
    W
    35,250
    
    
    W
    35,250
    
    
    $
    29,572Development costs
    
    
    (1,251
    )
    
    
    (999
    )
    
    
    (2,716
    )
    
    
    (2,278
    )Interest capitalization
    
    
    
    
    
    
    
    
    
    
    3,168
    
    
    
    2,658Loans to employees
    
    
    (13,807
    )
    
    
    (12,900
    )
    
    
    (12,573
    )
    
    
    (10,548
    )Bonds with stock warrants
    
    
    34,988
    
    
    
    7,066
    
    
    
    
    
    
    
    Changes in consolidated subsidiaries
    
    
    713
    
    
    
    (786
    )
    
    
    
    
    
    
    Consolidation of SPE
    
    
    471
    
    
    
    2,159
    
    
    
    2,314
    
    
    
    1,941Revenue recognition
    
    
    (975
    )
    
    
    (628
    )
    
    
    (282
    )
    
    
    (236
    )Goodwill
    
    
    
    
    
    
    425
    
    
    
    850
    
    
    
    713Deferred tax effect of U.S.GAAP
adjustments
    
    
    (10,823
    )
    
    
    (12,853
    )
    
    
    (11,454
    )
    
    
    (8,820
    )Valuation allowance against
deferred tax assets created byU.S.GAAP adjustments
    
    
    10,823
    
    
    
    12,853
    
    
    
    11,454
    
    
    
    8,820Changes in minority interest
applying U.S.GAAP
    
    
    (147,088
    )
    
    
    (145,477
    )
    
    
    (599
    )
    
    
    (503
    )Minority interests under U.S.GAAP
    
    
    (10
    )
    
    
    (19
    )
    
    
    (19
    )
    
    
    (16
    )(91,709
    )
    
    
    (115,909
    )
    
    
    25,393
    
    
    
    21,303Shareholders equity under U.S.GAAP
    
    W
    1,476,683
    
    
    W
    1,399,589
    
    
    W
    1,783,296
    
    
    $
    1,496,054
 F-42




---



##### Table of Contents



(23)
    
    Reconciliation of the Balance Sheet Accounts The reconciliation of the significant balance sheet accounts under Korean GAAP
except for the shareholders equity items shown above, to the approximate
amounts determined under U.S.GAAP as of December 31 is as follows: Translation intoKorean Won
    
    U.S. Dollars (Note 2)2002
    
    2003
    
    2003(In millions)
    
    (In thousands)Current assetsAs reported
    
    W
    749,559
    
    
    W
    679,236
    
    
    $
    569,829U.S. GAAP adjustments:Short-term loans
    
    
    
    
    
    
    (9,618
    )
    
    
    (8,069
    )Accrued income
    
    
    
    
    
    
    (5,036
    )
    
    
    (4,224
    )Prepaid expenses
    
    
    10,811
    
    
    
    5,041
    
    
    
    4,229Changes in consolidated subsidiaries
    
    
    (67,674
    )
    
    
    
    
    
    
    Consolidation of SPEs
    
    
    34,996
    
    
    
    42,314
    
    
    
    35,498Deferred income tax assets
    
    
    
    
    
    
    799
    
    
    
    671As adjusted
    
    
    727,692
    
    
    
    712,736
    
    
    
    597,934Non-current assetsAs reported
    
    
    3,355,226
    
    
    
    2,707,312
    
    
    
    2,271,235U.S. GAAP adjustments:Long-term loans
    
    
    (12,900
    )
    
    
    (4,135
    )
    
    
    (3,469
    )Long-term prepaid expenses
    
    
    7,686
    
    
    
    6,442
    
    
    
    5,404Intangibles
    
    
    34,676
    
    
    
    33,385
    
    
    
    28,007Interest capitalization
    
    
    
    
    
    
    3,168
    
    
    
    2,658Changes in consolidated subsidiaries
    
    
    (437,374
    )
    
    
    
    
    
    
    Consolidation of SPEs
    
    
    (10,180
    )
    
    
    (9,000
    )
    
    
    (7,550
    )Deferred income tax assets
    
    
    13,516
    
    
    
    11,545
    
    
    
    9,685As adjusted
    
    
    2,950,650
    
    
    
    2,748,717
    
    
    
    2,305,970Total assets based on U.S.GAAP
    
    W
    3,678,342
    
    
    W
    3,461,453
    
    
    $
    2,903,904Current liabilitiesAs reported
    
    W
    1,605,367
    
    
    W
    796,850
    
    
    $
    668,498U.S.GAAP adjustments:Unearned income
    
    
    11,157
    
    
    
    5,322
    
    
    
    4,465Bonds with stock warrants
    
    
    (7,066
    )
    
    
    
    
    
    
    Changes in consolidated subsidiaries
    
    
    (276,295
    )
    
    
    
    
    
    
    Consolidation of SPEs
    
    
    (1,086
    )
    
    
    24,784
    
    
    
    20,792Deferred income tax liabilities
    
    
    
    
    
    
    799
    
    
    
    671As adjusted
    
    
    1,332,077
    
    
    
    827,755
    
    
    
    694,426Long-term liabilitiesAs reported
    
    
    983,920
    
    
    
    831,795
    
    
    
    697,815U.S.GAAP adjustments:Unearned income
    
    
    7,968
    
    
    
    6,444
    
    
    
    5,406Changes in consolidated subsidiaries
    
    
    (83,004
    )
    
    
    
    
    
    
    Consolidation of SPEs
    
    
    23,743
    
    
    
    
    
    
    
    Deferred income tax liabilities
    
    
    13,516
    
    
    
    11,545
    
    
    
    9,685As adjusted
    
    
    946,143
    
    
    
    849,784
    
    
    
    712,906Total liabilities based on U.S.GAAP
    
    W
    2,278,220
    
    
    W
    1,677,539
    
    
    $
    1,407,332Minority interests based on U.S.GAAP
    
    W
    533
    
    
    W
    618
    
    
    $
    518
 F-43




---



##### Table of Contents



(24)
    
    Tax Effects of Temporary Differences The tax effects of temporary differences that resulted in significant portions
of the deferred tax assets and liabilities at December 31, computed under
U.S.GAAP, and the description of the financial statement items that created
these differences are as follows: Korean Won2002
    
    2003Current
    
    Non-current
    
    Current
    
    Non-current(In millions)Deferred tax assets:Development costs
    
    W
    297
    
    
    W
    
    
    
    W
    807
    
    
    W
    Revenue recognition
    
    
    103
    
    
    
    84
    
    
    
    84
    
    
    
    Changes in consolidated subsidiaries
    
    
    180
    
    
    
    
    
    
    
    
    
    
    
    Total deferred income tax assets
    
    
    580
    
    
    
    84
    
    
    
    891
    
    
    
    Valuation allowance
    
    
    (580
    )
    
    
    13,432
    
    
    
    (92
    )
    
    
    11,545Net deferred income tax assets
    
    
    
    
    
    
    13,516
    
    
    
    799
    
    
    
    11,545Deferred tax liabilities:License fee
    
    
    
    
    
    
    (10,469
    )
    
    
    
    
    
    
    (10,469
    )Changes in consolidated subsidiaries
    
    
    
    
    
    
    (187
    )
    
    
    
    
    
    
    Consolidation of SPEs
    
    
    
    
    
    
    (635
    )
    
    
    (681
    )
    
    
    Bonds with stock warrants
    
    
    
    
    
    
    (2,099
    )
    
    
    
    
    
    
    (253
    )Interest capitalization
    
    
    
    
    
    
    
    
    
    
    (118
    )
    
    
    (823
    )Goodwill
    
    
    
    
    
    
    (126
    )
    
    
    
    
    
    
    Total deferred income tax liabilities
    
    
    
    
    
    
    (13,516
    )
    
    
    (799
    )
    
    
    (11,545
    )Net deferred income tax assets
    
    W
    
    
    
    W
    
    
    
    W
    
    
    
    W
    
 At December 31, 2002 and 2003, the Company has available loss carryforwards of
W686,475 million and W752,757 million, respectively, which may be applied
against future taxable income through 2007 and 2008, respectively. The income tax expenses under U.S.GAAP for the years ended December 31, 2001,
2002 and 2003 are as follows: Korean Won2001
    
    2002
    
    2003(In millions)Income tax currently
payable
    
    W
    108
    
    
    W
    323
    
    
    W
    354Deferred income taxes
    
    
    (72
    )
    
    
    127
    
    
    
    (52
    )Income tax expense
    
    W
    36
    
    
    W
    450
    
    
    W
    302
 The deferred income tax consequences of temporary differences in reporting
items for financial statement and income tax purposes are recognized, if
appropriate. Realization of the future tax benefits related to the deferred
income tax assets is dependent on several factors, including the Companys
ability to generate taxable income within the period during which the temporary
differences reverse, the outlook for the Korean economic environment and the
overall industry outlook. Management has considered these factors in reaching
its conclusion as to the valuation allowance for financial reporting purposes.
Such valuation allowance is reviewed periodically. F-44




---



##### Table of Contents



The difference between the actual income tax expense and the tax benefit
computed by applying the statutory Korean corporate income tax rates to income
before income tax for 2001, 2002 and 2003 is attributable to the following: Korean Won2001
    
    2002
    
    2003(In millions)Income tax benefit at statutory Korean
corporate income tax rate of 30.8% in 2001 and
29.7% in 2002 and 2003
    
    W
    (75,278
    )
    
    W
    (48,113
    )
    
    W
    (49,184
    )Non-deductible meals and entertainment and other
    
    
    1,376
    
    
    
    708
    
    
    
    1,143Change in valuation allowance
    
    
    75,759
    
    
    
    45,957
    
    
    
    47,692Other
    
    
    (1,821
    )
    
    
    1,898
    
    
    
    651Actual income tax expense
    
    W
    36
    
    
    W
    450
    
    
    W
    302
 F-45