##### Table of Contents



As filed with the Securities and Exchange Commission on June 29, 2005
   UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
  
 FORM 20-F o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934 OR
 þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004
 OR  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period to
 Commission file number 001-15012  
 hanarotelecomChushikHoesa  hanarotelecom incorporated (Translation of Registrants name into English)
 The Republic of Korea
(Jurisdiction of incorporation or organization) Tae-pyung-ro 2-43
Chung-ku, Seoul 100-733
Korea
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon shares, par value Won 5,000 per share
    
    The KRX KOSDAQ MarketAmerican depositary shares, each of which represents one common share
    
    The NASDAQ National Market
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the
Act: None Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: As of December 31, 2004, 462,135,180 common shares were issued and outstanding. 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 short 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 þ      No o Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 o      Item 18 þ




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TABLE OF CONTENTS PageForward-Looking Statements
    
    
    3Item 1. Identity of Directors, Senior Management and Advisors
    
    
    4Item 2. Offer Statistics and Expected Timetable
    
    
    4Item 3. Key Information
    
    
    4Item 4. Information on the Company
    
    
    17Item 5. Operating and Financial Review and Prospects
    
    
    40Item 6. Directors, Senior Management and Employees
    
    
    54Item 7. Major Shareholders and Related Party Transactions
    
    
    62Item 8. Financial Information
    
    
    65Item 9. The Offer and Listing
    
    
    67Item 10. Additional Information
    
    
    69Item 11.
Quantitative and Qualitative Disclosures about Market Risk
    
    
    87Item 12. Description of Securities Other Than Equity Securities
    
    
    88Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    88Item 14. Material Modifications of the Rights of Security Holders and Use of Proceeds
    
    
    88Item 15. Controls and Procedures
    
    
    88Item 16. [Reserved]
    
    
    89Item 16A. Audit Committee Financial Expert
    
    
    89Item 16B. Code of Ethics
    
    
    89Item 16C.
Principal Accountant Fees and Expenses
    
    
    89Item 16D.
Exemptions from the Listing Standards for Audit Committees
    
    
    89Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    90Item 17. Financial Statements
    
    
    91Item 18. Financial Statements
    
    
    91Item 19. Exhibits
    
    
    91Glossary
    
    
    93Consolidated
Financial Statements
    
    
    F-1EX-1.1 ARTICLES OF INCORPORATIONEX-4.1 AGREEMENT FOR ACQUISITION OF KOREA THRUNETEX-4.2 INDENTURE DATED FEBRUARY 1, 2005EX-4.3 SENIOR SECURED CREDIT FACILITY AGREEMENTEX-12.1 SECTION 302 CERTIFICATION OF CEOEX-12.2 SECTION 302 CERTIFICATION OF CFOEX-13.1 SECTION 906 CERTIFICATIONS
  Unless the context otherwise requires, when we refer in this Annual Report to hanarotelecom,
we, us and our, we mean hanarotelecom incorporated and its consolidated subsidiaries. All
references to Korea and the Republic contained in this Annual Report shall mean The Republic of
Korea. All references to the Government shall mean the government of The Republic of Korea. All
references to the MIC shall mean the Ministry of Information and Communication of Korea. All
other capitalized terms used but not defined in this Annual Report have the meanings given to them
in Glossary. 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. 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. 2




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Forward-Looking Statements We may from time to time make written or oral forward-looking statements. Written
forward-looking statements may appear in documents filed with the SEC, including this Annual
Report, and other reports to shareholders and other communications. The U.S. Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking information to encourage companies to provide prospective information about
themselves without fear of litigation so long as the information is identified as forward looking
and is accompanied by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in the information. We rely on this
safe harbor in making these disclosures. Forward-looking statements appear in a number of places in this Annual Report and include
statements regarding our intent, belief and current expectations and the current belief or current
expectations of our management with respect to our future results of operations and financial
condition. In many, but not all cases, we use words such as anticipate, aim, believe,
estimate, expect, intend, plan, probability, risk and similar expressions, as they
relate to us or our management, to identify forward-looking statements. These statements reflect
our current views with respect to future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those which are anticipated,
believed, estimated, expected, intended or planned. We do not intend to update these
forward-looking statements. Our forward-looking statements are not guarantees of future performance and involve risks and
uncertainties. Actual results may differ from those in the forward-looking statements as a result
of various factors. We identify in this Annual Report, in Item 3.D. Risk Factors, Item 4.B.
Business Overview, Item 5. Operating and Financial Review and Prospects and elsewhere some, but
not necessarily all, of the important factors that could cause these differences. We are under no obligation, and disclaim any obligation, to update or alter our
forward-looking statements, whether as a result of new information, future events or otherwise. 3




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##### Table of Contents



PART I 
 Item 1. Identity of Directors, Senior Management and Advisors. Not applicable. 
 Item 2. Offer Statistics and Expected Timetable. Not applicable. 
 Item 3. Key Information. A. Selected Financial Data Our selected consolidated financial data should be read in conjunction with the audited
consolidated balance sheets as of December 31, 2003 and 2004, and the related audited consolidated
statements of operations, shareholders equity and cash flows for the fiscal years ended December
31, 2002, 2003 and 2004, 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, 2000, 2001,
2002, 2003 and 2004 are derived from our audited consolidated financial statements, which were
audited by Deloitte HanaAnjin LLC (formerly known as Anjin Deloitte LLC), a member firm of Deloitte
Touche Tohmatsu, independent accountants. Our consolidated financial statements are prepared in accordance with Korean GAAP, which
differs in significant respects from U.S. GAAP. See note 26 to our consolidated financial
statements. Year ended December 312000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(millions of Won, except number of shares and per share data)Statements of Operations Data:Korean GAAP:Operating revenue
    
    Won
    342,804
    
    
    Won
    830,721
    
    
    Won
    1,417,854
    
    
    Won
    1,383,486
    
    
    Won
    1,449,569Voice revenue(1)
    
    
    34,089
    
    
    
    114,529
    
    
    
    210,664
    
    
    
    248,964
    
    
    
    291,186Leased line revenue(2)
    
    
    8,767
    
    
    
    17,706
    
    
    
    111,813
    
    
    
    37,992
    
    
    
    39,717Broadband revenue(3)
    
    
    284,159
    
    
    
    641,544
    
    
    
    969,635
    
    
    
    982,693
    
    
    
    985,428Other
    
    
    15,789
    
    
    
    56,942
    
    
    
    125,742
    
    
    
    113,837
    
    
    
    133,238Operating expenses
    
    
    647,415
    
    
    
    1,001,335
    
    
    
    1,396,426
    
    
    
    1,312,792
    
    
    
    1,335,639Operating income (loss)
    
    
    (304,611
    )
    
    
    (170,614
    )
    
    
    21,428
    
    
    
    70,694
    
    
    
    113,930Non-operating expenses, net
    
    
    (2,476
    )
    
    
    (78,194
    )
    
    
    (149,106
    )
    
    
    (231,606
    )
    
    
    (100,081
    )Ordinary income (loss) before
income tax
    
    
    (307,087
    )
    
    
    (248,808
    )
    
    
    (127,678
    )
    
    
    (160,912
    )
    
    
    13,849Income tax expense
    
    
    (57
    )
    
    
    (35
    )
    
    
    (1,083
    )
    
    
    (302
    )
    
    
    (495
    )Minority interest share of loss
(income)
    
    
    1,974
    
    
    
    2,941
    
    
    
    3,736
    
    
    
    (85
    )
    
    
    (308
    )Net income (loss)
    
    Won
    (305,170
    )
    
    Won
    (245,902
    )
    
    Won
    (125,025
    )
    
    Won
    (161,299
    )
    
    Won
    13,046Weighted average number of shares
outstanding (in thousands)  Basic
    
    
    257,836
    
    
    
    285,440
    
    
    
    298,251
    
    
    
    321,310
    
    
    
    462,135Weighted average number of shares
outstanding (in thousands) 
Diluted
    
    
    257,836
    
    
    
    285,440
    
    
    
    298,251
    
    
    
    321,310
    
    
    
    462,135Basic and diluted earnings (loss)
per share of common share and
ADS(4)
    
    Won
    (1,184
    )
    
    Won
    (861
    )
    
    Won
    (419
    )
    
    Won
    (502
    )
    
    Won
    28Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. GAAP:Net income (loss)
    
    Won
    (298,351
    )
    
    Won
    (244,447
    )
    
    Won
    (162,525
    )
    
    Won
    (165,988
    )
    
    Won
    16,703Basic and diluted earnings (loss)
per share of common share and
ADS(4)
    
    Won
    (1,157
    )
    
    Won
    (856
    )
    
    Won
    (545
    )
    
    Won
    (517
    )
    
    Won
    36
 4




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As of December 312000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(millions of Won)Balance Sheet Data:Korean GAAP:Working capital(5)
    
    Won
    (40,488
    )
    
    Won
    (303,936
    )
    
    Won
    (855,808
    )
    
    Won
    (117,614
    )
    
    Won
    (90,529
    )Property and equipment, net
    
    
    2,438,865
    
    
    
    3,146,589
    
    
    
    3,134,314
    
    
    
    2,550,921
    
    
    
    2,372,845Total assets
    
    
    3,351,246
    
    
    
    4,104,265
    
    
    
    4,104,785
    
    
    
    3,386,548
    
    
    
    3,185,250Net assets
    
    
    1,667,078
    
    
    
    1,568,392
    
    
    
    1,515,498
    
    
    
    1,757,903
    
    
    
    1,778,789Long-term indebtedness(6)
    
    
    1,008,401
    
    
    
    1,896,839
    
    
    
    2,128,703
    
    
    
    1,157,582
    
    
    
    1,034,739Capital stock
    
    
    1,320,000
    
    
    
    1,320,000
    
    
    
    1,396,613
    
    
    
    2,310,676
    
    
    
    2,310,676Total shareholders equity
    
    
    1,667,078
    
    
    
    1,568,392
    
    
    
    1,515,498
    
    
    
    1,757,903
    
    
    
    1,778,789U.S. GAAP:Property and equipment, net
    
    
    2,438,865
    
    
    
    2,727,091
    
    
    
    2,703,850
    
    
    
    2,554,089
    
    
    
    2,377,399Total assets
    
    
    3,384,218
    
    
    
    3,672,451
    
    
    
    3,678,342
    
    

    
    3,461,453
    
    
    
    3,232,290Total shareholders equity
    
    
    1,681,712
    
    
    
    1,476,683
    
    
    
    1,399,589
    
    
    
    1,783,296
    
    
    
    1,803,436
 
 (1)
    
    Voice revenue consists of revenue derived from services provided to fixed line customers.(2)
    
    Leased line revenue consists of revenue derived from services that give the subscriber the
right to use a private line exclusively.(3)
    
    Broadband revenue consists of revenue 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, the weighted average number of
common shares for the years ended December 31, 2001 and 2002 was recalculated to reflect the
issuance of new shares in 2003 at a price below market.(5)
    
    Working capital means current assets minus current liabilities.(6)
    
    Long-term indebtedness includes long-term debt in local and foreign currencies, debentures,
long-term obligations under capital leases, current portion of Asset-Backed Securities payable
and current maturities of long-term debt. As ofAs of December 31,
    
    
    April 30,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005Other Data:Residential subscribers
    
    
    1,274,327
    
    
    
    2,391,952
    
    
    
    3,544,001
    
    
    
    3,442,251
    
    
    
    3,825,777
    
    
    
    3,867,928Corporate subscribers
    
    
    208,682
    
    
    
    355,816
    
    
    
    273,377
    
    
    
    284,893
    
    
    
    336,430
    
    
    
    326,082Corporate leased lines(1)
    
    
    1,488
    
    
    
    3,216
    
    
    
    6,709
    
    
    
    6,480
    
    
    
    6,057
    
    
    
    6,353Employees
    
    
    1,501
    
    
    
    1,519
    
    
    
    1,576
    
    
    
    1,489
    
    
    
    1,532
    
    
    
    1,580Network route kilometers-owned(2)
    
    
    6,419
    
    
    
    8,804
    
    
    
    12,425
    
    
    
    15,317
    
    
    
    17,051
    
    
    
    17,406Network route kilometers-leased(3)
    
    
    2,887
    
    
    
    2,991
    
    
    
    5,487
    
    
    
    5,821
    
    
    
    7,429
    
    
    
    5,020Office buildings connected with fiber optic
lines
    
    
    1,304
    
    
    
    1,608
    
    
    
    2,978
    
    
    
    3,131
    
    
    
    3,216
    
    
    
    3,262Apartment complexes connected with fiber
optic lines
    
    
    3,827
    
    
    
    4,972
    
    
    
    6,470
    
    
    
    7,291
    
    
    
    7,899
    
    
    
    8,849Switches installed (voice)
    
    
    32
    
    
    
    37
    
    
    
    38
    
    
    
    38
    
    
    
    43
    
    
    
    43Switches installed (data)(4)
    
    
    143
    
    
    
    156
    
    
    
    161/140
    
    
    
    161/149
    
    
    
    161/168
    
    
    
    161/188
 
 (1)
    
    The 6,057 leased lines in service as of December 31, 2004 included 2,812 individual Internet
dedicated lines connected to corporate subscribers and 3,198 individual traditional leased
lines connected to corporate subscribers. The 6,353 leased lines in service as of April 30,
2005 included 2,809 individual Internet dedicated lines connected to corporate subscribers and
3,480 individual traditional leased lines connected to corporate subscribers.(2)
    
    Network route kilometers-owned includes owned fiber optic lines within cities we service,
including fiber optic last mile connections.(3)
    
    Network route kilometers-leased includes leased fiber optic lines within cities we service,
including portions of our backbone, but does not include inter-city connections.(4)
    
    Information as of December 31, 2002, 2003 and 2004 and April 30, 2005 represents the number
of ATM/routers installed. 5




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Exchange Rate Information The following table sets forth, for the periods and dates indicated, 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 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. Year ended December 31,
    
    At End of Period
    
    
    Average Rate(1)
    
    
    High
    
    
    Low(Won per U.S.$1.00)2000
    
    Won
    1,267.00
    
    
    Won
    1,140.00
    
    
    Won
    1,267.00
    
    
    Won
    1,105.502001
    
    
    1,313.50
    
    
    
    1,293.40
    
    
    
    1,369.00
    
    
    
    1,234.002002
    
    
    1,186.30
    
    
    
    1,242.00
    
    
    
    1,332.00
    
    
    
    1,160.602003
    
    
    1,192.00
    
    
    
    1,193.00
    
    
    
    1,262.00
    
    
    

    1,146.002004
    
    
    1,035.10
    
    
    
    1,139.30
    
    
    
    1,195.10
    
    
    
    1,035.102005 (through June 23)
    
    
    1,010.50
    
    
    
    1,009.02
    
    
    
    1,058.00
    
    
    
    997.00
 Month ending
    
    At end of period
    
    
    High
    
    
    Low(Won per U.S.$1.00)December 31, 2004
    
    Won
    1,035.10
    
    
    Won
    1,067.00
    
    
    Won
    1,035.10January 31, 2005
    
    
    1,026.85
    
    
    
    1,058.00
    
    
    
    1,024.00February 28, 2005
    
    
    1,000.85
    
    
    
    1,044.00
    
    
    
    1,000.85March 31, 2005
    
    
    1,015.40
    
    
    
    1,023.85
    
    
    
    997.50April 30, 2005
    
    
    997.00
    
    
    
    1,019.00
    
    
    
    997.00May 31, 2005
    
    
    1,005.00
    
    
    
    1,009.00
    
    
    
    997.00
 
 (1)
    
    The average of the noon buying rates on the last date of each month (or a portion thereof)
during the period. B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors Investing in our securities involves a high degree of risk. You should carefully consider the
risks described below as well as all the other information in this Annual Report, including our
consolidated financial statements and related notes, Item 11. Quantitative and Qualitative
Disclosure about Market Risk. Our business, operating results and financial condition could be materially adversely affected
by any of the factors discussed below. The trading price of our securities could decline due to
any of these factors. This Annual Report also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including the risks faced by us
described below and elsewhere in this Annual Report. See Forward-Looking Statements. 6




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Risks Related to the Telecommunications Industry and Our Business We are subject to intense competition in all of the markets in which we operate, which may
subject us to intense price competition and could affect our revenues The telecommunications industry is highly competitive. KT Corporation is our main competitor
in both the broadband Internet access services and local telephony services markets. As of April
30, 2005, KT had market share of approximately 50.7%, in the broadband services market in Korea and
market share of approximately 93.8% in the local telephony services market. KT has significantly
greater capital resources and owns significantly more fixed assets (including an integrated
telecommunications network throughout Korea) than we do. With respect to the broadband services
market, KT has an extensive fiber optic backbone network throughout Korea and is upgrading its
last-mile connections and related transmission facilities to provide DSL services to its
subscribers at speeds comparable to ours. We believe KT is focusing its upgrading process and
marketing efforts on targeted high density and high demand areas. With respect to the telephony
services market, KT was the sole provider of local telephony services prior to the commencement of
our operations in April 1999 and operates an extensive fixed-line network in Korea. We remain KTs
main competitor in this market with a relatively small market share. Dacom Corporation, the only
other local telephony licensee, has also begun offering commercial local telephony services since
January 2005. Continued upgrading or other competitive pressure by KT or Dacom could have a
negative effect on our financial condition and results of operations. We are also facing competition from others in the broadband Internet access services market
and may face increased competition in this area in the future from a variety of sources, including
cable television network system operators and relay operators. Since late 2004, Dacom has been
strengthening its retail broadband Internet access business by using the network facilities of
Powercomm Corporation, a subsidiary of Dacom, and launching LAN-based Internet services. In June
2005, the MIC decided to grant to Powercomm a NSP license to provide retail broadband Internet
access service. The detailed terms of the license, including the conditions to Powercomm providing
retail broadband Internet access service, are expected to be finalized at the time the license is
granted which is expected to be in September 2005. Entries by competitors such as Powercomm in the
broadband Internet access market will further intensify competition in our market. As a result of having to compete with KT in all of our markets and potential increases in the
number of additional competitors in the broadband Internet access services market, we currently
encounter and expect to continue to encounter significant pricing pressure and other forms of
competitive pressures. Increased price or other competition could adversely affect our revenues
per subscriber, the overall profitability of our business and our 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. In addition, future acquisitions,
business combinations and alliances in the telecommunications industry may create additional
competitors with resources greater than ours or strengthen existing competitors. For example, in
January 2005, Dacom announced that it intends to merge its operations with Powercomm. The
integration synergies generated from that merger may significantly increase the competitive
strength of that combined entity. Any significant changes to the market share or resources of our
competitors could have a material adverse effect on our business, financial condition and results
of operations. The acquisition of Thrunet or any other companies, businesses or technologies could result in
integration and other operational challenges and other harmful consequences relating to our overall
business and results of operations The Thrunet acquisition, or any other future acquisitions, may be a complex, time consuming
and costly process. Risks to the successful completion of the acquisition of Thrunet or any other
future acquisition include: 7




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
    
    potential disruptions of our ongoing business and the distraction of our
managements time and focus;
    
    difficulties in integrating the systems and technologies, back office functions,
personnel and customer base of Thrunet or any other acquired company with ours;
    
    impairment of relationships with customers, employees and strategic partners; and
    
    difficulties in integrating the accounting, management information, human resources
and other administrative systems, which will prevent us from realizing an effective
management structure. We may not succeed in addressing these risks or other problems encountered in connection with
the Thrunet acquisition or any other future acquisitions. Significant or unexpected costs may be
incurred during the integration process, preventing us from achieving the targeted benefits from
the acquisitions. The revenue synergies and cost savings that we aim to achieve through some
acquisitions may require longer periods to realize. For example, we currently estimate that
positive financial impact from the acquisition of Thrunet will not be immediate, and that the
acquisition will negatively impact our consolidated net income for the year ending December 31,
2005 by approximately Won 7 to 11 billion. If we are unable to resolve smoothly the problems that
arise in the integration process between our business and operations and those of an acquisition
target, including Thrunet, our business, results of operations, financial condition and stock price
may be materially and adversely affected. We may not have recourse under the Thrunet acquisition agreement for losses relating to the
acquisition Our acquisition of Thrunet is on an as is basis because it was being sold through an auction
process by its court-appointed receiver. The acquisition agreement with the court-appointed
receiver does not provide for post-closing adjustments to the purchase price or indemnities or
other contractual recourse against the seller. The due diligence that we conducted with respect to
Thrunet may not have been sufficient to identify and evaluate potential losses resulting from the
acquisition, including unforeseen liabilities that could be asserted against us in the future as
the owner of Thrunet shares. Hence, we may be exposed to potential Thrunet liabilities without
meaningful recourse against the seller. Any such liabilities could have a material adverse effect
on our results of operations and financial condition. Our Thrunet acquisition price may not be reflective of the true value of the Thrunet business The purchase price for the Thrunet acquisition was fixed in February 2005. Changes in the
operations and prospects of Thrunet, general market and economic conditions and other factors which
may be beyond the control of Thrunet may have altered the value of Thrunet, or the fair value of
Thrunets assets. In addition, some of the publicly available information about Thrunet may not be
accurate. For example, we believe Thrunet has around 900,000 to 1 million subscribers which is
lower than the information published by the MIC. Although we have conducted due diligence
investigation with respect to Thrunet prior to negotiating the purchase price, the Thrunet purchase
price may not be reflective of the true value of the Thrunet business. Charges to earnings resulting from the application of the purchase method of accounting may
adversely affect our financial results and the market value of our common shares In accordance with Korean GAAP, we will account for the Thrunet acquisition using the purchase
method of accounting. We will allocate the total purchase price to Thrunets assets and
liabilities based on the proportionate share of the fair values of those assets and liabilities.
Estimating the fair value of Thrunets assets and liabilities involves significant judgments and a
variety of assumptions. The excess of the purchase price over the fair values of Thrunets assets
and liabilities will be recorded as goodwill, and will be required to be amortized over the
estimated useful life period ranging from three to 10 years. The 8




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additional amortization expense to be incurred under Korean GAAP, which is expected to be
around Won 13 to 16 billion for the year ending December 31, 2005, will negatively affect our
earnings per share. In addition, to the extent the value of goodwill becomes impaired, we may be
required to incur material charges relating to the impairment of goodwill. If the anticipated
benefits of the Thrunet acquisition are not achieved, our financial results, including earnings per
share, and the market value of our common shares will be further adversely affected. We may not be able to maintain a high level of broadband subscriber growth because of Koreas
high broadband penetration rate The Korean telecommunications industry is one of the most developed in Asia, particularly in
terms of broadband penetration. According to data derived from the MIC, the broadband penetration
rate, as a percentage of Korean households with broadband Internet access, had reached 78% as of
April 30, 2005, and broadband subscribers increased from approximately 3.9 million as of December
31, 2000 to approximately 12.0 million as of April 30, 2005. We have benefited from this growth
and currently derive most of our revenues from monthly subscription fees for our high-speed
broadband Internet access services. Until recently, a primary factor in our broadband revenue
growth has been our high broadband subscriber growth rate. We do not expect to maintain a high
broadband subscriber growth rate because of Koreas existing high broadband penetration rate.
Accordingly, our ability to generate additional revenues from our broadband operations will depend
substantially on our ability to retain our existing broadband subscribers and increase the usage of
our services by providing competitive and technologically up-to-date broadband and value-added
services. The profitability of our broadband business and our overall financial condition may be
adversely affected if we fail to retain our existing subscribers or increase the usage of our
services, or develop other sources of revenue, in a cost-effective manner. The telecommunications industry is capital intensive and subject to rapid changes in
technology The telecommunications industry is capital intensive and subject to rapid and ongoing
technological changes. In particular, Korea is experiencing the beginning of convergence between
voice, data and broadcasting, and fixed line and mobile, technologies. Government initiatives or
policies, changing market demands and consumer trends and new technological advances may require us
to adopt new technologies which could render our existing technology less competitive or obsolete.
For example, the Government is currently envisioning a Broadband Converged Network which will
combine broadband and mobile technologies and include terrestrial and satellite video broadcasting.
This rapid technological evolution has had, and will continue to have, a significant impact on the
speed and quality of our services and, in turn, the pricing of our services. In addition, we may
require substantial capital expenditure and access to related and enabling technologies in order to
develop and integrate any new technology with existing platforms and to comply with new industry
standards, including any implementation of the Broadband Converged Network. We may be unable to
integrate new technology into our network infrastructure in a timely and cost-effective manner,
which could have a material adverse effect on the value of our network, business, financial
condition and results of operations and on our ability to compete with other operators who
implement the new technology more successfully. There can also be no assurance that new technology
adopted by us will be profitable. The Government has had, and continues to have, significant control and influence over the
development of the telecommunications industry in Korea The Government has had, and continues to have, significant control and influence over the
development of the telecommunications industry in Korea. Under Korean law, the Government,
primarily through the MIC, has authority to regulate the telecommunications industry. The MIC is
responsible for, among other things, licensing telecommunications operators, monitoring the rates
charged by some telecommunications operators, including us, and setting standards and policies
which affect pricing, competition, marketing, foreign investment, frequency allocation, technology
choices, recommended levels of research and development spending, interconnection fee and other
arrangements. Each agreement for interconnection with other service providers is subject to
approval by, or reporting requirements to, the 9




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Korea Communications Commission. In addition, if the Communications Commission finds that we
are engaged in unfair business practices, including the implementation of a pricing structure that
restricts fair competition or which is against the interests of our service users, 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. The Government also regulates the Internet
exchanges through which all broadband networks are connected to the Internet. See Item 4.B.
Business OverviewKorean Telecommunications Laws and Regulations for a description of the
regulatory environment in Korea. No assurance can be given that the Government will not change
existing regulations, or impose additional regulations, that will have an adverse effect on our
business and results of operations, particularly in light of increasing technological convergence. For example, the Presidential Enforcement Decree of the Telecommunications Business Law
currently prohibits any telecommunications service provider from offering bundled sales of
telecommunications services or products that the MIC determines to be adverse to consumer
interests. In making this determination, the MIC may weigh the advantages of cost-savings or
increased convenience for the consumer as a result of the bundling against the disadvantages of any
anti-competitive effects of the bundling. If the MIC determines our bundled sales to be adverse to
consumer interests and the MIC were to exercise its discretion to prohibit us from offering bundled
services, this could have a material adverse effect on our financial condition and results of
operations. In general, the MIC has promoted, and continues to promote, fair and effective competition in
the telecommunications industry and we have benefited significantly from such policy initiatives.
The MICs facilities provision policy, which requires dominant operators to provide their essential
facilities to competitors upon request, and local loop unbundling regulations, under which we can
use KTs local loop facilities, have allowed us and other competitors to compete more effectively
with dominant operators which may have more capital resources than we do. In particular, the MICs
designation of KT as a dominant operator in the local telephony services market has been effective
in preventing KT from exercising its market power. As a dominant operator, KT is subject to more
stringent regulations and restrictions on its ability to change its local telephony rates. There
can be no assurance that the MIC will continue to promote competition in the telecommunications
industry and any reduction in the MICs support for competition could have a material adverse
effect on our results of operations and financial condition. The finding by the Korean Fair Trade Commission that we are guilty of horizontal collusion
with other telecommunications companies could result in fines, other criminal and civil liabilities
and a significant change in our competitive environment We, along with several other telecommunications companies, have been the subject of an
investigation by the Korean Fair Trade Commission, or the FTC, into horizontal collusion, including
formation of a price cartel, among the telecommunications companies with respect to leased line,
broadband, local telephony and domestic long distance telephony services. In May 2005, the FTC
announced that, together with KT, we are guilty of horizontal collusion with respect to local
telephony and leased line services. The FTC also announced that it will impose an aggregate fine
of Won 2.4 billion against us with respect to the horizontal collusion in those service areas.
Although the FTC has not yet completed its investigation with respect to broadband and domestic
long distance telephony services, the FTC is expected to find us and several other
telecommunications companies guilty of horizontal collusion in the other service areas. The FTC is
expected to make its final determinations with respect to the other services, including the amounts
of fines, by the end of June 2005. The FTC has the power to impose a fine of up to 5% of our total
revenues derived from the collusion. The sanction level will be determined by considering the
totality of circumstances such as the size of the relevant businesses affected by the collusion,
our role in forming the collusion, the period of the collusion being maintained and the impact of
the collusion on consumers in the respective markets. The FTC decision may also result in criminal
and civil liability against us or our officers and employees. Following the announcement about the
FTC decision, a citizen activist group announced its intention to solicit subscribers harmed by the
horizontal collusion to file a civil lawsuit against us and KT to seek damages based on the FTC
conclusions. If a lawsuit is filed and damages are awarded to the plaintiff in such lawsuit, we
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based on similar grounds by other subscribers. In addition, the FTC decision and the outcome
of any possible related lawsuit may affect the competitive environment in which we operate. Our licenses from the MIC are subject to certain conditions and may be subject to future
conditions imposed by the MIC We operate our telecommunications businesses pursuant to various licenses granted by the MIC.
See Item 4.B. Business OverviewLicensing. The MIC may suspend or revoke our licenses or impose
fines on us under certain circumstances, including the violation of telecommunications laws and
regulations and the breach of any conditions of the relevant license. Although we believe we are
in general compliance with telecommunications laws and regulations and the conditions of our
licenses, suspension or revocation of any license required for us to operate any of our
telecommunications businesses would have a material adverse effect on our business, financial
condition and results of operations. We outsource a significant portion of our sales force needs. Our lack of direct control over
our outsourced sales forces actions may materially affect our sales and marketing efforts As of April 30, 2005, we had 475 employees in our marketing and sales department. However, 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. In 2004, we acquired about 72% of our
new broadband services subscribers and about 63% of our new voice services subscribers through our
outside sales force. The outside sales force and its employees are not employees of hanarotelecom
and the amount of control we exercise over their activities 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 our
performance, including the number of new subscribers, could suffer. Certain major shareholders have a significant influence over our management and operations A consortium of investors comprised of companies or partnerships which are directly or
indirectly controlled and managed by the AIG Asian Infrastructure Fund II, the AIG Asian
Opportunity Fund, Newbridge Capital, Inc. and TVG Capital Partners, Ltd., owns an aggregate of
39.6% of our outstanding common shares. See Item 7.A. Major Shareholders. Pursuant to an
investment agreement between us and those principal shareholders, we have agreed not to take
certain significant corporate actions without the consent of those principal shareholders so long
as they and their affiliates continue to hold an aggregate of at least 15% or more of our
outstanding common shares. In addition, pursuant to certain other agreements, certain of the
principal shareholders have the right, among other things, to nominate directors to our board, to
nominate our chief financial officer, to make proposals to our board of directors and to discuss
our business and affairs with our board of directors, officers and independent accountants. The
interests of those principal shareholders may, in certain circumstances, differ from the interests
of the other holders of our securities. The inability to lease networks from third parties could materially affect our ability to
provide services We lease a substantial portion of our network from third parties including telecommunications
operators. We lease from Korea Electric Power Corporation, or 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 with KEPCO
could have a material adverse effect on our operations. Furthermore, any failure by KEPCO to
properly maintain its ancillary facilities could result in service disruptions or reduced data
transmission quality. In areas that are not covered by our network, we have entered into non-exclusive network lease
agreements with cable television network system operators, relay operators and Powercomm. Our 11




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competitors also have, or are trying to establish, relationships with these cable television
network system operators, relay operators or Powercomm. We may not be able to maintain our
relationships with these cable television network system operators, relay operators and Powercomm.
In particular, in connection with Dacoms marketing of LAN-based internet services, Dacom will be
using Powercomms network. In addition, in June 2005, the MIC decided to grant to Powercomm a NSP
license to provide retail broadband Internet access service. Dacoms focus on the retail broadband
Internet access market in conjunction with Powercomm may prevent us from continuing to lease our
network on similar terms from Powercomm, which may require us to make significant capital
expenditures to build our own last-mile connections in those areas. Our networks may be vulnerable to security breaches, piracy and hacking Despite the implementation of security measures, our networks may be vulnerable to computer
viruses, piracy, hacking or similar disruptive problems. Computer viruses or problems caused by
third parties could lead to disruptions of our services to our customers. Fixing such problems
caused by computer viruses or security breaches may require the interruption, delay or temporary
suspension of our services, which could result in lost revenue and penalties payable to affected
customers. Breaches of our network security, including through piracy or hacking may have a material
adverse effect on our earnings and financial condition and may require us to incur further
expenditure to put in place more advanced security systems to prevent any unauthorized access to
our networks. We may not 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 As a result of the rapid expansion of our business and the substantial operating losses we
incurred in the past, we have principally relied on equity and debt financings to fund our
operations and have significant debt and debt service and repayment obligations. 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. 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. Moreover, under current Korean law our ability to sell additional voting shares to foreign
investors is limited. As a result, our options to raise equity capital are more limited than other
companies. 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. We will be exposed to increased risks as we expand the range of our services As we expand the range of our products and services beyond our traditional business lines and
as the complexity of our services and network systems increases, we will be exposed to new and
increasingly complex risks. We may have only limited experience with the operational risks or new
technologies related to the expanded range of our services. To the extent we expand our service
offerings through acquisitions, we face risks relating to the integration of acquired businesses
with our existing operations. Our operational systems may prove to be inadequate and may not work
in all cases or to the degree required. In addition, our efforts to offer new services may not
succeed if market opportunities develop more slowly than expected or if the profitability of
opportunities is undermined by competitive pressures. 12




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We may be liable for information disseminated over our Internet services network The liability of ISPs under Korean law for information carried on or disseminated through
their networks is not completely settled. New court decisions, laws, regulations and other
activities regarding content liability may significantly affect the development and profitability
of companies offering online and Internet access services, including us. The imposition upon ISPs
of potential liability relating to information carried on or disseminated through the ISPs
systems, such as liability for computer viruses, defamatory speech or copyright infringement, 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 or
results of operations. We could be adversely affected if we experience a failure of our equipment We do not carry business interruption insurance. A major failure of our equipment or a
natural disaster affecting any part of our network or equipment could have a material adverse
effect on our operations. Risks Related to Korea There are unique economic and political risks associated with investing in Korean companies We generate substantially all of our revenue from operations in Korea. Our future performance
will depend in large part on Koreas future economic growth. Adverse developments in Koreas
economy or in political or social conditions in Korea may have an adverse effect on our number of
subscribers, call volumes and results of operations, which could have an adverse effect on our
business. The pace of economic recovery in Korea over the past several years has been volatile. The
economic indicators in 2001, 2002, 2003 and 2004 have shown mixed signs of recovery and
uncertainty, and future recovery or growth of the economy is subject to many factors beyond our
control. Events related to terrorist attacks in the United States that took place on September 11,
2001, recent developments in the Middle East, including the war in Iraq, higher oil prices, the
general weakness of the global economy and the outbreak of severe acute respiratory syndrome, or
SARS, in Asia and other parts of the world have increased the uncertainty of world economic
prospects in general and continue to have an adverse effect on the Korean economy. Any future
deterioration of the Korean economy would adversely affect our financial condition and results of
operations. Developments that could adversely affect Koreas economy in the future include:  
    
    financial problems relating to chaebols, or their suppliers, and their potential
adverse impact on Koreas financial sector;
    
    adverse changes or volatility in foreign currency reserve levels, commodity prices
(including oil prices), exchange rates (including depreciation of the U.S. dollar or
Japanese yen), interest rates and stock markets;
    
    adverse developments in the economies of countries such as the United States, China
and Japan, to which Korea exports, or in emerging market economies in Asia or
elsewhere, which developments could result in a loss of confidence in the Korean
economy;
    
    social and labor unrest or declining consumer confidence or spending resulting from
layoffs, increasing unemployment and lower levels of income; and 13




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
    
    a deterioration in economic or diplomatic relations between Korea and its trading
partners or allies, including such deterioration resulting from trade disputes or
disagreements in foreign policy. Developments that adversely affect Koreas economic recovery will likely also decrease demand
for our services and adversely affect our results of operations. Increased international tensions with North Korea could have an adverse effect on us and the
market value of our common shares Relations between Korea and North Korea have been tense over most of Koreas history as a
republic. The level of tension between Korea and North Korea has fluctuated and may increase or
change abruptly as a result of current and future events, including ongoing contacts at the highest
levels of the governments of Korea and North Korea and increasing hostility between North Korea and
the United States. In December 2002, North Korea removed the seals and surveillance equipment from
its Yongbyon nuclear power plant and evicted inspectors from the United Nations International
Atomic Energy Agency, and has reportedly resumed activity at its Yongbyon power plant. In January
2003, North Korea announced its intention to withdraw from the Nuclear Non-Proliferation Treaty,
demanding that the United States sign a non-aggression pact as a condition to North Korea
dismantling its nuclear program. In August 2003, representatives of Korea, the United States,
North Korea, China, Japan and Russia held multilateral talks in an effort to resolve issues
relating to North Koreas nuclear weapons program. While the talks concluded without resolution,
participants in the August meeting indicated that further negotiations may take place in the future
and, in February and June 2004, six-party talks were held in Beijing, China. The third round of
the six-party talks held in June 2004 ended with an agreement by the parties to hold further talks
in the near future. In recent months, however, the level of tension between the two Koreas has
increased. In February 2005, North Korea declared that it had developed and is in possession of
nuclear weapons. It also announced withdrawal from the six-party talks on its nuclear program.
Any further increase in tensions resulting, for example, from a breakdown in contact or an outbreak
in military hostilities, could hurt our business, results of operations and financial condition and
could lead to a decline in the market value of our common shares and the ADSs. Koreas new legislation allowing class action suits related to securities transactions may
expose us to additional litigation risk Effective January 1, 2005, a new law became effective that allows class action suits to be
brought by shareholders of companies listed on the KRX Stock Market or the KRX KOSDAQ Market,
including us, for losses incurred in connection with purchases and sales of securities and other
securities transactions arising from (1) false or inaccurate statements provided in registration
statements, prospectuses, business reports and audit reports; (2) insider trading; or (3) market
manipulation. This new law applies to companies such as ourselves listed on the KRX Stock Market
or the KRX KOSDAQ Market whose total assets are equal to or greater than Won 2,000 billion at the
end of the immediately preceding fiscal year. However, in the event that certain elements of a
financial statement for the fiscal year ended before January 1, 2005, was not in compliance with
the then effective accounting standards, this law does not apply, if such non-compliance is cured
or addressed in the financial statement for the fiscal year ending on December 31, 2006, and such
corrected information is submitted to the Financial Supervisory Commission, the Korea Exchange,
Inc., or KRX, or made publicly available. This law permits, subject to court approval, 50 or more
shareholders who collectively held 0.01% or more of the shares of a company at the time when the
cause of action arose to bring a class action suit against, among others, the company and its
directors, officers and auditors. It is uncertain how the courts will apply this law. Class
action suits can be time-consuming and expensive to resolve, and can divert management time and
attention from the operation of a business. Although we are not aware of any basis for such suit
being brought against us, nor of any such suits that are pending or threatened, any such litigation
brought against us could have a material adverse effect on our business, financial condition and
results of operations. 14




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Risks Related to Owning Our Shares or ADSs Rights of shareholders under Korean law may be different from those under the laws of
jurisdictions within the United States and other countries Our articles of incorporation, the regulations of our board of directors, the Korean
Commercial Code and the Korean Securities and Exchange Act govern our corporate affairs. Legal
principles relating to such matters as the validity of corporate procedures, directors and
officers fiduciary duties and shareholders rights may be different from those that would apply if
we were a non-Korean corporation. Shareholders rights under Korean law are different in some
respects from shareholders rights under the laws of jurisdictions within the United States and
other countries. You may have more difficulty in asserting your rights as a shareholder than you
would as a shareholder of a corporation organized in a jurisdiction outside of Korea. For a detail
discussion of the relevant provisions under the Korean Commercial Code and our articles of
incorporation, see Item 10.B. Memorandum and Articles of Association. Restrictions on foreign ownership of our voting shares imposed by Korean law may depress the
price of our common shares The Telecommunications Business Law of Korea restricts foreign ownership in voting shares of a
network service provider, including us. 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. As of May 31, 2005, foreign ownership in our
voting shares was approximately 49%, including the 39.6% share ownership held by a consortium of
investors led by AIG Asian Infrastructure Fund II and AIG Asian Opportunity Fund, Newbridge
Capital, Inc. and TVG Capital Partners, Ltd. The market price of our common shares may be, and may
continue to be, lower because of these limitations on foreign share ownership in our voting shares.
A stricter application of the rules relating to foreign share ownership may also negatively impact
our share price in the future. Additional restrictions on acquiring a large stake in our common shares imposed by Korean law
may depress the market price of our common shares 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 of Korea. Failure to comply with this reporting
requirement may result in the imposition of criminal sanctions. Subsequent sales by the investor
of its shares in the company will also require a prior report to the bank. 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 the
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. These restrictions may discourage some
investors from acquiring large positions in our common shares and as a result, may have lowered,
and may continue to lower, the market price of our common shares. 15




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Foreign exchange rate fluctuations may affect the dollar value of our ADSs and dividends
payable to holders of our ADSs Market prices for our ADSs may fall if the value of the Korean won declines against the U.S.
dollar. Although we do not expect to pay dividends in the foreseeable future, any dividends that
we do declare and pay will be paid to the depositary for the ADSs in Korean won and then converted
by the depositary into U.S. dollars. As a result, the U.S. dollar amount of cash dividends and
other cash payments made to holders of our ADSs would be reduced if the value of the Korean won
declines against the U.S. dollar. As a holder of ADSs, you have fewer rights than a shareholder has, and you must act through
the depositary to exercise these rights The rights of our shareholders under Korean law to take actions including voting their shares,
receiving dividends and distributions, bringing derivative actions, examining our accounting books
and records and exercising appraisal rights are available only to shareholders of record. Because
the depositary, through its custodian, is the record holder of the shares underlying the ADSs, a
holder of ADSs may not be entitled to the same rights as a shareholder. In your capacity as an ADS
holder, you are not able to bring a derivative action, examine our accounting books and records or
exercise appraisal rights except through the depositary. In addition, the Korean Commercial Code 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 we offer 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 U.S. 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 U.S. Securities Act. We are under no obligation to
file a registration statement under the U.S. 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 U.S. Securities Act would be available. Holders of ADSs that are not entitled to
exercise preemptive rights may thereby suffer dilution of their interests. 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. It may not be possible for investors to effect service of process within the United States
upon us or our directors or senior management, or to enforce against us or those persons judgments
obtained in U.S. courts predicated upon the civil liability provisions of the federal securities
laws of the United States We are a stock corporation organized under the laws of the Republic of Korea. Almost all of
our directors and senior management reside outside of the United States. Most of our assets and
those persons are located in Korea and elsewhere outside of the United States. It may not be
possible, therefore, for U.S. investors to effect service of process within the United States upon
us or those persons or to enforce against us or those persons judgments obtained in U.S. courts
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federal securities laws of the United States. We believe that there is doubt as to the
enforceability in Korea, in original actions or in actions to enforce judgments of U.S. courts, of
claims predicated solely upon the federal securities laws of the United States. 
 Item 4. Information on the Company. A. History and Development of the Company We are 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 hanarotelecomChushikHoesa
in Korean, and hanarotelecom incorporated in English. Our registered office is located at
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. We were 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, Busan, 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. 17




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
    
    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.
    
    In November 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.
Following such new share issuance, there was a change in certain members of our
management. See Item 6. Directors, Senior Management and Employees.
    
    In July 2004, we launched hanarotelecom as our new corporate identity.
    
    In January 2005, we were selected by the MIC as one of the three approved
applicants to receive a license to provide WiBro services. In late April 2005,
however, we decided not to proceed with the WiBro business after an in-depth analysis
of our future business strategies that need to address the rapidly-changing
telecommunications market in Korea.
    
    On June 3, 2005, we acquired Thrunet common shares representing 96.22% of Thrunets
outstanding shares and an aggregate Won 223.3 billion principal amount of debt
securities issued by Thrunet for a combined purchase price of Won 471.4 billion. On
June 23, 2005, the court approved Thrunets application to terminate its court
receivership. See Item 5.B. 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. B. Business Overview General We have been providing telecommunications services since 1999 and currently offer high-speed
broadband Internet access, voice, leased line and IDC services in Korea. We are the second largest
provider of broadband Internet access services in Korea in terms of both revenue and subscribers
and our network currently covers 79% of households in Korea. Our voice service comprises local,
domestic long distance, international long distance and VoIP services. For the year ended December
31, 2004, we had revenues of Won 1,449.6 billion and net income of Won 13.0 billion. As of April 30, 2005, we had 2.76 million broadband Internet access subscribers. Our market
share of Korean broadband Internet access subscribers was 22.7%. 45.6% of our broadband Internet
access subscribers are using DSL technology, 52.3% are using cable modem technology and 2.1% are
using other technologies, namely broadband WLL, often referred to as B-WILL, and wireless LAN,
often referred to as WLAN. We are the only major provider of broadband Internet access services
in Korea with a significant presence in both DSL and cable modem technology, with our major
competitors predominantly 18




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providing one or the other. Broadband Internet access services accounted for 69.9% of our
revenues for the year ended December 31, 2004. As of April 30, 2005, we had 1.41 million voice lines. We added 288,782 net voice lines in
the nine-month period from August 2004 through April 2005, which represents a 25.2% growth in our
voice lines and an increase in our market share of total voice lines in Korea from 5.0% to 6.2%.
The recent growth is principally due to the Governments decision, with nationwide effect in August
2004, to allow fixed-line telephony customers to retain their existing telephone numbers when they
switch providers, commonly referred to as fixed-line number portability, and our promotion of
fixed-line number portability, as well as a significant increase in the marketing of our VoIP
services. In July 2004, we launched our domestic and international long distance telephony
services. Voice services accounted for 20.0% of our revenues for the year ended December 31, 2004.
As of April 30, 2005, 35.3% of our broadband Internet access customers use our voice lines on a
bundled basis. We also provide leased line services and operate an Internet data center for corporate
customers. These and other activities accounted for 11.9% of our revenues for the year ended
December 31, 2004. We have a technologically advanced transmission and access network, which comprises 17,406
route kilometers of owned and 5,020 route kilometers of leased fiber optic cables as of April 30,
2005. As of April 30, 2005, we had connected 8,104 apartment complexes and 3,262 office buildings
with fiber optic lines. We estimate that our network has access to approximately 12.2 million
Korean households. We provide our broadband Internet access and voice services under the hanafos and hanafone
brands, respectively. We have been voted as the best Internet service provider in Korea for the
last four years and the best local telephony service provider for the last two years by the
National Customer Satisfaction Index which is sponsored by the Korea Productivity Center and the
University of Michigan, Ann Arbor. Recent Acquisitions and New Services Thrunet Acquisition On June 3, 2005, we acquired 99,240,000 Thrunet common shares and an aggregate principal
amount of Won 223.3 billion of newly issued debt securities of Thrunet for a combined purchase
price of Won 471.4 billion. Under the amended reorganization plan which was approved by Thrunets
interested parities meeting and the bankruptcy court, Thrunet reduced its capital and as a result,
the shares that we acquired represent 96.22% of Thrunets outstanding common shares. Through the
acquisition of Thrunet, we expect to further consolidate our position as the second largest
broadband Internet access provider in Korea. The Thrunet acquisition agreement requires 50% of the
shares to be acquired by us to be locked up for a one year period in an account with the Korea
Securities Depository. On June 23, 2005, the court approved Thrunets application to terminate its
court receivership. We believe that our acquisition of Thrunet would give us an opportunity to improve our
competitive position in the broadband services market, with the following benefits in particular:  
    
    Competitive size. Thrunet is the third largest broadband services operator in
Korea. Thrunet provides most of its broadband services via cable modem and was our
main competitor in this market. If we are successful in retaining Thrunets
subscriber base and integrating its network infrastructure with our own, our
acquisition of Thrunet will expand our customer base, our network coverage and our
distribution channels, strengthening our competitive position in the Korean broadband
services market. We believe that this combination will provide us with the
opportunity to enhance our scale of operations and the range of service offerings.
    
    Complementary customer bases. We believe that we will have the opportunity to
expand our bundled broadband and voice service offering to Thrunet customers. 19




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
    
    Synergies. We will seek to achieve cost savings through various synergies,
including:  
    
    reducing operating expenses and capital expenditure as we integrate Thrunets
network infrastructure, optimize network planning and jointly procure equipment;
    
    reducing marketing expenses since Thrunet will no longer be a competitor of
ours in the broadband services market; and
    
    reducing operating expenses as result of merging Thrunets sales and marketing,
administration, information technology and corporate functions with our own. For a discussion of the risks involved in our proposed acquisition of Thrunet, see Item 3.D.
Risk FactorsRisks Related to the Telecommunications Industry and Our BusinessThe acquisition of
Thrunet or any other companies, businesses or technologies could result in integration and other
operational challenges and other harmful consequences relating to our overall business and results
of operations, Our Thrunet acquisition price may not be reflective of the true value of the
Thrunet business, and Charges to earnings resulting from the application of the purchase method
of accounting may adversely affect our financial results and the market value of our common
shares. Combined Telecommunications and Broadcasting Service In November 2004, we announced our intention to develop a combined telecommunications and
broadcasting service using our existing broadband network. This combined service would provide our
broadband subscribers with value-added services (such as access to television broadcasts, live
information, video-on-demand, games and data broadcasting) through Internet Protocol Television,
commonly referred to as IP-TV. IP-TV is a technology that will allow subscribers to receive
television broadcasts through a broadband Internet network using a signal-receiving device. We are
currently conducting a technical trial of IP-TV. We believe that the value-added services to be
provided through our combined service have the potential to improve customer retention and generate
additional revenue. We intend to market this combined service as a bundled package of voice (using
VoIP), broadband and broadcasting services, which we refer to as Triple Play Service, and we have
recently entered into a memorandum of understanding with Korea Digital Satellite Broadcasting Co.,
Ltd., or Skylife, and a strategic alliance with a consortium of 12 cable television network system
operators, known as the Joong-Ang MSO, to further bundle our Triple Play Service with broadcast
media content produced by Skylife and members of the Joong-Ang MSO. In line with the Governments
BCN initiative, we and Skylife are also evaluating the joint development of combined and
technologically converged telecommunications and broadcasting services. There can be no assurance, however, that we will be able to implement our combined service.
Under the current laws and regulations, Internet access providers are not permitted to provide
broadcasting services. See Korean Telecommunications Laws and RegulationsOther Laws. We will
not be able to provide our combined service unless the relevant laws and regulations are revised by
the Government to allow for the provision of combined telecommunications and broadcasting services. T-Commerce Services On March 22, 2005, the Korean Broadcasting Commission granted us a license to provide
Television-Commerce, or T-Commerce, services through Data Broadcasting. Data Broadcasting is a
type of broadcasting service which delivers graphics, letters, voice and limited moving image
through digital television, which may be delivered either independently or in connection with an
existing television program, and which the viewers may watch on-demand. Services that may be
provided through Data Broadcasting include, T-Commerce, weather forecasts, traffic information,
news, electronic government services, network games, education and other combined services, among
which T-Commerce represents the core service. A basic requirement to facilitate T-Commerce through
Data Broadcasting is the establishment of a two-way broadcasting system. Once two-way broadcasting
is enabled, and upon completion of digitalized broadcasting, television may be used as a household
appliance that allows a two-way flow of 20




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information, which is a departure from the current one-way system of broadcasting. For
example, such two-way broadcasting will allow television home-shopping consumers to directly
participate in learning about the products and as a result is expected to increase the level of
consumer trust in home-shopping. As a telecommunications company, we intend to utilize our
experience in two-way networking systems to provide a high quality Data Broadcasting service. We
plan on testing this service during 2005. Our Services We currently provide broadband Internet access services, telephony services and leased line
services in Korea pursuant to several wire-line based options and wireless technologies. The
following table shows the numbers of subscribers or lines by business segment and technology: As of December 31,
    
    
    As of2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    May 31, 2005Broadband:Residential:VDSL
    
    
    
    
    
    
    
    
    
    
    165,068
    
    
    
    272,815
    
    
    
    331,568ADSL
    
    
    984,432
    
    
    
    1,274,765
    
    
    
    1,033,619
    
    
    
    961,513
    
    
    
    702,541Cable Modem
    
    
    920,243
    
    
    
    1,535,973
    
    
    
    1,457,700
    
    
    
    1,438,649
    
    
    
    1,452,899Fiber optic LAN(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219,125Corporate:VDSL
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    85
    
    
    
    85ADSL
    
    
    30,247
    
    
    
    19,603
    
    
    
    18,272
    
    
    
    18,363
    
    
    
    18,426Cable Modem
    
    
    80,357
    
    
    
    3,717
    
    
    
    1,619
    
    
    
    1,143
    
    
    
    961B-WLL
    
    
    29,917
    
    
    
    38,293
    
    
    
    26,715
    
    
    
    20,187
    
    
    
    15,933WLAN
    
    
    
    
    
    
    5,175
    
    
    
    22,704
    
    
    
    36,179
    
    
    
    35,704Subtotal
    
    
    2,045,196
    
    
    
    2,877,526
    
    
    
    2,725,763
    
    
    
    2,748,934
    
    
    
    2,777,242Voice lines
    
    
    702,572
    
    
    
    939,852
    
    
    
    1,001,381
    
    
    
    1,413,273
    
    
    
    1,452,477Leased lines
    
    
    3,216
    
    
    
    6,709
    
    
    
    6,480
    
    
    
    6,057
    
    
    
    6,403Total
    
    
    2,750,984
    
    
    
    3,824,087
    
    
    
    3,733,624
    
    
    
    4,168,264
    
    
    
    4,236,122
 For the years ended December 31, 2001, 2002, 2003 and 2004, we had the following revenues
generated by our business segments: Year ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004(billions of Won)Broadband
    
    Won
    
    
    641.5
    
    
    Won
    
    
    969.6
    
    
    Won
    
    
    982.7
    
    
    Won
    
    
    985.4Voice
    
    
    
    
    
    
    114.5
    
    
    
    
    
    
    
    210.7
    
    
    
    
    
    
    
    249.0
    
    
    
    
    
    
    
    291.2Leased line
    
    
    
    
    
    
    17.7
    
    
    
    
    
    
    
    111.8
    
    
    
    
    
    
    
    38.0
    
    
    
    
    
    
    
    39.8Others
    
    
    
    
    
    
    57.0
    
    
    
    
    
    
    
    125.8
    
    
    
    
    
    
    
    113.8
    
    
    
    
    
    
    
    133.2Total
    
    Won
    
    
    830.7
    
    
    Won
    
    
    1,417.9
    
    
    Won
    
    
    1,383.5
    
    
    Won
    
    
    1,449.6
 Broadband We currently provide high-speed broadband Internet access services through several service
offering options marketed under the brand name hanafos. Our broadband network coverage extends
to 78.5% of households in Korea. We offer broadband Internet services to subscribers in large
apartment complexes and commercial buildings through fiber optic networks and to subscribers in
less densely populated residential areas through HFC cable networks. We also provide wireless
broadband Internet access to medium and low density housing complexes using B-WLL technology and in
high traffic areas (such as hotels and commercial centers) using WLAN technology. Residential
subscribers in areas covered by fiber optic networks 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 leased line services. Subscribers in service areas covered by HFC cable networks are
provided with cable modem based services. 21




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The principal features of our main broadband Internet access service packages and tariff
structure are set out in the table below: Monthly ServiceService Package
    
    Technology
    
    Max Speed
    
    Charge(1)hanafos V Dream II
    
    VDSL
    
    50 Mbps
    
    Won
    43,000hanafos V Dream I
    
    VDSL
    
    20 Mbps
    
    
    40,000hanafos V Pro xDSL
    
    ADSL
    
    8 Mbps
    
    
    38,000hanafos Fiber LAN
    
    LAN
    
    100 Mbps
    
    
    33,000hanafos V Pro CATV
    
    Cable Modem
    
    10 Mbps
    
    
    34,000hanafos V Lite
    
    ADSL, Cable Modem
    
    4 Mbps
    
    
    28,000
 
 (1)
    
    There is a one-time installation fee of Won 30,000. Cable or DSL modems are rented for a
monthly fee of Won 8,000. Discounts on the monthly service charge are given to long-term
subscribers and range from 3.0% to 11.0%. Modem rental fees have in some circumstances been
waived or discounted by up to 40.0%. DSL (ADSL and 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. Our DSL
services are targeted at subscribers in large apartment complexes. ADSL services offer Internet
access transmission speeds of up to 8 Mbps and VDSL services offer data transmission speeds of up
to 50 Mbps. DSL subscribers pay a monthly flat fee. Fiber Optic LAN We provide fiber optic LAN service to apartments and residential complexes hooked up to our
Fiber LAN service and equipped with hanarotelecom LAN facilities. It is useful for professional
users and others desiring access to the broadband internet at a lower flat price as well as for
customers that frequently access services requiring symmetrical throughput (equal upload and
download), such as e-Learning and e-mail Healthcare services, video chat and peer-to-peer networks.
We are able to offer internet access transmission speeds of up to 100 Mbps. Cable Modem Services Our cable modem based services are currently available in 162 service areas and are delivered
via HFC cable infrastructure. HFC connections to our data network allow for maximum speeds of 10
Mbps downstream and 700800 Kbps upstream through the use of cable modems installed at our
subscribers premises. Compared to the construction of our fiber optic network, our use of
existing HFC cable lines to offer broadband Internet access allows us to expand our broadband
service coverage area with lower capital expenditures. We have not invested in building out our
own network in areas where we have established non-exclusive network lease agreements with cable
television network system operators and Powercomm to use their HFC cable lines. As of April 30,
2005, approximately 60% of our cable modem subscribers used cable lines that we lease from cable
television network system operators and Powercomm. In connection with Dacoms focus on the retail
broadband Internet access market in conjunction with Powercomm, by using Powercomms network, we
may be prevented from continuing to lease our network on similar terms from Powercomm in the
future, which may require us to make significant capital expenditures to build our own network in
those areas. See Item 3.D. Risk FactorsRisks Related to the Telecommunications Industry and Our
BusinessThe inability to lease networks from third parties could materially affect our ability to
provide services. Wireless Services We also provide wireless last mile connections to our backbone using B-WLL and WLAN
technologies. We commenced our commercial high-speed Internet access services using B-WLL
communications technology in July 2000. B-WLL services are marketed primarily to medium-sized 22




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businesses and apartment complexes which are not covered by our fiber optic or HFC networks.
Our B-WLL services are currently provided in 11 cities, including Seoul and Busan. We commenced
providing hanafos wing WLAN services in April 2002, which allow Internet access through mobile
devices such as notebook computers or personal digital assistants, or PDAs, equipped with a LAN
card for users within the coverage of our access points. As of April 30, 2005, we provide WLAN
services in approximately 309 access point areas across Korea, including high traffic areas such as
hotels, subway stations, shopping malls, colleges and fast food stores. Voice We offer corporate and residential customers in Korea, local telephony, VoIP and domestic and
international long distance telephony services. Local Telephony We are one of two competitors to KT, the dominant operator, in the local telephony market, the
other being Dacom. Although KT has a dominant position in this market, we have increased our
market share to 6.2% as of April 30, 2005. 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 and teleconferencing services in order to distinguish our
services from those available from KT. During the third quarter of 2004, we rolled out a nationwide marketing program, targeted at
major metropolitan areas including Seoul and Busan, to promote our newly-branded hanafone
telephony services and fixed-line number portability with the aim of increasing our telephony
subscriber base. We have increased our local telephony voice lines from 736,443 residential lines
and 264,938 corporate lines as of December 31, 2003 to 1,125,566 and 306,551 lines, respectively,
as of April 30, 2005. Most of our residential subscribers receive local telephony services bundled with our DSL
services. If customers subscribe for our bundled DSL and local telephony services, the monthly
base fee for our local telephony service is discounted from Won 4,500 to Won 2,000 per line. We
believe the ability to offer local telephony distinguishes our service offerings from that of other
communication service providers, except for KT and Dacom, 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 to residential subscribers under the name hanafos cable + voice, which allow
simultaneous use of high-speed Internet and local telephony services. We also provide VoIP
services on an unbundled basis to corporate customers. We currently provide VoIP services in Seoul
and other major municipal areas. As a result of improvements in VoIP technology and our increased
marketing efforts, the number of VoIP lines increased by 371.1% to 241,997 lines as of December 31,
2004 from 51,150 lines as of December 31, 2003. As of April 30, 2005, we provided hanafos cable +
voice services to 247,031 residential subscribers. In December 2004, the MIC decided to allow us
to provide local telephony service by way of VoIP, thereby making our VoIP services eligible for
fixed-line number portability provided certain conditions are met. Pursuant to these new
regulations since December 22, 2004, we have been providing VoIP services as part of our local
telephony service offering. For a further discussion of these regulations, see
CompetitionVoice. Long Distance Telephony In July 2004, we launched our domestic long distance telephony service and international long
distance telephony services. We promoted these new services, together with our local telephony
services and the introduction of nationwide fixed-line number portability, in a nationwide
marketing campaign during the third quarter of 2004. 23




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Leased Line Services We hold a license to operate leased line services on a nationwide basis in Korea. Our leased
line fees vary depending on the distance and bandwidth requirements of our subscribers. Our leased
line services enable high volumes of data to be transmitted quickly and reliably. We also provide
back-up storage for transmitted data. We use international transmission lines with transmission
speeds of over 10 Gbps to provide leased line services to countries such as the United States,
Japan and China and have points of presence, commonly referred to as POP, facilities in the
United States. Our Internet leased line services are provided to companies with LAN facilities
through fiber optic cable lines. With the aim of expanding the scope of our Internet leased line
services, we have entered into transit or peering agreements with 89 domestic and 140 international
Internet leased line service providers. Other Internet Data Center We opened N-GENE, our IDC, in May 2000. Through N-GENE, we provide our corporate
subscribers with server-based support in the form of co-location and dedicated server hosting.
Co-location allows our customers to connect their servers directly to our backbone network at
speeds in excess of those available through leased Internet lines. This service is targeted at
corporate customers with multiple servers and for those who need broadband circuit capacity.
Dedicated server hosting provides our customers with servers customized to their desired
specifications. These services are connected to our backbone network at Gbps rates and allow our
customers access to dedicated servers without the burden of purchasing or maintaining such servers.
As of April 30, 2005, N-GENE hosted approximately 12,100 servers, mostly for corporate customers. Internet and Related Support Services Through our hanafos.com portal site, which is operated by our subsidiary, Hanaro Dream
Corp., we offer to our subscribers a variety of basic on-line services, including personal
homepages, free email services, chat 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. We intend to continue developing our Internet
content business and maintaining a competitive position in this business through Hanaro Dream. Sales, Marketing and Customer Service Sales We are focused on bringing our high-speed broadband Internet access, and voice services to
residential users, and Internet dedicated lines and data, leased line services and IDC, to
corporate users. Residential We currently outsource a significant portion of our retail sales force needs. Our outside
sales force receives several weeks of training on how to sell our services. The training includes
basic instruction on selling techniques, as well as classes regarding our corporate image and our
services. Follow-up sessions are held to introduce new services to the sales force. Our outside
sales force sells our services through the following channels:  
    
    Customer Centers. We have agreements with 70 customer centers and 13 service
centers, most of which are located in Seoul. Service centers serve areas with
population densities that are lower than the areas served by the customer centers.
These customer and service centers sell our services exclusively and contributed to
approximately 23% of our total sales in 2004. These centers receive a commission for
each service contract and installation contract secured. 24




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In addition, we pay these centers for the maintenance and repair work that they perform
for our subscribers. Customer and service centers often enter into sub-contracts with
smaller distribution outlets within their area to increase their sales coverage and
sell through telemarketing.
    
    Cable Television Network System Operators and Relay Operators. As of April 30,
2005, we have arrangements to sell our services with 38 cable television network
system operators and 21 relay operators. These arrangements form part of the
strategic alliances we have formed with these cable television network system
operators and relay operators (see CompetitionBroadband). The cable television
network system operators and relay 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.
    
    Other Agents. We use individual sales agents and small sales agencies to sell our
services in our coverage areas. Our agents receive a sales commission for each new
subscriber. Corporate Sales to corporate subscribers are handled through our in-house sales group. Our sales people
focus on securing contracts with large commercial complexes, allowing us to install our remote
terminals at their premises. After installation, sales people direct their attention to individual
corporate clients within these premises. Sales people that have secured contracts with corporate
clients remain the primary contacts for all aspects of the clients needs, including further
installation and customer and follow-up service. Our sales force is compensated using an
incentive-based performance scheme. Others We also have agreements with providers of other services in order to further expand our sales
coverage. We are a party to agreements with certain construction companies 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 strategies and media to raise awareness of our services. Our
marketing strategies include the following: Broadband  
    
    Entering into strategic alliances with cable television network system operators
and relay operators to provide bundled services such as Triple Play Service.
    
    Shifting our marketing emphasis from high-speed broadband Internet access services
to value-added services. Voice  
    
    Marketing voice services to both existing and new broadband subscribers and new
voice subscribers as a bundled service. 25




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
    
    Diversifying our voice services by offering services such as VoIP and other
value-added telephone services.
    
    Promoting fixed-line number portability to potential voice subscribers. General  
    
    Developing a CRM system to analyze customer profiles.
    
    Improving our marketing efforts through CRM analysis to increase customer retention
and customer usage of our services. We also organize special events, such as Internet seminars, to promote our services. We spent
a total of Won 26.8 billion in 2003 and Won 44.8 billion in 2004, on advertising. Customer Service We believe our emphasis on customer care differentiates us from our competitors. We have been
voted by the National Customer Satisfaction Index as the best Internet service provider in Korea
for the last four years and the best local access telephony service provider for the last two
years. We provide 24-hours-a-day, 365-days-a-year customer support through four call centers
operated by our subsidiary, Hanaro Telephone & Internet Information, Inc., or Hanaro T&I. We also
have a customer claims center located within the call centers to handle subscriber claims regarding
our service quality and billing. All service representatives receive two months orientation
training and on-site supervisors provide additional support. All calls to the call centers are
recorded and service representatives are graded periodically based on performance. We strive to
answer all calls within 27 seconds. The call centers are currently receiving approximately 63,000
calls per day. We use automated answering services to respond to routine inquiries, such as
account balances. Subscribers can also voice their complaints through email. Common questions or
complaints are posted, together with our response, on a bulletin board on our home page. As of
April 30, 2005, we employed 1,028 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 also have face-to-face access to our representatives at our customer and service
centers and to representatives at customer centers operated by cable television network system
operators and relay operators with which we have non-exclusive sales arrangements. Our sales staff
at our customer and service centers receive customer service training in addition to their sales
training. Our in-house sales people monitor the performance of our customer and service center
employees during their visits to these centers. Relationship with Dreamline In November 2001, we acquired a 32.2% equity interest in Dreamline, a broadband and leased
line services provider. As a result of a third partys investment in Dreamline in early 2004, our
equity interest in Dreamline has been diluted and was 14.18% as of April 30, 2005. Accordingly,
Dreamline is no longer considered our affiliate for accounting purposes. Information Systems and Billing Information Systems We currently use an information system 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 related to the management of our operations and acts as the interface to the network
management system, which monitors 26




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the performance of our network and delivery of services on a 24-hours basis every day. This
interface allows for quick identification of network faults and relays the information to our
customer support system. The business support system handles data regarding internal business
operations, including accounting, personnel and our assets. Our operational information system is
designed to integrate all of our internal support services. The integration of our internal
support services has been substantially completed. The integration of our operational information system allows management personnel from our
customer care, sales engineering, service management, service delivery, accounting and inventory
sales departments to access a single subscriber record. Accordingly, a subscriber is able to
request support for any of our 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 and to identify more cross-selling opportunities. In addition, credit
history information regarding potential and existing subscribers obtained from credit analysis
organizations is available through our integrated information system. This allows our sales and
operational staff to suspend services to non-paying subscribers with poor credit ratings at an
early stage. In March 2004, we implemented our Information Strategy Planning which aims to identify new
business opportunities by analyzing the customer information contained in our operational
information system, to create a transparent strategy formulation process and to promote a stable
service environment. We also intend to establish CRM and knowledge management systems, an
enterprise data warehouse, an enterprise information portal and a disaster recovery center by the
end of 2007. Billing Our billing system is designed to allow our sales and marketing staff some flexibility in
designing new pricing plans and service offerings. The subscription terms, deposit requirements
and service period for each subscriber are determined in accordance with the subscribers credit
rating. We currently provide joint billing services for subscribers who also subscribe to the long
distance and international telephony services of Dacom and Onse Telecom. The billing system is able to process discounted billing rates for different types of calls
and allows subscribers to pay for our services in several ways, including online payment or by
direct debit from their bank accounts. Each subscriber may also access a detailed breakdown of
services rendered on the Internet. Any bill which has not been paid for one month is actively
managed. Services are suspended if a bill remains unpaid for two months and the relevant service
agreement is terminated after four months of non-payment. After five months, the collection of any
unpaid bill is turned over to debt collection agencies. Competition Broadband In the high-speed broadband Internet access market, our main competition comes from KT. As of
April 30, 2005, KT had a 50.7% market share of total broadband subscribers in Korea. As KT has the
largest subscriber share of the broadband internet access market, the
MIC announced in June 2005 that it will designate KT as the dominant operator for this market. As a result, KT may become subject to
more stringent regulation and restrictions on its ability to change its broadband tariff structure. See Korean
Telecommunications Laws and RegulationsDesignation of a Dominant Operator. We have also faced competition from cable television network system operators and relay
operators which have been offering broadband Internet access at steep discounts in an effort to
diversify their revenue sources. However, the recent classification of broadband as a facilities
based service means that the cable television network system operators and the relay operators will
be required to obtain a license from the MIC to provide broadband services and will become subject
to more stringent regulations by the MIC. The MIC has granted the cable television network system
operators and relay operators a 27




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two-year period to comply with these requirements. In addition, we have entered into over 59
strategic alliances with cable television network system operators and relay operators for the
purposes of establishing mutually beneficial arrangements with respect to the provision of
broadband Internet access, marketing, sales and customer services. In general, we have agreed to
outsource to the cable television network system operators and relay operators our sales, marketing
and customer service functions in return for our use of their last-mile connection networks and our
acquisition of their broadband Internet subscriber base. For further detail on our relationship
with cable television network system operators, see Item 7.B. Related Party
TransactionsRelationships with Cable Television Network System Operators. Since late 2004, Dacom has been strengthening its retail broadband Internet access business by
using the network facilities of Powercomm, and launching LAN-based Internet services. In June
2005, the MIC decided to grant a NSP license to provide broadband services telecommunications to
Powercomm. The detailed terms of the license, including the conditions to Powercomm providing
retail broadband Internet access service, are expected to be finalized at the time the license is
granted which is expected to be in September 2005. 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 dominant telecommunications carrier, has a nationwide copper wire last
mile network and an extensive fiber optic backbone network throughout Korea and has significantly
greater capital resources than we do. KT currently provides ADSL services and is upgrading its
last-mile connections and related transmission facilities to provide DSL services to its
subscribers at speeds comparable to ours. KT is focusing its upgrading process and marketing
efforts in our targeted high density, high demand areas and is continuing to increase the marketing
of its long-reach VDSL services to single resident houses located among apartment complexes. As of
April 30, 2005, KT and hanarotelecom had market shares of approximately 82.6% (based on MIC data)
and 15.8% (based on MIC data), respectively, in the DSL services market in Korea. Cable Modem Thrunet has been our main competitor in the cable modem market. We, together with Thrunet and
Onse Telecom, utilize almost all of Powercomms cable networks for the provision of our cable modem
services. Our cable lease agreements with Powercomm are not exclusive and, accordingly, Powercomm
may lease the cable networks we are currently leasing to additional service providers. In
addition, we may be prevented from continuing our lease agreements with Powercomm on similar terms
if Dacom expands its business in the retail broadband Internet access market by using Powercomms
network. See Item 3.D. Risk FactorsRisks Related to the Telecommunications Industry and Our
BusinessThe inability to lease networks from third parties could materially affect our ability to
provide services. Dreamline provides services through smaller, localized cable networks owned by
cable television network system operators. Voice In the local telephony market, we and Dacom are the only competitors to the dominant operator,
KT. As of April 30, 2005, we and KT had a 6.2% and 93.8% market share, respectively, in the local
telephony market. Dacom was granted a local telephony license in July 2004 and commenced its
commercial local telephony services in January 2005. Fees charged by KT for local telephony
services are currently regulated by the MIC while we are only required to report our fees charged
for local telephony services to the MIC. The MIC will not allow KT to charge fees which it deems
to be unreasonable and against public interest. See Korean Telecommunications Laws and
RegulationsDesignation of a Dominant Operator. In addition, as the local common carrier, KT is
under a universal service obligation to provide its local telephony services to all subscribers
requesting service. We do not have a universal service obligation and are able to focus the
roll-out of our services to areas with high density populations and households with greater than
average disposable income. 28




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Our main competitors in the domestic and international long distance telephony markets are KT,
Onse Telecom and Dacom. According to the Korea Telecommunications Operators Association, as of
April 30, 2005, our share of the domestic long distance telephony market was 3.4% and KT had the
largest share with 86.7%, based on the number of lines for which subscribers have designated
certain operators as their preferred long distance operators. There are currently two types of VoIP services on offer in Korea. SSPs, which are mostly
cable television network system operators and Internet portal operators, provide VoIP services
which allow calls to be made but not received. VoIP services which allow calls to be made and
received (often referred to as two-way VoIP) could only be provided, until recently, by service
operators with a local telephony license. To date, we are the only significant provider of two-way
VoIP using a standard eight-digit telephone number. While KT has not been pursuing this market
actively, Dacom has announced its intention to provide two-way VoIP by November 2005. On October
1, 2004, the MIC announced a decree authorizing the provision of two-way VoIP service using
eleven-digit number with a dialing prefix of 070. There is currently no carrier which provides
eleven-digit two-way VoIP services, mainly due to the lack of two-way connection standards, but it
is expected that the eleven-digit two-way VoIP services will be made available by carriers during
2005 since the relevant companies have recently been actively cooperating amongst each other with
respect to the establishment of the two-way connection. We have applied for a license to provide
this type of VoIP service. Separately, the MIC adopted a set of new regulations on December 13,
2004, which allows licensed local telephony carriers, including ourselves, to provide local
telephony service by way of VoIP provided that certain technical and regulatory requirements are
met. These requirements include improving the voice quality to a certain level, charging VoIP
subscribers different usage rates between local telephony and domestic long distance services, and
providing free emergency call services. We have met these requirements, and have been providing
VoIP-based local telephony service in our HFC areas since December 22, 2004. In addition, because
this type of VoIP service is considered a local telephony service under the new regulations, our
VoIP-based local telephony service is currently eligible for fixed-line number portability. Leased Line Services In the leased line services market there are currently seven major service providers in Korea.
As of December 31, 2003, we believe our market share in terms of revenue was 4.2% while KT, with
57.9% in terms of revenue, had the largest share of the leased line market, followed by Dacom with
13.2% and Powercomm with 8.3%. Competition in this market is primarily based on price, network
coverage and quality. In order to provide leased line services, a service provider must have a
license to provide network services. Other In the IDC services market, there are currently three major IDC service providers in Korea:
KT, Korea Internet Data Center and Hanaro (N-GENE). 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. Licenses NSP License Under the Korean Telecommunications Business Law (Law No. 4394 of August 10, 1991, as
amended), the telecommunications services that Network Service Providers, which are
facilities-based telecommunications service providers (referred to as NSPs) 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 29




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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. Additionally, in October 2004, we obtained a perpetual
license to provide broadband services as a result of recent amendments to the enforcement
regulations of the Telecommunications Business Law. 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. Only the NSPs whose total broadband, voice and leased line services
revenue amount for the preceding year was more than Won 30.0 billion (provided that
broadband revenue will only be counted towards this threshold from 2005 onwards) 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
broadband, 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
the case of a dominant operator, the amount is 0.75% of such revenue. The net
profit which the MIC will use in its determination of the amount of our contribution
is calculated using the MIC accounting standards which differs in certain respects
from Korean GAAP.
    
    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 report to the MIC, the general terms (including the service
fee of each service) together with supporting documentation. We are not required to pay any fees to the Government 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 (referred to as an SSP).
This registration is for an indefinite term. As a SSP, we are permitted to provide the following
services:  
    
    By utilizing our own switching facilities and other telecommunications facilities
owned by NSPs, resell or provide the same types of telecommunications services as
those of domestic NSPs.
    
    By leasing telecommunications facilities owned by other NSPs without its own
switching facilities, resell the same types of telecommunications services as those of
domestic NSPs.
    
    By utilizing our own facilities, provide telecommunications services within a
specific building. Our registration as a SSP requires that, prior to the commencement of commercial operations,
we submit to the MIC detailed information on the location of our principal facilities and the
structure of our network. We are not required to pay any fees to the Government in connection with our registration as a
SSP. 30




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Cable TV Network Operator License Pursuant to the Integrated Cable Broadcasting Law (which was subsequently replaced by the
Broadcasting Law), we were designated by the MIC in June 1999 as a network operator in the cable
television industry. As a network operator, we are permitted to install, operate and lease network
facilities to cable television network system operators and relay operators in 57 regions
throughout Korea. No fees are required to be paid to the Government 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
(Law No. 4393 of August 10, 1991, as amended) and obtain fitness confirmation from the MIC prior
to providing network facilities to cable television network system operators under Article 80 of
the Broadcasting Law. We have obtained fitness confirmations from the MIC prior to each provision
of these network facilities. 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 transmission. In August 1999, we obtained the
B-WLL frequency of 26 GHz for 360 MHz down- and 150 MHz up-stream transmission. These rights are
for an indefinite term and no fees are required to be paid to the Government in connection with
such rights. In February 2002, the MIC announced its plans to allocate 100 MHz of the WLL
frequency to WiBro services after June 2005. International Common Carrier Authorization in the United States. In July 2000, hanarotelecom
America, our U.S. subsidiary, obtained a Section 214 authorization from the U.S. Federal
Communications Commission. This authorization authorizes hanarotelecom America to operate as a
facilities-based international common carrier and to resell the international services of
authorized U.S. common carriers. On December 15, 2004, we filed an application for the liquidation
of hanarotelecom America with the United States state and federal authorities. Upon liquidation,
we will cease to have this authorization and our international common carrier services will be
provided through DVS with which we have entered into an alliance agreement. Interconnection We have entered into interconnection agreements that allow for interconnection of our
telecommunication facilities and those of other telecommunications 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 Business Law, a telecommunication service provider is required to enter into
interconnection arrangements with any other telecommunications service provider that requests
interconnection. In the event a dispute arises between interconnecting parties, the Communications
Commission is to act as the arbitrator. 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 mobile
service operators (such as SK Telecom, KT Freetel Co., Ltd. and LG Telecom Co., Ltd.), of carrying
a call. The regulated operators are required to calculate such costs every other year. The MIC
determines the interconnection rate after the MIC reviews cost price of KT and mobile phone service
providers every other year. In July 2004, the MIC determined, for the 2004 to 2005 period, that
the fixed line interconnection rate be increased from Won 11.3 to Won 16.2 per 60 seconds and no
interconnection fee be charged for a certain portion of the land to land telephone calls switched
between the networks of hanarotelecom and KT. 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: 31




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Type
    
    Name of ProvidersLocal
    
    KT; DacomDomestic long distance
    
    KT; Dacom; Onse Telecom; SK Telink Inc.International
    
    KT; Dacom; Onse Telecom; SK TelinkCellular
    
    SK TelecomPersonal communication service providers
    
    KT Freetel Co., Ltd.; LG Telecom Co., Ltd.
 Korean Telecommunications Laws and Regulations Overview Koreas telecommunications industry is subject to comprehensive regulations by the MIC
pursuant to, among others, provisions of the Telecommunications Basic Law, the Telecommunications
Business Law, and the Radiowave Act (Law No. 6197 of January 21 2000, as amended) (collectively,
and including subordinate regulations promulgated thereunder, the Telecommunications Laws). In
addition to the Telecommunications Laws, industry participants are subject to other
telecommunications regulations and regulations 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, user
protection and interconnection and facilities sharing between telecommunications service providers.
In addition, the MIC is in charge of and responsible for informatization, information and
communications industry, telecommunications services, radio and broadcasting, 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: NSPs, SSPs
and Value-added Service Providers (referred to as VSPs). We are classified as an NSP and also
registered as an SSP. An NSP provides specified types of telecommunications services as stipulated
under the Telecommunications Business Law (Network Services) and 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, long distance and international telephony services, leased
line services (domestic and international), and Internet access services. These licenses are for
indefinite terms. Network services to be provided by an NSP include local, long distance and international
telephone services, subscribed telegraph services, leased line services, services through allocated
radio frequencies (including cellular communications services, paging services, PCS services, IMT-2000 services, and trunked radio system services), Internet access services, and such other
services as designated by the MIC (including certain VoIP services). 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 as
follows:  
    
    type 1 reseller licenses for entities that have their own switching facilities and
resell or provide the Network Services;
    
    type 2 reseller licenses for entities that do not have their own switching
facilities and resell the Network Services; and
    
    intra-building telecommunications service provider licenses for entities that
provide telecommunications services within a specific building area through their own
facilities. 32




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Ownership Restrictions Under the current Telecommunications Basic Law and the Telecommunications Business Law, an
NSP, such as hanarotelecom, must be an entity incorporated in Korea (other than the Government and
any municipal government) 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 or a foreigner may not own more than 49.0% of the aggregate
number of the entitys issued and outstanding voting shares, including
stock-equivalents and investment securities having voting powers such as depositary
receipts. For this purpose, an entity whose voting shares are held by a foreigner or
a foreign government that, together with specially-related parties, is the largest
shareholder and holds 15.0% or more of the total number of voting shares issued and
outstanding, is also deemed a foreigner; provided, that if such entity owned by a
foreigner or a foreign government holds less than 1.0% 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 3/1000th of the purchase price of the
share per day (or up to Won 0.1 billion for cases that do not relate to shareholding);
and
    
    under the recent amendment of the Telecommunications Business Law, if an NSP that
is subject to mandatory interconnection requirement (currently, KT and SK Telecom),
together with specially related person(s), acquire shares in another NSP, which is
subject to a mandatory interconnection requirement, in excess of 5%, the acquiring NSP
cannot exercise the voting rights with respect to the shares exceeding such
limitation, subject to certain exceptions. Under the recent amendment of the Telecommunications Business Law, the MIC may review whether
any investment in, or change in the control or business management of, an NSP by means of any of
the following transactions impairs national security, public interest, or social order:  
    
    owning 15% or more of total outstanding shares of the NSP in concert with
specially-related person(s);
    
    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 important business management matters, such as the appointment of
representative director or officers of the NSP, the transfer of NSPs business or
engaging in a new Network Service by the NSP; or
    
    an agreement by shareholders of the NSP (that are not the largest shareholder) to
exercise their voting rights in concert so that there is a de facto change in the
management of the NSP. If any of the above events occur to the NSP, the NSP or the shareholder of the NSP is required to
report to the MIC within seven days of the occurrence of such event. In its implementing regulations, the MIC designated KT and SK Telecom (both currently
designated as dominant operators) as the carriers subject to the foregoing rules and the MIC will
set up a Public Interest Review Committee to implement the foregoing. If the MIC decides in the
negative, it may 33




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order an amendment or suspension of the relevant contract, suspension of the voting rights, or
the sale of shares. The MIC may also impose on a non-compliant violator a mandatory performance
fee within 3/1000th of the purchase price of the share per day (or up to Won 0.1 billion for cases
that do not relate to shareholding). Authority of the MIC and Communications Commission The MIC has the authority to require NSPs, as a condition to granting the license, to
contribute towards the Informatization Promotion Fund, a government-managed fund for national
research and development of telecommunications technology and related projects, pursuant to the
License Application Guidelines, a notification issued by the MIC. Currently, we are required to
contribute 0.5% of the total annual service revenues derived from our voice and leased line and
broadband services in the event that we have net income for the preceding year. The net profit
which the MIC will use in its determination of the amount of our contribution is calculated using
the MIC accounting standards which differs in certain respects from Korean GAAP. The MIC may revoke an NSPs license. The grounds for revocation include fraud in obtaining
the license, failure to perform the conditions imposed by the MIC upon issuance of the NSP license,
failure to comply with any corrective order issued by the MIC in connection with non-compliance
with foreign shareholding restrictions, failure to commence business within the time period
designated by the MIC, failure to abide by the standard terms and conditions for the services
either reported to or approved by the MIC, and failure to comply with the Telecommunications Laws,
the Act on Information Communication Network Promotion and Information Protection, the
Informatization Promotion Law or any order issued under such laws. If an NSP wants to cease its
business (or any part of it) or dissolve, such NSP must obtain MIC approval. In addition, the MIC
may impose fines against such telecommunication service provider instead of suspending its license,
subject to certain exceptions, up to 3.0% of the entitys average sales revenues generated from the
service in violation of such regulation during the three years preceding such violation. The Communications Commission also has the authority to monitor unfair business practices as
specified in the Telecommunications Business Law by telecommunication service providers in
accordance with the Telecommunications Business Law. If an NSP or any telecommunication service
provider engages in such activities, the Communications Commission may order such telecommunication
service provider to take certain actions, including (1) separating the service providing
organization, (2) changing its internal accounting regulations, (3) disclosing certain information
regarding the services, (4) executing, performing or amending an agreement between
telecommunication service providers, (5) changing its articles of incorporation, or the standard
terms and conditions of services, (6) discontinue violation of the law, (7) making a public
announcement of the fact that a corrective order was issued, (8) measures necessary for the
rectification of any violation, such as removal of telecommunications facilities which gave rise to
the violation, and (9) other actions specified in the Presidential Enforcement Decree. In
addition, if the Communications Commission finds a service provider has conducted unfair business
activities, including the implementation of a pricing structure that restricts fair competition or
that is against the interests of service users, it may order the service provider to take
corrective measures or impose an administrative fine of up to 3.0% of the service providers
average annual revenues for the three years preceding the violation. Under the Telecommunications Business Law, telecommunications service providers may request
other service providers to interconnect to their networks for the purposes of offering other
services. Telecommunications service providers may not, without any justifiable reason, refuse to
enter into such interconnection agreement with other telecommunications service providers
requesting for such interconnection. In the event an agreement between the service providers is
not reached within 90 days, either service provider becomes entitled to file an application for
mediation before the Communications Commission. We have entered into interconnection arrangements
with most major service providers in Korea, including KT, Dacom, Onse Telecom and other NSPs, and
expect that we will enter into more interconnection agreements as additional licenses for
telecommunications services are issued. 34




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Designation of a Dominant Operator As an NSP, we must report to the MIC our standard terms and conditions of service containing,
among others, 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 prior approval
from the MIC with respect to its proposed standard terms and conditions of service, including the
rate, 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 that require MIC approval.
Other than the market share and the market influence of the relevant NSP, the MIC may consider
such other factors as it may deem appropriate in making these designations. On June 8, 2004, the
MIC designated the local telephone service of KT and the mobile service of SK Telecom as requiring
prior 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 standard terms
and conditions, including rates, if it deems the terms to be unreasonable and against public
interest. In
June 2005, the MIC announced that it will designate KT as the
dominant operator in the broadband Internet access market, as KT had a 50.5%
market share as of April 30, 2005. 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 a 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 band for 20 MHz downstream and upstream transmission
and the frequency of 26 GHz band for 360 MHz downstream and 150 MHz upstream transmission. Bundling of Services The Presidential Enforcement Decree of the Telecommunication Business Law currently prohibits
any telecommunications service provider from offering bundled sales of telecommunication services
or products that the MIC determines to be adverse to consumer interests. In making this
determination, the MIC may weigh the advantages of cost-savings or increased convenience for the
consumers as a result of bundling against the disadvantages of any anti-competitive effects of
bundling. According to the Decree, commencing in March 2007, only NSPs (including ourselves), but
not non-NSP service providers, will be subject to such review by the MIC and potential bundling
prohibitions pursuant to this Decree. Other Laws Companies that operate network facilities for cable TV transmission are required to register
with the MIC under the Broadcasting Act (Law No. 6139 of January 12, 2000, as amended). We are
registered as a service provider under such statute. However, as a NSP, we are not currently
permitted to provide broadcasting services under certain other laws and regulations, including the
Broadcasting Act. 35




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The Foreign Exchange Transaction Law, the Foreign Investment Promotion Law and their
regulations require companies, such as hanarotelecom, to obtain approval from, or file a report
with, a foreign exchange authority in connection with any foreign direct investment. The relevant
governmental authority may be the Ministry of Finance and Economy, or 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. Monopoly Regulation and Fair Trade 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 FTC 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. In the case of abusive business practices by a market-dominating business entity, the FTC 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 FTC
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 0.2 billion or its
representative(s) may receive imprisonment of up to three years, although imprisonment is rarely,
if ever, imposed. Under the Korean Fair Trade Law which was recently amended effective from April 1, 2005, a
service provider that is found guilty of horizontal collusion with other providers may be subject
to fines of up to 10% of the total revenues derived from the collusion. The Korean Fair Trade Law
provisions applicable to the current FTC investigation that we are subject to are the pre-amendment
provisions that provide for fines of up to 5% of the total revenues derived from the collusion. Intellectual property As of May 31, 2005, we held 123 registered trademarks, 89 program copyrights, 15 registered
patents and two registered industrial design rights in Korea. As of May 31, 2005, we also had 31
trademark applications pending, 175 patent applications (which includes 17 international
applications under the Patent Co-operation Treaty) 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. 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 FTC 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 (1) 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 (2) shall not provide payment guarantees with respect to loans
extended by certain Korean financial institutions for its domestic affiliates. The following table lists information concerning the significant subsidiaries and affiliates
of hanarotelecom: 36




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Percentage of Ownershipand Voting Interest held byJurisdiction of
    
    hanarotelecom as ofName
    
    Incorporation
    
    May 31, 2005Hanaro Realty Development & Management Co., Ltd
    
    Korea
    
    
    99.99
    %Hanaro T&I
    
    Korea
    
    
    99.99Hanaro Dream(1)
    
    Korea
    
    
    57.02Thrunet(2)
    
    Korea
    
    
    __
    (2)
 
 (1)
    
    In July 2004, we purchased 57.02% of Hanaro Dreams total issued and outstanding shares from
Dreamline and other major shareholders of Hanaro Dream.(2)
    
    On June 3, 2005, we acquired 96.22% of Thrunets total issued and outstanding shares. We sold all of our shareholdings in two of our previous affiliates, Hanaro WEB(n)TV Co.,
Ltd. and Mediaholdings Co., Ltd. to the Joong-Ang MSO in March 2005. In addition, in December
2004, we completed the liquidation of our previous affiliate, hanarotelecom America. D. Property, Plants and Equipment Facilities Our principal fixed assets 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 Busan,
Taegu, Kwang-ju and Taejeon, to manage the networks in those regions. The area in square meters of
such centers is approximately 5,900, 6,900, 8,400 and 4,300, respectively. Those centers are
equipped with exchange and transmission equipments. We also have 36 exchange offices equipped with exchange equipments in 20 cities including
Seoul, Busan, Taegu, Taejeon and Kwang-ju. We own 33 of those offices and lease the remaining
three offices. We also have 45 transmission offices equipped with transmission equipments in 23
cities including Seoul, Busan, Taegu, Taejeon and Kwang-ju. We own 30 of those offices and lease
the remaining 15 offices. We lease our head office 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 March 31, 2005
(excluding construction in progress), transmission facilities and telecommunication equipment
represented 79.3%, buildings and real property represented 19.2% and other assets represented 0.5%.
As of March 31, 2005, our fiber optic network consisted of 22,426 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 Our 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 high-speed broadband Internet access services and our telephony services are currently
provided over our fiber optic backbone network and last-mile connections consisting of 17,406
kilometers 37




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of owned and 5,020 kilometers of leased fiber optic cable. Our backbone network is a
WDM-based ring type backbone with duplicate routers to ensure high system reliability. We utilize
advanced switches and other technologies in our backbone network to ensure high quality and fast
transmission. Our system utilizes technologies that offer the following advantages over
traditional networks: Deployment of Gigabit IP Network over WDM Backbone Systems. Our data network utilizes Gigabit
IP routers over 800 Gbps and 40 Gbps wavelength division multiplex (often referred to as WDM)
systems, which offer greater transmission speed capability than traditional backbone network. The
maximum transmission speed currently is 10 Gbps. We also deploy ATM switches which aggregate ADSL
and dedicated access lines. CCS7 Signaling Method. Our voice network utilizes the CCS7 signaling method, which allows us
to offer advanced value-added services, such as fixed-line number portability, and to process our
calls more efficiently. V5.2 Protocol to Increase Voice Network Efficiency. We were the first in Korea to provide
services using the V5.2 protocol. KT is using this protocol in a small number of apartment
complexes. 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 equipment based on a number of technologies developed by
third party vendors, including Lucent Technologies, Cisco Systems, Alcatel and NEC Corporation. We
believe that telecommunications network technologies have been standardized and are generally
compatible with each other, so that equipment and hardware provided by different vendors can be
used within an integrated network and we are not dependent on any one particular vendor for the
procurement of important network equipment. We have our own POP facilities in Palo Alto and Los Angeles in the United States and in
London, United Kingdom. Our backbone network has direct links of 8 Gbps to these POP facilities in
the United States and the United Kingdom 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 the right to use the following international leased lines on various submarine cables
connecting the United States, Asia and certain parts of Europe until the end of the economically
useful life of such cables. Bandwidth CapacityConnecting Points
    
    Providers
    
    Quantity
    
    Acquisition Cost(billions of Won ormillions of U.S. dollars)Korea  US
    
    Iljin C2C Ltd.; Onse Telecom; Asia
Global Crossing; Dacom Crossing;
Flag Telecom; Dacom
    
    29 x STM-1
5 x STM-4
    
    $
    36.7Korea  Japan
    
    Iljin C2C; Teleglobe Dacom;
Teleglobe Onse Telecom
    
    11 x STM-1
1 x E-1
    
    $
    17.2Korea  Hong Kong
    
    Onse Telecom
    
    19,158km
    
    $
    1.2Japan  US
    
    Teleglobe; Metromedia Fiber Network
    
    3 x STM-1
    
    $
    1.3Japan  US
    
    Cable Network
    
    2 x STM-1
    
    $
    5.8Korea  Vietnam
    
    Dacom
    
    2 x Half E-1
    
    Won 0.2Korea  Belgium
    
    Dacom
    
    2 x Half E-1
    
    Won 0.2Korea  Singapore
    
    Iljin C2C
    
    1 x Half STM-1
    
    $
    0.4Korea  China
    
    Enterprise Networks
    
    1 x Half STM-1
    
    $
    1.0US  UK
    
    France Telecom; British Telecom;
Onse Telecom; FLAG Telecom
    
    4 x STM-1
1 x DS-3
    
    $
    0.9
 
 (1)
    
    Each STM-1 represents a bandwidth capacity of 155 Mbps.(2)
    
    Each E-1 represents a bandwidth capacity of 2 Mbps. 38




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(3)
    
    Each STM-4 represents a bandwidth capacity of 622 Mbps. In addition, we have agreements with foreign ISPs, such as Cable & Wireless IDC, Sprint
Communications Co., L.P., AboveNet Communications, Inc., AT&T, MCI WorldCom Korea Ltd., Aleron
Broadband Services, LLC and Teleglobe, for global Internet Protocol transit services. Our backbone network has been deployed in 83 cities and 51 districts, including Seoul, Busan,
Inchon, Taegu and Ulsan. Each of the ten local loops is interconnected by 800 Gbps and 40 Gbps WDM
backbone networks. We have expanded our voice network to 42 cities for PSTN and VoIP services. PSTN is in
service in 33 cities and districts, and VoIP in 41 cities and one district. After taking into
account the overlapping coverage areas between the two services, our voice services are available
in 41 cities and one district in total. This is translated into 28 out of the total of 144 local
access and transport areas, or LATA, nationwide covered by us as of late May 2005. Four LATAs for
VoIP were newly added on June 1, 2005. Fiber to the Office and the Curb We connect subscribers in large commercial buildings and apartment complexes with over 150
units to our backbone network through fiber optic connections directly to the premises. These
subscribers have three basic options in the mode of service to be used to secure access to our data
network. DSL. Subscribers in large apartment complexes and buildings can receive our services by
installing ADSL or VDSL 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 residential households and
small apartment buildings located within a one kilometer radius of certain of these large buildings
can also receive DSL 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. Ethernet (LAN). In August 2001, we introduced the e-Valley service, which connect
subscribers to a remote router in each apartment complex via a LAN cable instead of copper wire.
The remote router is, in turn, connected to our backbone network through fiber optic cable. Our
fiber optic LAN service operates at a maximum speed of 100 Mbps. As of April 30, 2005, we were
providing e-Valley service to 2,230 apartment complexes. 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 10 Gbps. Hybrid Fiber Coaxial We currently provide our cable modem high-speed Internet access through hybrid fiber coaxial
connections in 118 service areas. These HFC connection services are provided over our own cable
network in 46 service areas, Powercomms cable network in 37 service areas and other cable
television network system operators cable networks in 35 areas. The approximate number of homes
within these areas is 8.6 million. We have agreements with 38 cable television network system operators in 29 service areas as of
March 31, 2005. Each of these cable television network system operators is responsible for
maintaining subscriber lines and subscriber relationships within its service area. The cable
television network system operators in the service areas in which we own a network also provide
cable television services to subscribers. Most of the agreements are for three to five year terms
that are automatically renewed absent termination by either party. 39




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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
other telecommunications companies. We currently provide services using HFC lines at a maximum
speed of ten Mbps downstream and 600700 Kbps upstream. As of April 30, 2005, our HFC cable
network covered 8,593,761 households and 1,456,598 subscribers were provided with our services
through HFC connections. As of December 31, 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 using
BWLL and WLAN technologies. WLAN connection equipment and infrastructure are easier and quicker to
install than wire-line connections to our backbone network. Services using B-WLL are transmitted at a maximum speed of 8 Mbps. As of December 31, 2004,
our network was connected to 1,007 buildings through B-WLL connections. Our WLAN services allow
Internet access through mobile devices equipped with a LAN card for users within the coverage of
our access points. Internet access services using WLAN are transmitted at a maximum speed of 11
Mbps. We currently provide WLAN services in approximately 309 access point areas across Korea,
including high traffic areas such as hotels, subway stations, shopping malls, colleges and fast
food stores. 
 Item 5. Operating and Financial Review and Prospects. The following discussion is based on information derived from our consolidated financial
statements. Our consolidated financial statements have been prepared in accordance with Korean
GAAP, which differs in certain significant respects from U.S. GAAP. Our consolidated financial
statements for the years ended December 31, 2002, 2003 and 2004 have been reconciled to U.S. GAAP
(see note 26 to our consolidated financial statements included elsewhere in this Annual Report).
The following discussion also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these forward
looking statements as a result of certain factors, including those set forth under Item 3.D. Risk
Factors and elsewhere in this document. You should read the following discussion together with
our audited consolidated financial statements and the related notes for the years ended December
31, 2002, 2003 and 2004, included elsewhere in this Annual Report. A. Operating Results Overview We offer high-speed broadband Internet access, voice, leased line and IDC services in Korea.
We are the second largest provider of broadband Internet access in Korea and our network covers
approximately 78.8% of households in Korea as of April 30, 2005. Our voice service comprises
local, domestic long distance, international long distance and VoIP services. The following table provides revenue data for the several segments of our operations: Year Ended December 31,2003
    
    
    2004(billions of Won)Revenue:Broadband
    
    Won
    
    
    982.7
    
    
    Won
    
    
    985.4Voice
    
    
    
    
    
    
    249.0
    
    
    
    
    
    
    
    291.2Leased Line
    
    
    
    
    
    
    38.0
    
    
    
    
    
    
    
    39.8Others
    
    
    
    
    
    
    113.8
    
    
    
    
    
    
    
    133.2Total
    
    Won
    
    
    1,383.5
    
    
    Won
    
    
    1,449.6
 Our broadband Internet access business has been our largest business segment and has
contributed the vast majority of our operating income to date. We had a 22.7% share of this market
as of April 30, 2005. KT held a 50.5% market share as of the same date. If completed, our
acquisition of Thrunet would enhance our market position. We provide broadband Internet access
through DSL services utilizing our 40




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fiber optic network, through cable modem access technology, and through wireless access via
B-WLL and WLAN. As of April 30, 2005, we had a 6.2% share of the local telephony market in Korea
and KT, the dominant operator in the local telephony market, had a 93.8% market share.
Incentivized by a favorable regulatory environment, we focused our attention on increasing voice
subscribers and expanding voice service areas in 2004. The principal regulatory change was the
Governments decision, with nationwide effect in August 2004, to allow for fixed-line number
portability. Our extensive advertising campaign that was designed to take advantage of this policy
change has helped us increase our customer base of voice lines by 25.2% in the nine-month period
from August 2004 through April 2005. In addition, following our receipt of appropriate licensing
approvals in July 2004 we expanded our voice service offering which had previously been limited to
local telephony by beginning to include domestic and international long-distance service. The competitive environment in the industry in which we operate has recently intensified and
may continue to intensify in the future. As a result, our operating income may be adversely
affected. We expect that Thrunets operations are likely to have been similarly affected by
heightened competition. Accordingly, there can be no assurance that our improved net income
results for the year ended December 31, 2004 will continue. Significant Factors Affecting Our Results of Operations Factors Directly Affecting Revenues Our service revenues are driven primarily by subscriber growth and retention, usage and prices
charged for the services we offer. Subscriber Growth Broadband. During our first several years of operation from 1999 to 2002, our results in the
broadband Internet access area were driven by rapid growth in number of subscribers for these
services. The compound average growth rate in broadband subscribers during this period was 204%.
Since that time, our rate of broadband subscriber growth has slowed. The broadband penetration
rate in Korea is among the highest in the world; according to data derived from the MIC, the
broadband penetration rate (as a percentage of Korean households with broadband Internet access)
was 77% as of December 31, 2004. The relatively high level of penetration suggests a more moderate
growth trend going forward. Our revenue growth in this area in the future will depend on our
successful integration with Thrunet, on retaining existing customers and on increasing the usage of
our services through adding or improving value-added services. Voice. Voice subscriber growth has increased significantly in 2004 due to the regulatory
change permitting fixed-line number portability and our consequent marketing efforts. Although the
continued rollout of our marketing campaign regarding fixed-line number portability will likely
result in further increases in our voice subscriber base, this effect will eventually lessen. We
believe another potential source of new voice service subscribers may become available if we
successfully integrate Thrunets operations, as we would be provided with an opportunity to offer
bundled broadband Internet access and voice services to Thrunet customers. Our recent promotion of
fixed-line number portability and VoIP service has also begun to contribute to revenue growth.
While the high percentage increase in VoIP lines is over a small base, we believe that this will
continue to be a source of revenue growth. Revenue per Subscriber Our revenue per subscriber has declined over the past several years and during 2004. The
primary factors contributing to this trend as it relates to our broadband Internet access services
are (1) revenue levels among long-term subscribers declining slightly due to the impact of
discounts provided in connection with such customers shifting into longer term (one year or longer)
contracts and (2) slower increases in numbers of subscribers yielding fewer installation and
connection charges than in years of 41




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rapidly increasing subscriber bases. The decline in revenue per subscriber for voice services
is due to the rapid growth in subscribers which has led to a change in subscriber mix towards
slightly lower-use subscribers. Competition and Pricing Since our inception, we have been operating in a competitive environment featuring a dominant
operator, KT, with a majority or significantly greater market share in both broadband Internet
access (50.5% versus our 22.7% share as of April 30, 2005, according to the MIC) and local
telephony (93.8% versus our 6.2% shares as of April 30, 2005) markets. KT has significantly
greater financial resources than we do, and has been aggressively upgrading its broadband offerings
in the past year. In the broadband Internet access market, in addition to KT, we face competition
from Onse Telecom Co., Ltd. and a variety of cable service operators. Since late 2004, Dacom has
been strengthening its retail broadband Internet access business by using the network facilities of
Powercomm, and launching LAN-based Internet services. As a result, pricing competition in our
market is likely to continue to be intense and our ability to implement price increases or to avoid
price decreases may be limited. In the local telephony market, although KT is constrained in its
pricing flexibility by its dominant operator status (see Significant Factors Affecting Our
Results of OperationsExtensive Governmental Regulation), we are effectively constrained in our
ability to increase prices by KTs dominant position. Customer Churn Managing our customer churn is a significant business objective. Customer churn is a measure
of the number of customers who stop using our services. We continue to focus on improving our
customer services and enhancing and expanding our service offerings to existing customers in an
effort to manage our customer churn rate. We have implemented quality improvements such as
increasing broadband Internet access speed, promoted conversion of non-contract subscribers to
contract subscribers and are developing differential customer management programs such as customer
relationship management, commonly referred to as CRM, a data analysis program designed to capture
more customer usage data and enable us to tailor packages, features and promotions to customers
preferences. We have recently succeeded in reducing our average monthly churn rate of our
broadband Internet access subscribers from 2.2% for 2003 to 1.7% for 2004. Extensive Governmental Regulation The Government has played a very active role in the development of the telecommunications
industry in Korea, primarily through regulation by the MIC. The MIC is responsible for licensing
(including granting licenses to utilize new technologies), competitive practices, interconnection
rates, tariff regulation, technological choices and levels of foreign investment, among others. Among the centerpieces of the MICs regulatory regime is its monitoring and control of pricing
policies. KT has been designated as the dominant operator of local telephony services in Korea.
The MIC has the authority to review and reject pricing proposals by the dominant operator. Thus,
the potential market power of KT, at least as it relates to pricing,
is restrained. In June 2005, the MIC announced that it will designate KT as the dominant operator in the broadband Internet access market, as
KT had a 50.5% market share as of April 30, 2005. Although our market share in this market would grow significantly
if we are successful in completing our acquisition of Thrunet (and retain its subscribers), our
combined market share would still be significantly below that of KT and below the majority level
and thus, we believe that we are unlikely to be considered a dominant operator. Further,
although the acquisition of Thrunet would give us a large percentage of the cable modem segment of
the broadband Internet access market, we believe it is unlikely that the MIC would choose to
segment the market in this way and deem us to be the dominant operator in this segment. The nature
and content of new regulations will continue to affect our operations. See also Item 4.B.
Business OverviewKorean Telecommunications Laws and Regulations, Item 4.B. Business
OverviewRecent Acquisitions and New Services and Item 3.D. Risk FactorsRisks Related to the
Telecommunication 42




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Industry and the CompanyThe Government has had, and continues to have, significant control
and influence over the development of the telecommunications industry in Korea. Rapid Technological Change The telecommunications industry is subject to rapid and ongoing technological change. Due to
the rapidly changing technological capabilities necessary to remain competitive, we may be required
to incur substantial capital expenditure to meet these requirements. The convergence of various
technologies competing to provide similar or related services may also dictate technological change
and attendant expenditure (if, for example, one technology offers a combination of benefits that
prove more attractive to subscribers than our then-current technology). See Item 3.D. Risk
FactorsRisks Related to the Telecommunications Industry and Our BusinessThe telecommunication
industry is capital intensive and subject to rapid changes in technology. Critical Accounting Policies and Issues Our financial statements are prepared in accordance with Korean GAAP. 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 are among our critical accounting policies: 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. 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 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. We changed the useful lives of certain types of tangible assets, effective from January 1,
2004, to more accurately reflect our own experience as well as the rapidity of technological change
in the telecommunications industry. These changes increased our depreciation expense by Won 7.9
million for 2004. The changes in estimated useful lives were: 43




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Previous useful lives

    
    Revised useful livesBuildings and structures
    
    50
    years
    
    40
    yearsMachinery (duct lines)
    
    8
    years
    
    15
    yearsMachinery (terminal equipment)
    
    8
    years
    
    6
    yearsVehicles and other
    
    58
    years
    
    4
    years
 In addition, after a review by management of equipment values in the fourth quarter of
2003, we determined that certain equipment had become obsolete or had significantly deteriorated
and wrote off Won 61.3 billion of such equipment in December 2003. As a result of a further review
by management, we have written off Won 20.7 billion of equipment in 2004. Investments in non-listed equity securities and use of the equity method of accounting 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 not 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 our
estimates, valuation losses previously determined to be recoverable may need to be charged as a
valuation loss in current operations. We utilize the equity method of accounting in circumstances in which we are able to exercise
significant influence over the investees, in which case our share of the investees net income or
loss is reflected in our current statements of operations. Typically, we utilize the equity method
of accounting in circumstances in which we hold 20% or more of the voting equity of an entity. As
our interest in Dreamline fell to 14.2% in January 2004, we determined that it was no longer
appropriate to utilize the equity method in respect of Dreamline and we reclassified our investment
as a long term (non-listed) investment security. As described above, further operational losses at
Dreamline could result in valuation losses in the long term investment securities category. Impairment of goodwill We record the excess of acquisition cost over the fair value of net identifiable assets
acquired that are related to entities being consolidated as goodwill, which is amortized on a
straight-line base over its estimated economic useful life. We review goodwill for impairment whenever events or changes in circumstance indicate that the
carrying amount may not be recoverable. In addition, we evaluate our goodwill for impairment each
year as part of our annual forecasting process. An impairment loss will be recognized when the
carrying amount of goodwill exceeds estimated discounted future cash flows expected from the
entities that are being consolidated and its eventual disposition are less than its carrying
amount. 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 fees, the recognition of
detachable stock warrants and the deferred tax effects of these differences. In addition, under
U.S. GAAP, certain subsidiaries would be accounted for under the equity method and special purpose
entities would be consolidated. In 2003, we recorded a net loss of Won 166.0 billion under U.S. GAAP compared to a net loss of
Won 161.3 billion under Korean GAAP, primarily because of the different accounting treatment of
detachable stock warrants and the different accounting treatment of the interest capitalization and
other GAAP differences carried over from prior years. In 2004, we recorded a net income of Won
16.7 billion 44




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under U.S. GAAP compared to a net income of Won 13.0 billion under Korean GAAP, primarily
because of the different accounting treatment of valuation allowance against deferred tax assets
and deferred tax effect and different accounting treatment of interest capitalization. Shareholders equity under U.S. GAAP is higher than that under Korean GAAP by Won 25.4 billion
and Won 24.6 billion at December 31, 2003 and 2004, respectively, primarily as a result of:   the difference in the treatment of licensing costs; the difference in the treatment of interest capitalization; the difference in the treatment of affiliates and special-purpose entity; the difference in the treatment of loans to employees; the difference in the treatment of development cost; and the difference in the treatment of goodwill. Results of Operations Year ended December 31, 2004 compared to year ended December 31, 2003 Operating Revenues Our total revenue for the year ended December 31, 2004 was Won 1,449.6 billion, an increase of
Won 66.1 billion, compared to total revenue of Won 1,383.5 billion in 2003. The increase in total
revenue in 2004 was primarily due to a increase in revenue of Won 42.2 billion from our voice
services from Won 249.0 billion in 2003 to Won 291.2 billion in 2004. The primary reason for the
increase in voice service revenues was the net addition of 411,892 subscribers, compared to the
level as of December 31, 2003 (including additions of 149,733 during the third quarter of 2004).
This was due to an extensive marketing campaign targeted at Seoul and Busan in the third quarter of
2004 seeking to capitalize on fixed-line number portability. VoIP also contributed to the growth
of revenues from voice services. This increase resulted from (1) the improved quality of VoIP
vis-a-vis standard Public Switched Telephone Network, commonly referred to as PSTN, telephony and
(2) a marketing campaign aimed at promoting this new service. The significant percentage growth,
however, represents an increase over a very small base. Broadband revenues for 2004 increased slightly by Won 2.7 billion compared to Won 982.7
billion in 2003. The slight increase is primarily attributable to an increase in the number of
active subscribers. In effect we recorded an increase of 23,171 subscribers as of December 31,
2004 compared to the corresponding date in 2003 as we deactivated approximately 240,000 inactive
subscribers in the fourth quarter of 2003. As noted elsewhere, we have focused on the retention of
customers (reflected in lower churn rates) and have been able to maintain a relatively stable cash
flow from our broadband Internet access operations. Other revenues for 2004 increased to Won 133.2 billion compared to Won 113.8 billion for 2003
primarily due to increased sales volume of VoIP services and PABX services. Operating Expenses Our total operating expenses for the year ended December 31, 2004 was Won 1,335.6 billion, an
increase of Won 22.8 billion, compared to total operating expenses of Won 1,312.8 billion in 2003.
The increase in operating expenses in 2004 was primarily due to increases of Won 13.8 billion in
depreciation and amortization, Won 12.1 billion in advertising expenses and Won 10.9 billion in
interconnection charges. The increase in depreciation and amortization was caused by increases in
depreciable plant and equipment. The increase in advertising expense in 2004 was the result of
significant advertising campaigns in the 45




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second and third quarters of 2004 to promote our change in corporate identity and logo, our
newly branded hanafone telephony services and fixed-line number portability. Although lower
interconnection fee rates set by the MIC that took effect in January 2004, interconnection charges
increased primarily due to an increase in the number of our local telephony services subscribers. These increases were partially offset by decreases in (1) sales commission expenses resulting
from the slower growth in subscribers during 2004 compared to growth in 2003, (2) telecommunication
equipment lease expense due to reduced dependence on cable lines leased to us by Powercomm and a
reclassification of expenses relating to long distance calls as interconnection fees, and (3)
certain promotional expenses attributable to our increased focus on entering into strategic
alliances with certain system operators and relay operators and our seeking to avoid predatory
pricing practices. Operating Income Our total operating income for the year ended December 31, 2004 was Won 113.9 billion, an
increase of Won 43.2 billion, compared to a total operating income of Won 70.7 billion in 2003.
The increase in our total operating income in 2004 was primarily due to an increase in our voice
revenues in 2004. For segment information on operating income see footnote 24 of the consolidated
financial statements for the years ended December 31, 2003 and 2004 included in this Annual Report. Non-Operating Income Our non-operating income for the year ended December 31, 2004 was Won 62.1 billion, an
increase of Won 35.2 billion, compared to non-operating income of Won 26.9 billion in 2003. The
increase in non-operating income in 2004 was primarily due to increases in gain on foreign currency
translations. Our gain on foreign currency translations increased by Won 33.8 billion from Won 19
million in 2003 to Won 33.8 billion in 2004 primarily due to the appreciation of the Korean Won
against the U.S. dollar and an increase in our dollar-denominated liabilities in 2004. The Korean
Won slightly depreciated against the U.S. dollar from Won 1,186.30 to U.S.$1.00 as of December 31,
2002 to Won 1,192.60 to U.S.$1.00 as of December 31, 2003 but the Korean Won appreciated against
the U.S. dollar to Won 1,035.00 to U.S.$1.00 as of December 31, 2004. Non-Operating Expenses Our non-operating expenses for the year ended December 31, 2004 were Won 162.3 billion, a
decrease of Won 96.3 billion, compared to non-operating expenses of Won 258.6 billion in 2003. The
decrease in non-operating expenses in 2004 was primarily due to lower interest expense as we
reduced our debt levels, particularly those with higher interest rates. The level of write-off of
property and equipment also decreased compared to 2003. In addition, the significant losses
attributable to Dreamline were not reflect in our income statement under the equity method
following the reclassification of our interest in Dreamline to a long-term investment. See note 8
to our financial statements for a detailed discussion relating to Dreamline. These improvements in
non-operating expenses were, however, partially offset by losses of Won 34.0 billion on valuation
of forward exchange contract. See note 17 to our financial statements for more a detailed
discussion. Net Income (Loss) As a result of the various factors discussed above, we recorded a net income of Won 13.0
billion for the year ended December 31, 2004 compared to a net loss of Won 161.3 billion for the
same period in 2003. 46




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Year ended December 31, 2003 compared to year ended December 31, 2002 Operating Revenues Our total revenue for the year ended December 31, 2003 was Won 1,383.5 billion, a decrease of
Won 34.4 billion, compared to total revenue of Won 1,417.9 billion in 2002. The decrease in total
revenue in 2003 was primarily due to a decrease in revenue of Won 73.8 billion from our leased line
services from Won 111.8 billion in 2002 to Won 38.0 billion in 2003, offset in part by increases in
revenue of (1) Won 38.3 billion from our voice services from Won 210.7 billion in 2002 to Won 249.0
billion in 2003 and (2) Won 13.1 billion from our broadband Internet access services from Won 969.6
billion in 2002 to Won 982.7 billion 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 Internet access services
revenue was due to an increase in the number of our active broadband subscribers. After excluding
approximately 240,000 inactive subscribers in October 2003, the number of our active broadband
services subscribers was 2,725,763 as of December 31, 2003. Operating Expenses Our total operating expenses for the year ended December 31, 2003 was Won 1,312.8 billion, a
decrease of Won 83.6 billion, compared to total operating expenses of Won 1,396.4 billion 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 35.2 billion 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 70.7 billion, an
increase of Won 49.3 billion, compared to a total operating income of Won 21.4 billion 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. For segment
information on operating income see footnote 24 of the consolidated financial statements for the
years ended December 31, 2003 and 2002 included in this Offering Circular. Non-Operating Income Our non-operating income for the year ended December 31, 2003 was Won 27.0 billion, a decrease
of Won 43.4 billion, compared to non-operating income of Won 70.4 billion 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 1,192.00 to U.S.$1.00 as of December
31, 2003. Our interest income decreased by Won 14.3 billion from Won 32.8 billion in 2002 to Won
18.5 billion in 2003, primarily due to a decrease in our interest bearing financial instruments and
the exclusion of Dreamlines interest income in 2003. 47




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Non-Operating Expenses Our non-operating expenses for the year ended December 31, 2003 were Won 258.6 billion, an
increase of Won 39.1 billion, compared to non-operating expenses of Won 219.5 billion in 2002. The
increase in non-operating expenses in 2003 was primarily due to a onetime Won 61.3 billion 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 23.1 billion 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 30.1 billion from Won 169.4
billion in 2002 to Won 139.3 billion in 2003, primarily from a decrease 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 decreased by Won 13.3 billion from Won
22.3 billion in 2002 to Won 9.0 billion in 2003 due to the decrease in the outstanding balance of
asset backed securities issued by Hanafos Securitization Specialty Co., Ltd. Net Loss Our net loss for the year ended December 31, 2003 was Won 161.3 billion, an increase of Won
36.3 billion, compared to a net loss of Won 125.0 billion in 2002. Such increase was primarily due
to the one-time Won 61.3 billion loss from the write-off of property and equipment, offset in part
by an increase in our operating income of Won 49.3 billion. 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 2000, 2001, 2002, 2003 and 2004 was
2.3%, 4.1%, 2.7%, 3.6% and 3.6%, respectively. Impact of Foreign Currency Fluctuations See Item 11. Quantitative and Qualitative Disclosures about Market RiskForeign Currency
Risk. B. Liquidity and Capital Resources Our primary uses of cash are to fund working capital, service indebtedness and fund capital
expenditures. Our primary sources of liquidity and capital requirements traditionally have been
from equity and debt financings, as cash flows from operations had not been sufficient to meet our
needs. Our cash flow from operations, however, has been increasing in recent periods, and this, in
turn, has led, among other things, to a reduced need for short term financing. As a result of the issuance and sale of our 7% notes due 2012 in February 2005, our debt to
equity ratio changed from 58.3% as of December 31, 2004 to 69.3% as of March 31, 2005. As of March
31, 2005, we had Won 631.3 billion of principal payments and contracted commitments coming due in
the remainder of 2005 through the end of 2007. With the combination of our cash on hand, increased cash flow from operations, and our
improved liquidity position attributable to the issuance and sale of our 7% notes in February 2005
and the refinancing of the secured credit facility in May 2005, we believe that we have sufficient
funding to meet our currently anticipated debt repayment, capital expenditure and debt service
requirements, as well as our working capital and other funding objectives for the next 12 months. 48




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In order to maintain our competitive position and continue to meet the increasing demands for
service quality, availability and competitive pricing, to successfully integrate Thrunet and to
further build our network, we may need to incur capital expenditures in addition to those currently
anticipated. 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. We believe that adequate financing
will be available in the event we need additional funds for such purposes. Nevertheless, we cannot
assure you that such financing will be available on favorable terms. If we are unable to obtain
such financing, we may need to modify, delay or abandon elements of our strategy. Cash Flows The following table sets forth selected information concerning our combined cash flows during
the periods indicated: Year ended December 31,2002
    
    
    2003
    
    
    2004(in billions of Won)Cash flows from operating activities
    
    Won
    52.5
    
    
    Won
    303.0
    
    
    Won
    469.9Cash flows from investing activities
    
    
    (297.6
    )
    
    
    (250.8
    )
    
    
    (209.2
    )Cash flows from financing activities
    
    
    253.3
    
    
    
    (135.1
    )
    
    
    (294.9
    )
 Cash flows from operating activities have increased during the three years ended December
31, 2004, primarily due to the improvement in operating performance. Cash flows used in investing activities have decreased during the three years ended December
31, 2004, principally as a result of decreased acquisitions of short-term financial instruments
from Won 929.6 billion in 2003 to Won 751.6 billion in 2004. Acquisitions of property and
equipment also stabilized from Won 342.6 billion for 2002 to Won 196.1 billion for 2003 and Won
212.5 billion for 2004, as our original network deployment approached completion. If we are no
longer able to use Powercomms network in certain areas, we expect our capital expenditure to
increase in 2005 due to additional network build-out requirements. Cash flows from financing activities in 2003 turned negative, reflecting decreased levels of
financing activity and our repayment of indebtedness in 2003. Cash flows from financing activities
were Won 294.9 billion in 2004, reflecting a continuation of the factors primarily responsible for
the earlier trend. The net cash outflow for the year ended December 31, 2004, however, does not
reflect as great an outflow of cash for financing activities as for the year ended December 31,
2003, as the amounts of repayments of indebtedness decreased for the year ended December 31, 2004
as compared to the corresponding period of 2003 (Won 422.0 billion in 2004 compared to Won 1,096.8
billion in 2003). See Liquidity and Capital ResourcesLong Term Indebtedness and Capital Lease Payments for
information regarding future repayments. Equity Investment On November 18, 2003, we issued 182,812,500 common shares (representing an aggregate of 39.6%
equity interest) at a purchase price of 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
585.0 billion. These proceeds were a primary source for our debt repayments in 2003 and 2004 as
well as for meeting our debt service requirements. See Item 7.B. Related Party
TransactionsRelationship with AIG-Newbridge-TVG Consortium. 49




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Long Term Indebtedness and Capital Lease Payments Our contractual obligations, including commitments for future payments under lease
arrangements and short-term and long-term debt arrangements, are summarized below and are fully
disclosed in notes 13, 14 and 15 to our consolidated financial statements included elsewhere in
this Annual Report. BalanceDecember
    
    
    Payments due during31,
    
    
    Years ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009(in billions of Won and millions of U.S. dollars)Korean corporate debentures
    
    Won
    496.0
    
    
    Won
    306.0
    
    
    Won
    190.0
    
    
    Won
    
    
    
    Won
    
    
    
    Won
    Information Promotion Fund loans
    
    
    66.7
    
    
    
    26.8
    
    
    
    22.6
    
    
    
    9.4
    
    
    
    6.3
    
    
    
    1.6Citibank Korea loan
    
    
    40.0
    
    
    
    40.0Syndicated loan:Won
    
    
    102.3
    
    
    
    
    
    
    
    15.4
    
    
    
    40.9
    
    
    
    46.0
    
    
    
    Dollar
    
    $
    258.6
    
    
    $
    
    
    
    $
    38.8
    
    
    $
    103.4
    
    
    $
    116.4
    
    
    $
    Capital leases
    
    Won
    79.9
    
    
    Won
    47.3
    
    
    Won
    23.5
    
    
    Won
    8.9
    
    
    Won
    0.2
    
    
    Won
    Total  Won
    
    Won
    784.9
    
    
    Won
    420.1
    
    
    Won
    251.5
    
    
    Won
    59.2
    
    
    Won
    52.5
    
    
    Won
    1.6 Dollar
    

    $
    258.6
    
    
    $
    
    
    
    $
    38.8
    
    
    $
    103.4
    
    
    $
    116.4
    
    
    $
    
 As of December 31, 2004, we had outstanding long-term debt (including current portions of
long term debt) in an aggregate amount of Won 972.6 billion (of which, the current portion was Won
372.8 billion). Of that amount, 27.5% was denominated in U.S. dollars and 72.5% was denominated in
Korean Won. The Won-denominated long-term debt consisted of amounts borrowed from (1) the
Information Promotion Fund established by the Government, (2) a loan borrowed from Citibank Korea
Inc., formerly KorAm Bank, and (3) the senior secured credit facility. Korean Corporate Debentures. As of December 31, 2004, we had outstanding Korean corporate
debentures of Won 496.0 billion (of which, the current portion was Won 306.0 billion). The
creditors include various Korean financial institutions. The term of such instruments ranged from
two to three years and the interest rates ranged from 5.42% to 8.59%. Information Promotion Fund. The Information Promotion Fund (representing indebtedness of Won
66.7 billion (including current portion) as of December 31, 2004) consisted of amounts paid into
government-sponsored funds by Korean telecommunications companies as required by the terms of
telecommunications licenses. Our loans from the Information Promotion Fund bore interest rates
ranging from 3.78% to 7.25%, which rates were slightly lower than the rates charged by Korean
commercial banks. The terms of the loans were for five years, with principal repaid in
installments over the last three years of such terms (with a two-year grace period). Citibank Korea Loan. Our long-term loan from Citibank Korea (representing indebtedness of Won
40.0 billion) bore interest at 6.99% per annum and was due in September 2005. Senior Secured Credit Facility. As of December 31, 2004, we had outstanding Won 102.3 billion
of Won-denominated indebtedness and U.S.$258.6 million of dollar-denominated indebtedness under our
senior secured credit facility. The senior secured credit facility provided for a term loan
facility in the aggregate amount of Won 660.0 billion and a revolving credit facility in the
aggregate amount of Won 60.0 billion. The Won-denominated debt under the senior secured credit
facility bore interest rates ranging from 6.61% to 6.80% per annum and the dollar-denominated debt
under the senior secured credit facility bore interest rate of 5.54% per annum. Capital Lease Agreements.We also have capital lease agreements with Korea HP Financial
Service Co., LG Card Services Corp., Star Leases Co., Ltd., Korea Development Leases Co., Ltd. and
Cisco Systems Capital Korea Ltd., for certain machinery and equipment. As of December 31, 2004,
the amount of payments attributable to the debt portion of our lease obligations was Won 79.9
billion (of which the portion due in 2005 was approximately Won 47.3 billion). 50




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Refinancing after December 31, 2004.In February 2005, we issued and sold aggregate principal
amount of U.S.$500 million of 7% notes due 2012. In addition, in April 2005, we entered into a new
secured credit facility with a syndicate of banks. Under the new secured credit facility, we
obtained a Won 60 billion revolving credit facility and the following term loans:  
    
    U.S.$201.8 million principal amount U.S. dollar denominated term loan to be repaid
in installments from February 2006 to November 2008;
    
    Won 250.0 billion principal amount Korean Won denominated term loan to be repaid in
installments from February 2007 to May 2010; and
    
    U.S.$208.1 billion principal amount U.S. dollar denominated term loan to be repaid
in installments from February 2007 to May 2010. A portion of the proceeds from the notes offering and the borrowings under the new secured
credit facility was applied to repay some of our outstanding debt obligations. Between January 1,
2005 and April 30, 2005, we repaid at maturity or prepaid prior to maturity the following amounts:  
    
    Won 120 billion aggregate principal amount of Korean corporate debentures,
including Won 70 billion of prepayments;
    
    all outstanding amounts under the Information Promotion Fund loan;
    
    the outstanding amounts under the Citibank Korea loan;
    
    all outstanding amounts under the previous senior secured credit facility; and
    
    Won 25.6 billion of lease obligations due under our capital lease agreements,
including Won 7.1 billion of prepayments. Other Financial Transactions On May 2, 2002, we entered into an interest rate swap contract with Industrial Bank of Korea
to hedge the exposure to changes in interest rates in connection with the issuance of Won 100
billion aggregate principal amount of floating interest rate notes issued on the same day. Under
the swap contract, we agreed to pay a fixed rate of 9.9% per annum in exchange for receiving the
government bond rate plus 1.95% per annum. 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 65.0 billion, which we have provided to Citibank Korea as collateral for our loan from Citibank
Korea. On December 19, 2003, we entered into a cross currency swap contract with Korea Development
Bank (pursuant to which we exchanged Won 75.0 billion for U.S.$63.1 million with a final maturity
dated as of November 13, 2008), 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.$1.00. This contract also includes an interest rate swap under which we agreed
to pay a fixed rate of 7.72% per annum on the notional principal amount and we are to receive
payments based on LIBOR plus a 3.25% spread. As of December 31, 2004, we provided three blank promissory notes as collateral to KDB Capital
Corp. 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 51




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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 February 10, 2004, we entered into cross currency swap contracts under which we exchanged
an aggregate of Won 161.8 billion (Won 116.6 billion with Korea Development Bank, Won 21.9 billion
with Korea Exchange Bank and Won 23.3 billion with Calyon Bank (formerly Credit Lyonnais Bank)) for
U.S.$138.7 million with a maturity date of November 13, 2008 to hedge exposure to changes in the
foreign currency exchange rate at Won 1,166.2 per U.S.$1.00. These contracts also include interest
rate swaps under which we agreed to pay a fixed rate of 7.60% per annum on the notional principal
and are to receive three month LIBOR plus a spread of 3.25%. On January 26, 2005, we entered into cross currency swap contracts under which we exchanged an
aggregate of Won 258.8 billion (Won 103.5 billion with Korea Development Bank, Won 103.5 billion
with DBS Bank and Won 51.8 billion with Shinhan Bank) for U.S.$250.0 million with a final maturity
date of February 1, 2012 to hedge the exposure to changes in the foreign currency exchange rate at
Won 1,035.0 per U.S.$1.00. These contracts also include interest rate swap arrangements under
which we agreed to pay a fixed rate of 7.13% per annum on the notional principal pursuant to the
contracts with the Korea Development Bank and DBS Bank and a fixed rate of 7.15% per annum on the
notional principal pursuant to the contract with Shinhan Bank, and are to receive a 7.00% fixed
coupon. On January 28, 2005, we entered into cross currency swap contracts under which we exchanged an
aggregate of Won 154.0 billion (Won 102.7 billion with ABN AMRO Bank and Won 51.3 billion with
JPMorgan Chase Bank N.A.) for U.S.$150.0 million with a final maturity date of February 1, 2012 to
hedge the exposure to changes in the foreign currency exchange rate at Won 1,026.5 per U.S.$1.00.
These contracts also include an interest rate swap arrangements under which we agreed to pay a
fixed rate of 6.89% per annum on the notional principal pursuant to the contract with ABN AMRO Bank
and a fixed rate of 6.98% per annum on the notional principal pursuant to the contract with
JPMorgan Chase Bank N.A., and are to receive a 7.00% fixed coupon. On February 1, 2005, we entered into cross currency swap contracts under which we exchanged an
aggregate of Won 102.9 billion (Won 82.3 billion with Chohung Bank and Won 20.6 billion with
Societe Generale) for U.S.$100.0 million with a final maturity date of February 1, 2012 to hedge
the exposure to changes in the foreign currency exchange rate at Won 1,028.6 per U.S.$1.00. These
contracts also include interest rate swap arrangements under which we agreed to pay a fixed rate of
7.23% per annum on the notional principal and are to receive a 7.00% fixed coupon. Capital Expenditure The following table sets forth the amount of our capital expenditures incurred from 2001 to
2004: Year ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004(in billions of Won)hanarotelecom:Backbone network
    
    Won
    200.2
    
    
    Won
    128.5
    
    
    Won
    111.1
    
    
    Won
    99.2Last mile connection
    
    
    348.9
    
    
    
    205.9
    
    
    
    191.7
    
    
    
    135.0Others
    
    
    50.5
    
    
    
    27.9
    
    
    
    34.7
    
    
    
    47.5Subtotal
    
    
    599.6
    
    
    
    362.3
    
    
    
    337.5
    
    
    
    281.7Consolidated subsidiaries
    
    
    1.5
    
    
    
    58.4
    
    
    
    0.3
    
    
    
    0.8Total
    
    Won
    601.1
    
    
    Won
    420.7
    
    
    Won
    337.8
    
    
    Won
    282.5
 Our capital expenditures differ from investments in property and equipment in our cash
flow statements as capital expenditures also include capital lease payments. Our capital
expenditures over the last three years consisted primarily of purchasing and deploying
switchboards, fiber optic cable lines and other telecommunication equipment. In 2004, we recorded
Won 281.7 billion in capital expenditures, out 52




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of which a substantial amount of our capital expenditures was incurred in the fourth quarter
due to the timing of expenditures on several planned projects. The downward trend in our capital
expenditure may not continue in 2005 depending on our level of subscriber growth, our network
coverage strategy and the possible need to upgrade our network. Other Contractual Obligations 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 Government to
operate our business. On May 9, 2002, the MIC announced that, effective from 2002, only the NSPs
whose total broadband (from 2005 onwards), 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 broadband (from 2005 onwards), 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. The net profit which the MIC will use in its determination of the amount of
these contributions is calculated using accounting standards and policies specified by the MIC
which differ in certain respects from Korean GAAP. Based on the MIC accounting standards, we did
not realize a net profit in 2003 and are not required to make a contribution in 2004. We do not
anticipate that we will realize a net profit based on the MIC accounting standards in 2004 and
therefore do not anticipate that we will be required to make a contribution in 2005. Under Korean law, an employee with more than one year of service is entitled to receive from
the company a lump-sum payment upon termination of his or her 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
15.6 billion and Won 5.1 billion in 2004, respectively. Our accrued severance indemnities as of
December 31, 2004 was Won 36.3 billion. As of December 31, 2003 and as of December 31, 2004, we had provided loans to our employees in
the amount of Won 13.4 billion and Won 13.1 billion, respectively, 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, 2004, we had also provided housing loans and other loans for medical
expenses and dependent educational expenses to our employees in the amount of Won 10.0 billion and
Won 0.2 billion, respectively. These loans are secured by accrued severance benefits of the
borrowing employees. As of December 31, 2004, 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. For time to time, we have provided secured or guaranteed interest-free loans to cable network
operators. The terms of each of those loans require repayment after a specified period (ranging
from one year to three years) from the date of the loan by equal installments on a quarterly basis
for two years. As of December 31, 2004, we had outstanding interest-free loans to seven cable
network operators in the aggregate amount of Won 1.0 billion. 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. C. Research and
Development, Patents and Licenses, etc. Not applicable. D. Trend Information See Item 5.A. Operating Results above. 53




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E. Off-balance Sheet Arrangements There were 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. F. Tabular Disclosure of Contractual Obligations The following table sets forth information with respect to our known contractual obligations
as of December 31, 2004: Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    years(in billions of Won)Long-term debt obligations
    
    Won
    972.6
    
    
    Won
    372.8
    
    
    Won
    598.2
    
    
    Won
    1.6
    
    
    
    Capital lease obligations
    
    
    79.8
    
    
    
    47.3
    
    
    
    32.5
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    1.5
    
    
    
    0.9
    
    
    
    0.6
    
    
    
    
    
    
    
    Purchase obligations
    
    
    28.8
    
    
    
    28.8
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    Won
    1,082.7
    
    
    Won
    449.8
    
    
    Won
    631.3
    
    
    Won
    1.6
    
    
    
    
 
 Item 6. Directors, Senior Management and Employees. 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. Name
    
    Age
    
    Position
    
    Nominated byChang Bun Yoon
    
    50
    
    
    
    President and Chief
Executive OfficerWilfried Kaffenberger
    
    60
    
    
    
    Non-standing Director
    
    AIG Asian Infrastructure Fund IIDavid Yeung
    
    54
    
    
    
    Non-standing Director
    
    AIG Asian Opportunity FundPaul Chen
    
    39
    
    
    
    Outside Director
    
    Outside Director Candidate Nominating CommitteeVarun Bery
    
    46
    
    
    
    Outside Director
    
    Outside Director Candidate Nominating CommitteeByung-Moo Park
    
    43
    
    
    
    Outside Director &
Member of Audit
Committee
    
    Outside Director Candidate Nominating CommitteeSung Kyou Park
    
    65
    
    
    
    Outside Director &
Chairman of Audit
Committee
    
    Outside Director Candidate Nominating CommitteeSun Woo Kim
    
    63
    
    
    
    Outside Director &
Member of Audit
Committee
    
    Outside Director Candidate Nominating Committee
 Chang Bun Yoonhas served as our President and Chief Executive Officer since August 2003.
From April 2000 until March 2003, he served as President of the Korea Information Society
Development Institute, or 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 the 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. Wilfried Kaffenbergerhas served as our non-standing Director 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 54




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Princeton University in 1966 and masters in business administration from Harvard Graduate
School of Business in 1968. David Yeunghas served as our non-standing Director 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. Paul Chenhas served as our outside Director since November 2003. He is currently a Managing
Director of Newbridge Capital based in Hong Kong. Mr. Chen played a key role in Newbridges
investments in hanarotelecom and Korea First Bank and currently serves as a member of our Director
and Compensation Committee and as a 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 has a
bachelor of science in applied economics and business management from Cornell University and
masters in business administration from Harvard Business School. Varun Beryhas served as our outside Director since March 2004. In April 1998, he co-founded,
and has since served as a managing director of 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 from Yale University in 1981 and a
masters in business administration from Harvard University. Byung-Moo Parkhas served as our outside Director since November 2003 and was reappointed as a
member of our audit committee at the annual general meeting of shareholders in March 2004. Since
2003, he has served as a managing director of Newbridge Capital Korea Ltd. Prior to joining
Newbridge, he served as Chief Executive Officer of PLENUS Entertainment Inc. Prior to that, he was
a partner in the law firm of Kim & Chang in Korea. Mr. Park is a graduate of the College and the
Graduate School of Law at Seoul National University, received his masters in business
administration from Yonsei University, and an LL.M. from Harvard Law School. Mr. Park is a member
of the Korean and New York Bar Associations. Sung Kyou Parkhas served as our outside Director and chairman of our audit committee since
March 2000. From 1987 until 1995, he served as President of Daewoo Telecom. From 1995 until 1997,
he served as Chairman 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 the Telecommunications Industry Association of Korea. He has a bachelor
of electronics engineering from MIT. He also received masters in electronics engineering from
Northeastern University in 1966 and a Ph.D. in electronics engineering from the University of Texas
at Austin in 1971. Sun Woo Kimhas served as our outside Director and member of our audit committee since March
2003. Since May 2004, he has served as a chairman of the board of directors of Korea Digital
Satellite Broadcasting. From 2000 until 2003, he served as a director of Korea Broadcasting
System. He has been a member of the Advisory Council on Democratic and Peaceful Unification since
1997. From 1992 until 1999, he served as an Executive Director of Busan 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. The following table sets out information on our principal senior executive officers who are
not members of the board of directors. 55




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Name
    
    Age
    
    PositionJong Myung Rhee
    
    50
    
    Senior Executive Vice President and Chief Technology OfficerDominic A. Gomez
    
    50
    
    Senior Executive Vice President and Chief Operating OfficerSoon-Yub Samuel Kwon
    
    47
    
    Senior Executive Vice President and Chief Corporate OfficerJung Taik Oh
    
    48
    
    Senior Executive Vice President and Chief Strategy OfficerGyu-Seok Oh
    
    41
    
    Executive Vice President and Chief Marketing OfficerKyounglim Yun
    
    40
    
    Executive Vice President and Chief Sales OfficerJanice Lee
    
    43
    
    Executive Vice President and Chief Financial OfficerKap Seok Oh
    
    47
    
    Executive Vice President and Chief Business OfficerDong Sik Byun
    
    44
    
    Senior Vice PresidentYoung Wan Cho
    
    45
    
    Senior Vice PresidentMatt Lee
    
    46
    
    Senior Vice PresidentJung Sik Suh
    
    35
    
    Senior Vice PresidentHyung Jun Song
    
    46
    
    Senior Vice PresidentGeon Jun Park
    
    47
    
    Senior Vice PresidentSueng Gil Park
    
    50
    
    Senior Vice PresidentKyu Shik Shin
    
    48
    
    Senior Vice PresidentHee Don Jung
    
    43
    
    Senior Vice PresidentChong Hoon Park
    
    40
    
    Senior Vice PresidentYoung Bo Chang
    
    47
    
    Senior Vice PresidentHyung Do Kil
    
    47
    
    Senior Vice PresidentWon Soo Doo
    
    45
    
    Senior Vice PresidentJong Soo Seo
    
    38
    
    Senior Vice President
 Jong Myung Rheehas served as our Senior Executive Vice President since November 1999 and
Chief Technology Officer since November 2003, and was the Head of the IMT-2000 Business Division.
He received a bachelor of science in electronic engineering in 1976 and masters degree in
electronic engineering in 1978, both from Seoul National University. He received a Ph.D. in
electronic engineering from North Carolina State University in 1987 and obtained a post-doctorate
standing from the University of Massachusetts in the area of designing DS-CDMA in 1995. Dominic A. Gomezhas served as our Senior Executive Vice President and Chief Operating Officer
since May 2005. Mr. Gormez previously served as an Executive Vice President at Lantern
Communications from 2002 to 2004 and Chief Operating Officer at EdgeNet Communications from 2000 to
2002. He received a bachelor of public administration in 1977 from University of Southern
California and completed PMD Business Administration at Harvard University. Soon-Yub Samuel Kwonhas served as our Senior Executive Vice President since December 2003,
our Chief Corporate Officer since April 2004 and as Head of our Thrunet M&A Division since January
2005. 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 Executive Vice President of Hansol
M.com. From May 1987 until December 1999, he was an attorney with Paul, Weiss, Rifkind, Wharton &
Garrison LLP. 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 J.D. in law from Columbia University in
1987. Jung Taik Ohhas served as our Senior Executive Vice President, our Chief Operating Officer
since April 2004 and as Chief Strategy Officer since January 2005. From October 1992 until
February 1995, he served as a professor at the National University of Singapore. From March 1995
until November 2003, he served as the Executive Director in charge of Planning & Coordination at
the 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. Gyu-Seok Ohhas served as our Executive Vice President and our Chief Strategy Officer since
April 2004, and as our Chief Marketing Officer since January 2005. From November 1999 until
December 2003, he served as the Chief Marketing Officer and Chief Strategy Officer 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. 56




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Kyounglim Yunhas served as our Executive Vice President in charge of business planning and
marketing since February 2004, served as our Chief Marketing Officer from April 2004 to December
2004 and as our Chief Operating Officer from January 2005 to April 2005, and was appointed as our
Chief Sales Officer in May 2005. From January 2000 until February 2004, he served as a Vice
President. From December 1998 until December 1999, he served as a Managing Director of the
Marketing Unit. He received a Ph.D. in management policy in 1997 and a masters 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 our Executive Vice President and Chief Financial Officer since May
2004. From December 1998 until May 2004, she served as Chief Financial Officer and Financial
Projects Manager of Volvo Construction Machinery Korea. From 1993 until November 1998, she served
as Financial Controller at Daewoo Heavy Industries America. Ms. Lee received a bachelor of arts in
English from Ewha Womans University in 1983, masters in finance from Ohio State University in 1986,
masters in accounting from Cleveland State University in 1990 and executive masters in business
administration from the University of Chicago in 2003. Kap Seok Ohhas served as our Executive Vice President and the Head of the Business Marketing
Division since January 2005. From January 2002 until November 2002, he served as a Managing
Director and the Head of the Sales Planning & Support Team. From February 2001 until December
2001, he served as a Managing Director and the Head of the Corporate Sales I Unit. From November
1999 until February 2001, he served as a Managing Director and the Head of the Internet Business
Unit. 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. Dong Sik Byunhas served as our Senior Vice President and Head of the Business Development
Unit 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 electronic
engineering from Inha University in 1987 and masters in business administration from Sogang
University in 2001. Young Wan Chohas served as our Senior Vice President since December 2002 and is currently the
Head of the Management Unit of our Thrunet M&A Division. 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 Head of the Finance Team. From April 2000
until December 2001, he served as a Managing Director and the Head of the Financial Strategy Unit.
From September 1997 until March 2000, he served as a Senior Manager and Head of the Finance Unit.
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. Matt Leehas served as our Senior Vice President since November 2001 and the Head of the Sales
Management Unit since January 2005. 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 our Senior Vice President and the Head of the Sales Support Unit
since January 2005. 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 our Senior Vice President and the Head of the Business Unit of
our Thrunet M&A Division since January 2005. He is also currently a Senior Vice President and 57




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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 electronic engineering from Hanyang University in 1982 and masters
in information and communication management from New York University in 2000. Geon Jun Parkhas served as our Senior Vice President and the Head of Network Operation Unit
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 electronic engineering from Ah-ju University in
1983. Sueng Gil Parkhas served as our Senior Vice President and the Head of Broadband Business Unit
since March 2004. He is also currently a Vice President and non-standing Director of Hanaro
WEB(n)TV, 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. Kyu Shik Shinhas served as a Senior Vice President and the Head of Corporate Sales Unit of
hanarotelecom since January 2005. From 1985 to 2003, he served 10 years in IBM, 9 years in COMPAQ
and HP as an Enterprise sales director. Mr. Shin received a bachelor of food technology from Seoul
National University in 1981. Hee Don Junghas served as a Senior Vice President and the Head of Corporate Innovation Unit
of hanarotelecom since March 2005. From February 1989 to January 2005, Mr. Jung worked at the
Management Consulting Service Division of Samil PricewaterhouseCoopers (PwC Korea), and served as a
partner from July 2003 to January 2005. He received a bachelor of management and business
administration from Sogang University in Korea and masters and Ph.D. from Korea Advanced Institute
of Science and Technology. Chong Hoon Parkhas served as a Senior Vice President and the Head of Regulatory Affairs Unit
at hanarotelecom since January 2005. From June 1999 to December 2004, Mr. Park served as a
Research Fellow of Telecom Policy Division at KISDI. He received a bachelor of economics and
mathematics from University of Wisconsin at Madison, an MBA from George Washington University and a
Ph.D. in economics from Northwestern University. Young Bo Changhas served as a Senior Vice President and the Head of the Financial Management
Unit of hanarotelecom since January 2005. From February 2004 to December 2004, he served as the
Vice President and Head of the Investor Relations team. Mr. Chang previously served as a Senior
Director at Jardine Fleming Securities from 1995 to 2000 and as a Vice President at JPMorgan from
2000. He received a bachelor of political and diplomatic science at Yonsei University in Korea and
MBA from Kellogg Business School of Northwestern University in 1986. Hyung Do Kilhas served as a Senior Vice President and the Head of Corporate Support Unit of
hanarotelecom since January 2005. From December 2003 to December 2004, he served as a Senior Vice
President and the Head of the Human Resource Management Team. He received a bachelor of library
and information science at Yonsei University in 1982. Won Soo Doohas served as a Senior Vice President and the Head of the Public Relations Unit of
hanarotelecom since January 2005. From March 1990 to September 1997, he served as a manager of the
Public Relations team at DACOM Corporation. Mr. Doo received a bachelor of mechanical engineering
from Ulsan University and MBA from Helsinki School of Economics and Business Administration in
2002. Jong Soo Seohas served as a Senior Vice President and the Head of the Corporate Strategy Unit
of hanarotelecom since April 2005. Mr. Seo previously served as a Principal at A.T.Kearney from
2001 to March 2005 and senior manager at Monitor Company from 1994 to 2001. Mr. Seo received a MBA
from Seoul National University in 1994. There are no family relationships between our directors and officers. 58




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The board of directors and executive officers may be contacted through our headquarters at
hanarotelecom incorporated., Tae-pyung-ro 2-43 Chung-ku, Seoul 100-733, Korea. There are no family
relationships between our directors and officers. B. Compensation We paid an aggregate of Won 3.0 billion as compensation during 2004 to our directors and
executive officers as a group. We also granted to our directors and executive officers 11,239,990 stock options during 2004
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.E. Share OwnershipStock Purchase Option Plan. The aggregate amount we set aside or accrued during the year ended December 31, 2004 to
provide retirement and severance benefits for our directors and executive officers (including our
statutory auditor) was Won 0.8 billion. During 2004, however, we did not pay any such retirement
allowances. C. Board Practices Board of Directors General. The board of directors has the ultimate responsibility for the administration of the
affairs of hanarotelecom. 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 hanarotelecom. 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 consisting of up to fifteen directors in
total. Our Articles of Incorporation further provide that any person who is employed by a company
that conducts business in Korea that is in competition with our business objectives or a company
belonging to the same group of companies as such competitor company pursuant to the Monopoly
Regulation and Fair Trade Act, cannot be a director of hanarotelecom and any existing director
(including those who were appointed prior to the amendments to the Articles of Incorporation) shall
immediately lose his or her directorship if the foregoing restriction becomes applicable. 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 us that provides for benefits upon termination of employment. Shareholders Agreement. Our major shareholders that form the investment consortium led by
AIG, Newbridge and TVG are parties to a shareholders agreement governing the terms of their
investments in us. See Item 7.A. 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
hanarotelecom pursuant to the terms of the agreement. 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 59




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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 more 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. For additional information on board practices, see Item 6.A. Directors and Senior
Management. D. Employees As of December 31, 2004, we had a total of 1,445 employees and an additional 161 full-time
employees employed on a contractual basis. The following chart shows the number of permanent
employees by functional areas. As of December 31,2002
    
    
    2003
    
    
    2004Planning and management
    
    
    132
    
    
    
    169
    
    
    
    243Information technology
    
    
    65
    
    
    
    54
    
    
    
    52Marketing and sales
    
    
    480
    
    
    
    565
    
    
    
    453Network and engineering
    
    
    675
    
    
    
    647
    
    
    
    645Research and development
    
    
    74
    
    
    
    54
    
    
    
    52Total
    
    
    1,426
    
    
    
    1,489
    
    
    
    1,445
 We have a trade union, called hanarotelecom Trade Union, which is an member
organization of the Federation of Korean Trade Union. Among 1,199 employees who could apply for
the union membership, 92.9% or 1,114 are members, of which seven members are serving as full-time
union members. We have not experienced any work stoppages. We consider our relations with
employees to be good. 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, 2004, we have provided loans and guarantees to our employees in the amount
of Won 20.6 billion 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, 2004, we have also
provided housing loans to our employees in the amount of Won 10.0 billion, of which 2.0 billion was
newly provided during 2004. These loans are secured by accrued severance benefits of the borrowing 60




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employees. As of December 31, 2004, 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 2004, we averaged 21 part-time employees at the end of each month. E. Share Ownership No director or member of senior management beneficially owns 1.0% 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 our establishment,
management and technical innovation pursuant to our Articles of Incorporation and the Korean
Securities and Exchange Act, exercisable for up to an aggregate of 15% of our total number of
issued and outstanding shares, provided that up to an aggregate of 10% of our total number of
issued and outstanding shares may be granted by resolution of the board of directors. 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 date on which the stock
purchase option may first be exercised. 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 us, 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 us
and the officer or employee. 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 (1) 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 (2) 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 (1) the average of (x) the 61




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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 (2) the par value of the common shares. No stock options were granted at the shareholders meetings held in 2001, 2002 and 2003. On December 16, 2004, we granted 1,451 of our employees (including certain directors and
officers), employed by us as of October 25, 2004, stock options to purchase a total of 19,772,890
common shares at a strike price currently of Won 5,000 per share during the period beginning
December 17, 2006 and ending December 16, 2011. On March 25, 2005, we granted seven of our officers, stock purchase options to purchase a
total of 610,000 common shares at a price of Won 5,000 per share during the period beginning March
26, 2007 and ending March 25, 2012. We have outstanding employee stock options to purchase a total of 22,104,043 common shares. Stock Ownership Association An employee stock ownership association under the Employee Welfare Basic Law 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,
2004, 500 employees of hanarotelecom were depositing members of the employee stock ownership
association and the association held 2,667,982 shares of our common shares. As of April 30, 2005,
495 employees of hanarotelecom were members of the employee stock ownership association and the
association held 2,643,895 common shares. The information required by this item is set forth in Item 6.B. Compensation. 
 Item 7. Major Shareholders and Related Party Transactions. 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, 2004, by each person known to us to own
beneficially more than 1% of our common shares. Shares Beneficially Owned as ofDecember 31, 2004Name
    
    Number
    
    
    PercentAIG-Newbridge-TVG Consortium
    
    
    182,812,500
    
    
    
    39.60
    %Korea Investment and Trust Management Co., Ltd.
    
    
    28,540,408
    
    
    
    6.18Dacom and its affiliated companies
    
    
    24,333,295
    
    
    
    5.27SK Telecom and its affiliated companies
    
    
    22,348,752
    
    
    
    4.84Daewoo Securities
    
    
    12,000,000
    
    
    
    2.60Daehan Investment & Securities
    
    
    6,140,771
    
    
    
    1.33Samsung Electronics Co., Ltd. and its affiliated company
    
    
    4,625,623
    
    
    
    1.00
 62




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The number of shares held by the AIG-Newbridge-TVG Consortium includes shares directly
held by Newbridge Asia HT, L.P., AIF II NT Ltd., AOF NT, Ltd., United Classic Investment Limited
and five other HT Holdings L.P. companies. As of December 31, 2004, 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 Investment Limited directly owned
20,392,746 common shares and the 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 Group. As of December 31, 2004,
Dacom directly owned 14,570,565 common shares and LG Telecom directly owned 5,397,574 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 Group. As of December 31, 2004,
Samsung Electronics directly owned 4,444,497 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 Group. As of December 31, 2004, SK
Telecom directly owned 22,090,000 common shares and SK Engineering & Construction directly owned
258,752 common shares. None of hanarotelecoms common shares entitles the holder to any preferential voting rights. 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 FTC based on the new criteria prescribed by the
amended Monopoly Regulation and Fair Trade Act. We know of no arrangements the operation of which may at a later time result in a change of
control. B. Related Party Transactions Relationship with AIG-Newbridge-TVG Consortium On November 18, 2003, we issued common shares pursuant to an Investment Agreement dated
September 9, 2003. The Investment Agreement provides that we 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 15.0% or more of our outstanding common shares.
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 November 18, 2003. As of December 31, 2004, the AIG-Newbridge-TVG Consortium beneficially owned an aggregate of
39.6% of our outstanding common shares. Investors Rights Agreement Pursuant to the Investors Rights Agreement, we have provided certain registration rights to
the investors with respect to the shares in which they originally invested. We have agreed to file
with the SEC a shelf registration statement on Form F-3 covering resales of the investors shares
by the holders thereof within 90 days after the written request of the investors representative
(made not less than 360 days after November 18, 2003). 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 us 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 63




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(1) the sixth anniversary of November 18, 2003 or (2) 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. Management Rights Agreement Pursuant to the Management Rights Agreement, we have granted to certain of the investors or
their affiliates, certain management rights in hanarotelecom so long as such investor owns any the
shares in which they originally invested, including, but not limited to, 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. Relationship with Dacom As of December 31, 2004, Dacom and its affiliated companies beneficially owned 5.27% of our
common shares. We have entered into several interconnection agreements with Dacom with respect to Dacoms
domestic and international long distance networks and data communications network, several of our
local telephony service areas and certain telecommunication facilities. We have also acquired from
Dacom a right to use two KoreaJapan international leased lines each supporting a bandwidth
capacity of 155 Mbps, three KoreaAsia international leased lines (half circuits), two
KoreaVietnam international leased lines (half circuits) and two KoreaBelgium leased lines (half
circuits). In addition, we have an agreement with Dacom which allows our subscribers that use
Dacom for domestic and international long-distance services to receive only one monthly statement
for local, long-distance and international call charges. Relationship with SK chaebol As of December 31, 2004, SK Telecom and its affiliated companies beneficially owned 4.84% 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 SK Telecom for which
we paid a rental deposit of Won 2.1 billion for five years from May 3, 1999 until May 2, 2004. We
have continued to lease the space under the same terms. Relationship with Cable Television Network System Operators On December 15, 2004, we entered into four agreements with the Joong-Ang MSO, a consortium of
12 cable television network system operators pursuant to which we agreed to sell all of our shares
in Hanaro WEB(n)TV to the Joong-Ang MSO for a purchase price of Won 32.0 billion and to outsource
our sales, customer service and HFC cable related services to the Joong-Ang MSO. In addition, the
Joong-Ang MSO has agreed not to engage in the broadband Internet access business or to cooperate
with or enter into similar agreements or arrangements with another ISP for a period of five years
from December 15, 2004. 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 cable television network system operators. These cable
television network system operators are responsible for maintaining subscriber lines and subscriber 64




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relationships (including customer service, troubleshooting and related services) within those
areas where they are licensed to provide cable broadcasting services. Through our relationships
with cable television network system operators, we seek to establish mutually beneficial
arrangements with respect to the provision of broadband Internet access, marketing, sales and
customer services. For time to time, we have provided secured or guaranteed interest-free loans to cable network
operators. These loans were provided pursuant to a loan program we commenced in 2000 as a means of
ensuring that cable television network system operators, with which we had or intended to have
network leasing arrangements, had the funds to upgrade their networks. The terms of each of those
loans require repayment after a specified period (ranging from one year to three years) from the
date of the loan by equal installments on a quarterly basis for two years. As of December 31,
2004, we had outstanding interest-free loans to seven cable network operators in the aggregate
amount of Won 1.0 billion. 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 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. Our
equity interest in Dreamline was reduced to 14.18% in January 2004. 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. C. Interests of Experts and Counsel Not applicable. 
 Item 8. Financial Information. A. Consolidated Statements and Other Financial Information The information required by this item is set forth in our consolidated financial statements
starting on page F-1 of this Annual Report. Legal Proceedings FTC Investigation We, along with several other telecommunications companies, have been the subject of an
investigation by the FTC into horizontal collusion, including formation of a price cartel, among
the telecommunications companies with respect to leased line, broadband, local telephony and
domestic long distance telephony services. In May 2005, the FTC announced that, together with KT,
we are guilty of horizontal collusion with respect to local telephony and leased line services.
The FTC also announced that it will impose an aggregate fine of Won 2.4 billion against us with
respect to the horizontal collusion in those service areas. Although the FTC has not yet completed
its investigation with respect to broadband and domestic long distance telephony services, it is
expected that the FTC will find us and several other telecommunications companies guilty of
horizontal collusion in these other service areas. The FTC is expected to make its final
determinations with respect to the other services, including the amounts of fines, by the end of
June 2005. The FTC has the power to impose a fine of up to 5% of our total revenues derived from
the collusion. The sanction level would be determined by considering the totality of circumstances 65




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such as the size of the relevant businesses affected by the collusion, our role in forming the
collusion, the period of the collusion being maintained and the impact of the collusion on
consumers in the respective markets. Criminal liability may be imposed against us or our employees
and officers if the FTC decides to file a criminal complaint with the prosecutors office and the
prosecutors office issues criminal indictments. To date, the FTC has not filed any criminal
complaint. The FTC decision may also result in civil liability against us. Following the announcement
about the FTC decision, a citizen activist group announced its intention to solicit subscribers
harmed by the horizontal collusion to file a civil lawsuit against us and KT to seek damages based
on the FTC conclusions. At this time, we are uncertain whether any of our subscribers will file a
lawsuit to seek damages from us based on the FTC conclusions. We are also uncertain as to the
outcome of any such possible lawsuit. If a lawsuit is filed and damages are awarded to the
plaintiff in such lawsuit, we may face additional actions based on similar grounds by other
subscribers. In addition, the FTC decision and the outcome of any possible related lawsuit may
affect the competitive environment in which we operate. Other 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 Microsoft Corporation and disrupted the Internet
service between Microsoft and a number of other 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,
seven customers filed a petition with the Communications Commission. On October 13, 2003,
Communications Commission awarded damages to the petitioners according to the terms of our standard
hanafos service agreement. However, the Communications Commission awarded only actual damages for
the disruption of service for five hours, without imposing a penalty on us, which resulted in an
award amount of Won 1,974 for seven petitioners. To challenge this award, we filed a counter suit
with the Seoul Central District Court on December 12, 2003, seeking declaratory judgment that we
have no liability against the petitioners. On April 30, 2003, 1516 Internet users (out of whom 421 were our customers), 71 Internet cafe
owners and OhmyNews, Co., Ltd., an Internet news media business, sued a number of Internet service
providers, including us, Microsoft, and the Government for failure to provide stable Internet
service without major disruptions, negligence in maintaining a stable network system and failure in
taking necessary measures to prevent further damage. The total sum claimed by these plaintiffs is
Won 0.1 billion. The two legal proceedings immediately described above are currently pending in the Seoul
Central District Court. We are not certain whether the outcome of the above legal proceedings will
be decided 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. 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. 66




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B. Significant Changes None. 
 Item 9. The Offer and Listing. A. Offer and Listing Details Market Price Information With the enactment of the Korea Securities and Futures Exchange Act, which came into effect on
January 27, 2005, the three existing spot and futures exchanges (which were the Korea Stock
Exchange, Korean Futures Exchange, and KOSDAQ) and KOSDAQ Committee, a sub-organization of Korea
Stock Dealers Association, were merged and integrated into a newly established joint-stock company
called the Korea Exchange Inc. There are three different markets run by the KRX: the KRX Stock
Market, the KRX KOSDAQ Market and the KRX Futures Market. The KRX, headquartered in Busan, has one
branch located in Seoul. Our common shares are traded on the KRX KOSDAQ Market, under the symbol
033630. Our shares were listed on Korea Securities Dealers Association Automated Quotation
Market (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 1,000. 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 KRX Stock Market.
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, (1) the high and low sales price
for our common shares as reported on the KRX, (2) the average daily trading volume of our shares,
(3) the highs and lows of the KOSDAQ Index and (4) the highs and lows of the KOSPI: AveragedailyPrice per share of our
    
    
    tradingcommon shares
    
    
    volume of
    
    
    KOSDAQ
    
    
    KOSPIHigh
    
    
    Low
    
    
    our shares
    
    
    High
    
    
    Low
    
    
    High
    
    
    LowYear ended December 312000
    
    Won 23,700
    
    
    Won 2,210
    
    
    
    2,612,052
    
    
    
    2,834.40
    
    
    
    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
    
    
    
    515.242004
    
    
    3,650
    
    
    
    2,345
    
    
    
    2,073,122
    
    
    
    491.53
    
    
    
    324.71
    
    
    
    936.06
    
    
    
    719.59Quarter EndedMarch 31, 2003
    
    Won 3,430
    
    
    Won 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
    
    
    
    821.26June 30, 2004
    
    
    3,350
    
    
    
    2,345
    
    
    
    2,623,955
    
    
    
    491.53
    
    
    
    361.17
    
    
    
    936.06
    
    
    
    728.98September, 2004
    
    
    3,325
    
    
    
    2,370
    
    
    
    1,798,398
    
    
    
    383.84
    
    
    
    324.71
    
    
    
    857.15
    
    
    
    719.59December 31, 2004
    
    
    3,640
    
    
    
    3,165
    
    
    
    1,930,121
    
    
    
    382.71
    
    
    
    350.70
    
    
    
    895.92
    
    
    
    808.14March 31, 2005
    
    
    3,585
    
    
    
    2,865
    
    
    
    3,192,942
    
    
    
    515.04
    
    
    
    390.40
    
    
    
    1,022.79
    
    
    
    870.84June 30, 2005 (through May 31)
    
    
    2,880
    
    
    
    2,380
    
    
    
    2,277,036
    
    
    
    471.48
    
    
    
    423.30
    
    
    
    992.17
    
    
    
    911.30Month EndedNovember 30, 2004
    
    Won 3,400
    
    
    Won 3,165
    
    
    
    1,443,204
    
    
    
    375.89
    
    
    
    359.51
    
    
    
    885.42
    
    
    
    835.66December 31, 2004
    
    
    3,505
    
    
    
    3,175
    
    
    
    2,582,772
    
    
    
    382.71
    
    
    
    370.77
    
    
    
    895.92
    
    
    
    844.20
 67




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AveragedailyPrice per share of our
    
    
    tradingcommon shares
    
    
    volume of
    
    
    KOSDAQ
    
    
    KOSPIHigh
    
    
    Low
    
    
    our shares
    
    
    High
    
    
    Low
    
    
    High
    
    
    LowJanuary 31, 2005
    
    
    3,585
    
    
    
    3,230
    
    
    
    2,958,771
    
    
    
    472.95
    
    
    
    390.40
    
    
    
    932.70
    
    
    
    870.84February 28, 2005
    
    
    3,545
    
    
    
    3,250
    
    
    
    3,312,588
    
    
    
    515.04
    
    
    
    461.78
    
    
    
    1,011.36
    
    
    
    921.44March 31, 2005
    
    
    3,395
    
    
    
    3,865
    
    
    
    3,324,015
    
    
    
    501.90
    
    
    
    449.35
    
    
    
    1,022.79
    
    
    
    955.45April 30, 2005
    
    
    2,880
    
    
    
    2,520
    
    
    
    1,907,113
    
    
    
    463.90
    
    
    
    424.40
    
    
    
    992.17
    
    
    
    911.30May 31, 2005
    
    
    2,630
    
    
    
    2,380
    
    
    
    2,629,343
    
    
    
    471.48
    
    
    
    423.30
    
    
    
    970.21
    
    
    
    913.82
 On June 24, 2005, the sale price of our common shares was Won 2,490 per share. On June
24, 2005, the closing KOSDAQ Index was 493.98 and the KOSPI was 1,002.43. As of December 31, 2004, we had 110,385 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 23, 2005 was $2.45 per
ADS. The table below shows the high and low closing prices of the ADSs on NASDAQ since our
listing. Average dailyPrice per share of our ADS
    
    trading volumeHigh
    
    
    Low
    
    of our sharesYear ended December 312000
    
    $
    15.50
    
    
    $
    1.63
    
    
    349,2842001
    
    
    4.20
    
    
    
    1.42
    
    
    39,9402002
    
    
    5.68
    
    
    
    2.50
    
    
    8,8722003
    
    
    3.77
    
    
    
    1.74
    
    
    19,7682004
    
    
    4.38
    
    
    
    1.91
    
    
    40,818Quarter EndedMarch 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
    
    
    85,004June 30, 2004
    
    
    2.87
    
    
    
    2.06
    
    
    31,411September 30, 2004
    
    
    2.99
    
    
    
    1.91
    
    
    33,949December 31, 2004
    
    
    3.44
    
    
    
    2.86
    
    
    13,197March 31, 2005
    
    
    3.63
    
    
    
    2.73
    
    
    14,034June 30, 2005 (through May 31)
    
    
    2.90
    
    
    
    2.33
    
    
    19,228Month Ended:November 30, 2004
    
    $
    3.09
    
    
    $
    2.88
    
    
    8,298December 31, 2004
    
    
    3.44
    
    
    
    2.90
    
    
    21,392January 31, 2005
    
    
    3.42
    
    
    
    2.96
    
    
    21,599February 28, 2005
    
    
    3.63
    
    
    
    3.15
    
    
    10,871March 31, 2005
    
    
    3.37
    
    
    
    2.73
    
    
    9,888April 30, 2005
    
    
    2.90
    
    
    
    2.40
    
    
    34,712May 31, 2005
    
    
    2.60
    
    
    
    2.33
    
    
    3,743
 B. Plan of Distribution Not applicable. 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 KRX KOSDAQ Market under the symbol 033630 since
November 1998. 68




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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. With the enactment of the Korea Securities and
Futures Exchange Act, which came into effect on January 27, 2005, the three existing spot and
futures exchanges (which were the Korea Stock Exchange, Korean Futures Exchange, and KOSDAQ) and
KOSDAQ Committee, a sub-organization of Korea Stock Dealers Association, were merged and integrated
into a newly established joint-stock company called the Korea Exchange Inc. The KOSDAQ, which
became KRX KOSDAQ Market, a division of newly established KRX, is originally modeled after the
NASDAQ National Market. However, unlike NASDAQ, shares listed on the KRX KOSDAQ Market are traded
by the KRX KOSDAQ Market 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 KRX KOSDAQ
Market are 9:00 a.m. to 3:00 p.m. Margin trading is not permitted on the KRX KOSDAQ Market and
daily price changes are limited to a range of 12% of the closing price for the previous trading
day. The KRX KOSDAQ Market has grown significantly since its inception. As of May 31, 2005, 877
companies were listed on the KRX KOSDAQ Market with an aggregate market capitalization of Won 41.5
trillion. The average daily turnover for 2004 was Won 625 billion. Market capitalization on the
KRX KOSDAQ Market is heavily concentrated in the larger companies, with the top 10 companies
comprising approximately 17.51% of total market capitalization and the top 25 companies comprising
approximately 28.73% of total market capitalization as of May 31, 2005. Companies listing on the
KRX KOSDAQ Market must meet its listing requirements and register with the Financial Supervisory
Commission of Korea. D. Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the Issue Not applicable. 
 Item 10. Additional Information. A. Share Capital Not applicable. B. Memorandum and Articles of Association The section below provides summary information relating to the material terms of our capital
stock 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: 69




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
    
    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. As of December 31, 2004, we have a total of 462,135,180 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, 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. 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 70




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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. 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 KRX Stock Market 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 KRX Stock Market, 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 KRX Stock Market. 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; 71




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
    
    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 Korean 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. 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 Korean 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 us;
    
    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 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. 72




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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. 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 the KRX (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 KRX. 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 73




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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. Acquisition of Shares by hanarotelecom 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 Korean 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 Korean Securities and Exchange Act, we may
acquire our own shares through purchases on the KRX 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 Korean 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 Korean 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 us, see Item 4.B.
Business OverviewKorean Telecommunications Laws and Regulations, Item 10.D. Exchange Controls
and Item 10.E. TaxationKorean Tax Considerations. C. Material Contracts Thrunet Acquisition Agreement On February 4, 2005, we entered into an agreement with the court receiver for Thrunet relating
to the acquisition of Thrunet by us. Under the agreement, we agreed to acquire 99,240,000 Thrunet
common 74




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shares and an aggregate of Won 223.3 billion of newly issued debt securities of Thrunet for a
combined purchase price of approximately Won 471.4 billion. On the day of the agreement, we paid a
deposit in the amount of Won 47.1 billion in total, equivalent to 10% of the acquisition price. Under the amended reorganization plan which was approved by Thrunets creditors committee,
interested parties meeting and the bankruptcy court, Thrunet reduced its capital and as a result,
we acquired 96.22% of Thrunets outstanding common shares. The Thrunet acquisition agreement
requires 50% of the shares to be acquired by us to be locked up for a one year period in an account
with the Korea Securities Depository. The agreement provided for limited indemnification. We are not able to claim any damages from
Thrunet, the reorganization court or the lead manager for the Thrunet acquisition transaction. Investment Agreement between hanarotelecom 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., referred to as the sponsors below,
providing for, among other things, the issuance by us and purchase by the sponsors, together with
co-investors designated by the sponsors (together, referred to as the investors), of an aggregate
of 182,812,500 common shares of hanarotelecom at a purchase price of Won 3,200 per share having an
aggregate value of Won 585 billion. The closing occurred on November 18, 2003 after certain
customary closing conditions were satisfied, including the resignation and appointment of certain
board members. The Investment Agreement provides that we 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 our 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 November 18, 2003. 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 shares, in which they invested. We have agreed to file with the
U.S. Securities and Exchange Commission a shelf registration statement on Form F-3 covering resales
of those shares by the holders thereof within 90 days after the written request of the investors
representative (made not less than 360 days after November 18, 2003). We are not required to
effect and complete more than three such shelf registration statements. In addition, the holders
have certain rights to piggyback on other registration statements relating to our common shares
and the right to cause us 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 (1) the
sixth anniversary of November 18, 2003 or (2) 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. Management Rights Agreement Pursuant to the Management Rights Agreement, we have granted to certain of the investors or
their affiliates, certain management rights in hanarotelecom so long as such investor owns any
shares, in which they invested, 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
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reasonably requested and the right to be informed in advance with respect to any significant
corporate actions. Indenture relating to 7% Notes due 2012 On February 1, 2005, we issued an aggregate principal amount of $500 million of 7% notes due
2012 pursuant to an indenture between us and Deutsche Bank Trust Company Americas, as trustee. Principal, Maturity and Interest. The notes are limited in initial aggregate principal amount
to $500 million and will mature on February 1, 2012. Interest on the notes accrues at the rate of
7% per annum and is payable semiannually on February 1 and August 1 of each year, commencing August
1, 2005. We will pay Korean taxes imposed upon the payment of the principal, interest and premium,
unless deduction or withholding is required by law, or otherwise required under the indenture. We may enter into supplemental indentures for various purposes, with or without consent of
existing security holders. If the holders of at least a majority in principal amount of the
outstanding securities consent, we and the trustee may enter into a supplemental indenture for the
purpose of changing the provisions of the indenture. However, no such supplemental indenture will:
(1) change the stated maturity of the securities; (2) reduce the principal amount of, or any
interest on, or additional amounts payable on, the securities; (3) change the place or currency in
which the securities are payable; (4) impair the right to institute suit for the enforcement of any
payment on any security; or (5) reduce the quorum requirements to modify the indenture. Ranking. The notes will rank equally in right of payment to all existing and future unsecured
debt of hanarotelecom which is not subordinated to the notes by its express terms. Covenants. The indenture constrains our ability to assume additional external indebtedness
secured by a lien on particular properties. In addition, we are prohibited from entering into any
sale/leaseback transaction unless otherwise provided in the indenture. Moreover, under certain
conditions of the indenture, we are restricted in our ability to consolidate or merge into, or
sell, transfer, lease or convey our assets to any corporation organized under Korean law. Redemption. We will make an offer to redeem all outstanding securities at a redemption price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest and applicable
Korean taxes, in the event that a change of control of hanarotelecom and subsequent reduction in
rating with respect to the securities occurs after November 13, 2008, or after the cancellation of
hanarotelecoms senior secured credit facility agreement with various financial institutions.
hanarotelecom is not required redeem outstanding securities under the above conditions if a third
party offers to redeem all outstanding securities at the same or a higher redemption price. The outstanding securities may also be redeemed at our option in whole at a redemption price
equal to 100% of the aggregate outstanding principal amount of the securities, plus accrued
interest, if a change in Korean law would oblige hanarotelecom to pay additional taxes with respect
to the securities and such obligation cannot be avoided by the use of reasonable measures available
to us. Events of Default. Events of default under the indenture include, among other things: (1)
defaults in the payment of principal or any installment of interest; (2) default in the compliance
with covenants contained in the indenture; (3) default on an aggregate outstanding principal amount
of $10 million or more of other indebtedness; (4) reduction in rating in connection with a merger
transaction that occurs after November 13, 2008, or after the cancellation of hanarotelecoms
senior secured credit facility agreement with various financial institutions; (5) a governmental
finding of hanarotelecoms bankruptcy or insolvency; and (6) hanarotelecoms voluntary commencement
of a case of bankruptcy or insolvency. Upon the occurrence of an event of default, the trustees or the holders of at least 25% of the
aggregate principal amount of the outstanding securities may declare the principal amount of the
securities immediately due and payable. The holders of a majority in aggregate principal amount of
the outstanding securities may annul the acceleration of payment if: the annulment does not
conflict with any judgment or 76




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decree; all existing events of default have been cured or waived except nonpayment of the
principal amount plus premium and default interest; and compensation to the trustee has been paid. Secured Credit Facility Agreement On April 21, 2005, we entered into a secured credit facility agreement with a number of
financial institutions, with The Korea Development Bank acting as paying agent and security agent.
Under this agreement, the lenders provided to us four credit facilities that consist of the
following:  
    
    a U.S. dollar denominated term loan facility in an aggregate amount equal to
U.S.$201,809,520, referred to as the Facility A Loan below,
    
    a Korean Won denominated term loan facility in the aggregate amount equal to Won
250,047,620,000, referred to as the Facility B1 Loan below,
    
    a U.S. dollar denominated term loan facility in the aggregate amount equal to
U.S.$208,142,860, referred to as the Facility B2 Loan below, and
    
    a revolving credit facility in the aggregate amount equal to Won 60,000,000,000,
referred to as the Facility C Loan below. Repayment of Term Loans. We will repay the loan facilities in installments by repaying a
certain percentage of the principal amount on dates specified in the agreement. For the Facility A
Loan, the first installment will be made on February 13, 2006, and the last installment will be
made on November 13, 2008. The percentage of principal to be repaid in any single installment
ranges from 3.75% to 11.25%. For the Facility B1 Loan and Facility B2 Loan, the initial
installments will be made on February 13, 2007, and the last installments will be made on May 13,
2010. The percentage of principal to be repaid in any single installment ranges from 6.0% to 8.0%. Change of Control. The agreement provides that upon the occurrence of a change of control
triggering event, we will be required to repay the full amount of the outstanding loan and cancel
the lenders obligations under the facilities. For the purposes of the agreement, a change of
control triggering event means the occurrence of both a change of control and a reduction in the
rating with respect to our debt securities or, in the event that our debt securities cease to be
outstanding or rated, our company rating. A change of control means the consummation of any
transaction in which any person or group other than AIG Investors, the Newbridge Investor, TVD Ltd.
or any other company or partnership that is directly or indirectly controlled by American
International Group, Inc., Newbridge Capital, Inc. or TVG Ltd. is or becomes the beneficial owner
of more than 45% of our voting stock. Voluntary Cancellation. Subject to certain conditions, we may cancel a lenders available
commitments with respect to a facility, in whole or in part. The minimum amount we may cancel is
Won 25 billion or the equivalent amount. Voluntary Prepayments. Subject to some conditions, we are permitted to prepay all or a part
of the loans and the amount prepaid is applied pro rata towards prepayment of the loans in the
following order:  
    
    First, towards prepayment of outstanding amounts under the Facility B1 Loan and
Facility B2 Loan on a pro rata basis according to their respective outstanding
amounts,
    
    Second, towards prepayment of outstanding amounts under the Facility A Loan, and
    
    Finally, towards prepayment of outstanding amounts under the Facility C Loan. The minimum amount we may prepay is Won 25 billion or the equivalent amount. 77




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Interest and Expenses. Borrowings under each loan will bear interest at the rate which is the
aggregate of the applicable base rate and the applicable margin. The interest period starts on the
date on which the loan is made or on the last day of its precedent interest period, and ends on the
next following quarterly date in the case of the Facility A loan or Facility B2 Loan or annual date
in the case of the Facility B1 Loan. The interest period for a loan under Facility C Loan starts
on the date on which the loan is made and ends on the next following quarterly date. The agreement
also provides for certain conditions, including a market disruption event, under which the
calculation of interest may change. The following table summarizes the applicable interest rates
for each loan: Base Rate
    
    Margin(1)Facility A Loan
    
    3-month LIBOR
    
    
    1.850
    %Facility B1 Loan
    
    3-year A+-rated corporate bond base rate
    
    
    2.050
    %Facility B2 Loan
    
    3-month LIBOR
    
    
    2.050
    %Facility C Loan
    
    91-day CD base rate
    
    
    2.075
    %
 
 (1)
    
    The margins may be adjusted by up to 0.75 percentage points if our credit rating is upgraded. Ranking. Our payment obligations under the secured credit facility agreement rank
equally with the claims of all of our other unsecured and unsubordinated creditors, except for
obligations mandatorily preferred by law. We have granted a security interest with respect to a
significant portion of our property to the lenders under the secured credit facility agreement. Events of Default. Events of default under this agreement include, among other things: (1)
default in payment; (2) breach of certain covenants and other obligations under the agreement; (3)
misrepresentation; and (4) insolvency. In the event of default, all commitments are immediately
cancelled and all loans, together with accrued interest and other outstanding amounts, are
immediately due and payable. Covenants. The agreement contains various affirmative, negative and financial covenants.
Limitations upon us under the agreement relate to, among other things: (1) aggregate capital
expenditure; (2) corporate status; (3) hedging arrangements; (4) subsidiary guarantees; (5)
disposal of assets; (6) liens and lease transactions; (7) corporate restructuring; (8)
acquisitions; (9) loans and guarantees; and (10) dividends and distributions. D. Exchange Controls General The Korean 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. 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, 78




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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 and purpose (in terms of whether the purpose of
shareholding is to affect control over management of the issuer) of such holding to the FSC and the
KRX within five business days after reaching the 5% ownership interest threshold. In addition, any
change (1) in the ownership interest subsequent to such report which equals or exceeds 1% of the
total outstanding Equity Securities, or (2) in the shareholding purpose, is required to be reported
to the FSC and the KRX within five business days from the date of such change. However, the
reporting deadline of such reporting requirement is extended for institutional investors who hold
shares for purposes other than management control to the tenth day of the month immediately
following the month of the shares were acquired or the shareholdings were otherwise changed. Those
who report that the purpose of their shareholding is to affect control over management of the
issuer are prohibited from exercising their voting rights and acquiring additional shares for five
days subsequent to the report under the recently amended Korean Securities and Exchange Act. 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 KRX Stock Market
or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may trade shares
listed on the KRX Stock Market or the KRX KOSDAQ Market only through the KRX Stock Market or the
KRX KOSDAQ Market, 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);
    
    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; 79




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
    
    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 KRX Stock Market or
the KRX KOSDAQ Market 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 KRX Stock Market or the KRX KOSDAQ Market 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 KRX
Stock Market or the KRX KOSDAQ Market (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. Upon a foreign investors purchase of shares through the KRX Stock Market or the KRX KOSDAQ
Market, 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 KRX Stock Market (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 KRX Stock Market or the KRX KOSDAQ Market, 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 80




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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. 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. 81




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E. Taxation Korean Tax Considerations 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
    
    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 transfer of certain capital reserves or asset
revaluation reserves into paid-in capital, that distribution may be regarded as dividend and, as
such, subject to Korean withholding tax. Taxation of Capital Gains You are exempt from Korean taxation if you sell through the KRX Stock Market or the KRX KOSDAQ
Market 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
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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
KRX Stock Market 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. Inheritance Tax and Gift Tax If you die while holding an ADS or transfer an ADS as a gift, it is unclear whether you will
be treated as the owner of the shares underlying the ADSs for Korean inheritance and gift tax
purposes. 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 KRX
Stock Market. If you transfer shares through the KRX KOSDAQ Market, 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 KRX Stock Market or the KRX KOSDAQ Market, 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. According to a tax ruling issued by the Korean tax authorities, foreign shareholders will not
be subject to a securities transaction tax upon the deposit of underlying shares and receipt of
depositary shares or upon the surrender of depositary shares and withdrawal of originally deposited
underlying shares. Moreover, to date, the imposition of securities transaction tax has not been
enforced on the transfers of ADSs. However, the MOFE recently issued a ruling on February 25, 2004
to the Korean National Tax Service, holding that depositary shares fall under the meaning of share
certificates that are subject to the securities transaction tax. In the ruling, the Ministry of
Finance and Economy treats the transfers of 83




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depositary shares the same as the transfer of the underlying Korean shares. Under Korean tax
laws, transfers of depositary shares listed or registered on the New York Stock Exchange, NASDAQ
National Market, or other foreign exchanges designated by the Ministry of Finance and Economy
(which are the Tokyo Stock Exchange, London Stock Exchange, German Stock Exchange, and a stock
exchange with functions similar to the other three exchanges, on which trading is done by
standardized procedure as set forth in the Enforcement Regulation of the Korean Securities and
Exchange Act) will be exempted from the securities transaction tax. Securities transaction tax, if applicable, must be paid in principle by the transferor of the
shares or the rights to subscribe to such shares. When the transfer is effected through a
securities settlement company, the settlement company is generally required to withhold and pay the
tax to the tax authority. When the transfer is made through a securities company, the securities
company is required to withhold and pay the tax. Where the transfer is effected by a non-resident
without a permanent establishment in Korea, other than through a securities settlement company or a
securities company, the transferee is required to withhold the securities transaction tax. The failure to pay the securities transaction tax will result in a penalty of 10% of the tax
amount due, plus interest at 10.95% per annum on the unpaid tax amount for the period from the day
immediately following the last day of tax payment period to the day of issuance of tax notice. The
penalty is imposed on the party responsible for paying the securities transaction tax or, if the
securities transaction tax is to be withheld, the penalty is imposed on the party that has the
withholding obligation. 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 hanarotelecom 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 (1) a citizen or individual resident of the
United States, (2) 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, (3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or (4) 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. If a partnership or other pass-through entity holds common shares or ADSs, the tax treatment
of a partner in or owner of the partnership or pass-through entity will generally depend upon the
status of the partner or owner and the activities of the entity. We urge partners and owners of
partnerships or other pass-through entities holding common shares or ADSs to consult their own tax
advisors. 84




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Special adverse U.S. federal income tax rules apply if a U.S. Holder holds common shares or
ADSs of a company that is treated as a passive foreign investment company, a foreign personal
holding company (for 2004 and earlier years) or a controlled foreign corporation for any taxable
year during which the U.S. Holder held common shares or ADSs. We believe that we are not and will
not become a passive foreign investment company, a foreign personal holding company (for 2004
and earlier years) or a controlled foreign corporation for U.S. federal income tax purposes. 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
hanarotelecom. 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 for taxable years beginning before January 1, 2007. For taxable years
beginning after December 31, 2006, dividends generally will be passive category income or
general category income for purposes of computing the foreign tax credit allowable to a U.S.
Holder. 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 hanarotelecom (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 85




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currency into U.S. dollars on the date of receipt, however, such Holder will have a basis in
such foreign currency equal to the U.S. dollar value on the date of receipt, and 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. 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. 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. hanarotelecom, 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. If a U.S.
holder is required to and does not provide a correct taxpayer identification number, the U.S.
Holder may be subject to penalties imposed by the IRS. 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 or refundable to the extent it exceeds such liability, provided that the required
information is furnished to the U.S. Internal Revenue Service. Estate and Gift Tax As discussed in Korean Tax Considerations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. F. Dividends and Paying Agents Not applicable. 86




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G. Statement by Experts Not applicable. H. Documents on Display We file periodic reports and other information with the SEC. You may read and copy any
document that we file with the SEC at the SECs public reference room at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SECs regional offices. Please
call the SEC at 1-800-732-0330 for further information on the operation of its public reference
rooms. The SEC also maintains a web site that contains reports, proxy and information statements,
and other information regarding registrants that file electronically with the SEC
(http://www.sec.gov). You may also inspect our SEC reports and other information at the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. Some of this information may also
be found on our website at http://www.hanaro.com. You may request a copy of these filings, at no cost, by writing or telephoning us at
Tae-pyong-ro 2-43, Chung-gu, Seoul, Korea, 100-733, Attention: Investor Relations Team, telephone
number: (+82-2) 6266-4319. I. Subsidiary Information Please refer to discussion under Item 4.C. Organizational Structure. 
 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. Interest Rate Risk Our exposure to risk for changes in interest rates relates primarily to our short-term
investments, and liabilities under our floating rate note (FRN) and our syndicated loan. 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, 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 instruments consist of time deposits, money market deposit accounts
and repurchase agreement securities. As our short-term financial instruments 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 instruments as a result of interest rate changes. We pay floating interest on our FRN and on 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, Korea Development Bank and other banks under which we receive variable interest rates and
pay fixed interest rates. Therefore, we do not expect any material loss with respect to our FRN or
the syndicated loan as a result of interest rate changes. 87




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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, 2004, Won 267.6 billion, representing 27.5% of our total
debt, is denominated in U.S. dollars. All of this amount represented the amount outstanding under
the Senior Secured Credit Facility. Our U.S. dollar denominated debt increased to Won 712.7
billion as of March 31, 2005 as a result of our February 2005 Notes, but we have entered into
foreign currency swap contracts with respect to the entire amount of the February 2005 Notes. Currently, we 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. In
December 2003, February 2004, September 2004, January 26, 2005, January 28, 2005 and February 1,
2005, we entered into foreign currency swap contracts with the Korea Development Bank and other
banks in connection with the Senior Secured Credit Facility and the February 2005 Notes to hedge
the exposure to changes in the foreign currency exchange rate. As a result, we do not expect to
incur any material losses with respect to the Senior Secured Credit Facility or the February 2005
Notes as a result of foreign exchange rate changes. We estimate that any losses we would incur from any depreciation of the Won against the U.S.
dollar resulting from unhedged U.S. dollar denominated liabilities would be negligible. This is
due to our policy that all foreign currency denominated liabilities be fully hedged. Third Party Credit Risk 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. In addition, it
is our policy that all foreign exchange investments be fully hedged. Substantially all of our
floating rate debt is hedged. 
 Item 12. Description of Securities Other Than Equity Securities. Not applicable. 
 Item 13. Defaults, Dividend Arrearages and Delinquencies. None. 
 Item 14. Material Modifications of the Rights of Security Holders and Use of Proceeds. None. 
 Item 15. 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. 88




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There have been no significant changes in internal control over financial reporting that
occurred during the fiscal year ended December 31, 2004, 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. See
Item 6. Directors, Senior Management and Employees for more information on Mr. Parks
educational background, qualifications and work experience. 
 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. Deloitte HanaAnjin LLC (formerly known as Anjin Deloitte LLC), a member firm of Deloitte
Touche Tohmatsu, 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 Deloitte HanaAnjin LLC to us in 2003 and 2004: 2003
    
    
    2004(millions of Won)(a) Audit Fees(1)
    
    Won
    
    
    286
    
    
    Won
    
    
    370(b) Audit-Related Fees(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85(c) Tax Fees(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (d) All Other Fees(4)
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
 
 (1)
    
    Audit Fees consist of aggregate fees billed by Deloitte HanaAnjin 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 Deloitte HanaAnjin LLC for advisory
services relating to analyses of multiple accounting issues (of which there was none for
2003).(3)
    
    Tax Fees consists of aggregate fees billed by Deloitte HanaAnjin LLC for the preparation of
income tax return and tax advisory services (of which there was none for 2003 and 2004).(4)
    
    All Other Fees include fees billed by Deloitte HanaAnjin LLC principally for due diligence
services relating to our call center and accounting assistance (of which there was none for
2004). 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
minimus services which are approved by the Audit Committee prior to the completion of the audit. 
 Item 16D. Exemptions from the Listing Standards for Audit Committees. None. 89




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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers. There have been no purchases made by or on behalf of us or any affiliated purchaser of our
shares or ADSs. 90




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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 starting on F-1 following Glossary. 
 Item 19. Exhibits. The following documents are filed as exhibits to this Annual Report: Exhibits
    
    Description1.1.
    
    Articles of Incorporation, as amended on March 25, 2005 (English translation)4.1.
    
    Agreement for Acquisition of Korea Thrunet Co. Ltd. dated February 4, 2005 (English translation)4.2.
    
    Indenture dated as of
February 1, 2005 relating to $500 million principal amount of 7% notes due 20124.3.
    
    Senior Secured Credit Facility dated April 21, 20058.1.
    
    List of hanarotelecoms
significant subsidiaries. (See Item 4.C. Organizational Structure.)11.1.
    
    Code of Ethics (English translation) (1)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 Certifications required by Rule 13a-14(b) and 18 U.S.C. Section 1350
 
 (1)
    
    Previously filed with the annual report on Form 20-F for the fiscal year ended December 31,
2003. 91




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Signature The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this Annual Report on its
behalf. hanarotelecom incorporatedBy:      /s/ Janice LeeName:
    

    Janice LeeTitle:
    
    Executive Vice Presidentand Chief Financial OfficerDate: June 29, 2005




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Glossary Set forth below are definitions of some of the terms used in this Offering Circular: 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 HFC lines. Because HFC
lines generally provide 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.DSL
    
    Digital Subscriber Line. DSL is a technology for bringing
high bandwidth information to homes and small businesses
over ordinary copper telephone lines.Gbps
    
    Gigabits per second. A measure of digital information
transmission rates. One Gbps equals l,000 Mbps, one
million Kbps, or one billion bps.GHz
    
    Gigahertz. A unit of frequency denoting one billion
cycles per second, used to measure band and bandwidth.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. IDC provides services such as
co-location, dedicated server hosting, security, backup,
storage hosting and network equipment rental services.
 93




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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.KHz
    
    Kilohertz. A unit of frequency denoting one thousand
cycles per second, used to measure band and bandwidth.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
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 business to connect geographically distant
offices. The fee for the connection is usually a fixed
monthly rate.Mbps
    
    Megabits per second. A measure of digital information
transmission rates. One Mbps equals 1,000 Kbps or one
million bps.MHz
    
    Megahertz. A unit of frequency denoting one million
cycles per second, used to measure band and bandwidth.MIC
    
    Ministry of Information and Communication of Korea.NSP
remote terminal
    
    Network Service Provider.
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.
 94




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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.WiBro
    
    A 2.3 GHz wireless broadband technology.WLL
    
    Wireless Local Loop. A local loop using fixed radio
access technology to provide low to medium speed Internet
services.
 95




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hanarotelecom incorporated
(formerly, HANARO TELECOM, INC.)
AND SUBSIDIARIES 
 CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004
AND REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM F-1




---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of
hanarotelecom incorporated (formerly Hanaro Telecom, Inc.): We have audited the accompanying consolidated balance sheets of hanarotelecom incorporated
(formerly Hanaro Telecom, Inc.) and its subsidiaries (collectively referred to as the Company) as
of December 31, 2003 and 2004, and the related consolidated statements of operations, shareholders
equity and cash flows for each of the three years in the period ended December 31, 2004, 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. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also 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 hanarotelecom incorporated and its subsidiaries as of December
31, 2003 and 2004, and the results of their operations, changes in shareholders equity and their
cash flows for each of the three years in the period ended December 31, 2004, in conformity with
financial accounting standards in the Republic of Korea. Our audits also comprehended the translation of Korean won amounts into U.S. dollar amounts and,
in our opinion, such translation has been made in conformity with the basis stated in Note 2. Such
U.S. dollar amounts are presented solely for the convenience of readers in the United States of
America. 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 26. Deloitte HanaAnjin LLC Seoul, Korea
March 26, 2005 F-2




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hanarotelecom incorporated (FORMERLY HANARO TELECOM, INC.)AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2004 Translation intoKorean Won
    
    
    U.S. Dollars (Note 2)ASSETS
    
    2003
    
    
    2004
    
    
    2004(In millions)
    
    
    (In thousands)CURRENT ASSETS:Cash and cash equivalents (Note 3)
    
    W
    199,548
    
    
    W
    168,346
    
    
    $
    162,637Short-term financial instruments (Notes 4 and 5)
    
    
    219,872
    
    
    
    193,716
    
    
    
    187,147Short-term investment securities (Note 6)
    
    
    389
    
    
    
    1,121
    
    
    
    1,083Trade receivables, net of allowance for doubtful
accounts of W37,510 million in 2003 and W62,216
million in 2004
    
    
    208,503
    
    
    
    205,600
    
    
    
    198,628Short-term loans, net of discount on present value of
W596 million in 2003 and W209 million in 2004
(Note 9)
    
    
    14,458
    
    
    
    7,631
    
    
    
    7,372Accounts receivable-other, net of allowance for
doubtful accounts of W2,899 million in 2003 and W55
million
in 2004
    
    
    2,820
    
    
    
    1,306
    
    
    
    1,262Accrued income
    
    
    6,313
    
    
    
    2,083
    
    
    
    2,012Prepaid expenses (Note 10)
    
    
    21,935
    
    
    
    13,240
    
    
    
    12,791Prepaid income tax
    
    
    2,353
    
    
    
    3,037
    
    
    
    2,934Advanced payments
    
    
    1,577
    
    
    
    26,853
    
    
    
    25,942Forward exchange contracts
    
    
    173
    
    
    
    
    
    
    
    Inventories
    
    
    1,295
    
    
    
    1,864
    
    
    
    1,802679,236
    
    
    
    624,797
    
    
    
    603,610NON-CURRENT ASSETS:Long-term financial instruments (Notes 4 and 5)
    
    
    7
    
    
    
    68
    
    
    
    66Long-term investment securities (Note 7)
    
    
    23,764
    
    
    
    28,816
    
    
    
    27,839Investment securities using the equity method (Note 8)
    
    
    9,565
    
    
    
    
    
    
    
    Long-term trade receivables, net of allowance for
doubtful accounts of W680 million in 2003 and W535
million in 2004
    
    
    1,038
    
    
    
    1,083
    
    
    
    1,046Long-term loans, net of discount on present value of
W2,525 million in 2003 and W2,709 million in 2004
(Note 9)
    
    
    13,483
    
    
    
    16,086
    
    
    
    15,541Key-money deposits
    
    
    43,928
    
    
    
    72,193
    
    
    
    69,745Long-term prepaid expenses (Note 10)
    
    
    12,893
    
    
    
    12,352
    
    
    
    11,933Deferred income tax assets (Note 21)
    
    
    232
    
    
    
    745
    
    
    
    720Property and equipment, net (Notes 11, 13 and 24)
    
    
    2,550,921
    
    
    
    2,372,845
    
    
    
    2,292,382Intangibles (Notes 12 and 24)
    
    
    51,481
    
    
    
    56,265
    
    
    
    54,3572,707,312
    
    
    
    2,560,453
    
    
    
    2,473,629Total Assets
    
    W
    3,386,548
    
    
    W
    3,185,250
    
    
    $
    3,077,239
 (continued) F-3




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hanarotelecom incorporated (FORMERLY HANARO TELECOM, INC.)AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) AS OF DECEMBER 31, 2003 AND 2004 Translation intoKorean Won
    
    
    U.S. Dollars (Note 2)LIABILITIES AND SHAREHOLDERS EQUITY
    
    2003
    
    
    2004
    
    
    2004(In millions)
    
    
    (In thousands)CURRENT LIABILITIES:Trade payables
    
    W
    32,951
    
    
    W
    28,803
    
    
    $
    27,826Other accounts payable
    
    
    116,632
    
    
    
    138,443
    
    
    
    133,748Short-term borrowings (Note 14)
    
    
    163,000
    
    
    
    
    
    
    
    Advances received
    
    
    3,321
    
    
    
    9,983
    
    
    
    9,644Accrued expenses
    
    
    59,982
    
    
    
    54,307
    
    
    
    52,465Withholdings
    
    
    21,210
    
    
    
    16,263
    
    
    
    15,712Income tax payable
    
    
    179
    
    
    
    653
    
    
    
    631Current portion of Asset Backed Securities payable
(Note 16)
    
    
    32,510
    
    
    
    
    
    
    
    Current maturities of long-term debt, net of discount
on debentures of W3,476 million in 2003 and W6,543
million in 2004, and present value discount of W1,698
million in 2003 (Notes 13 and 15)
    
    
    352,226
    
    
    
    413,526
    
    
    
    399,503Forward exchange contracts (Note 17)
    
    
    
    
    
    
    33,802
    
    
    
    32,656Interest swap (Note 17)
    
    
    13,058
    
    
    
    17,623
    
    
    
    17,025Deposits received
    
    
    1,781
    
    
    
    1,924
    
    
    
    1,860796,850
    
    
    
    715,327
    
    
    
    691,070LONG-TERM LIABILITIES:Long-term debt, net of current portion (Note 15)
    
    
    242,523
    
    
    
    399,154
    
    
    
    385,619Debentures, net (Note 15)
    
    
    481,753
    
    
    
    189,518
    
    
    
    183,091Long-term obligation under capital lease (Note 13)
    
    
    48,570
    
    
    
    32,541
    
    
    
    31,438Long-term advances received
    
    
    14,315
    
    
    
    13,142
    
    
    
    12,696Accrued severance indemnities, net (Note 2)
    
    
    23,876
    
    
    
    32,932
    
    
    
    31,815Long-term deposits received
    
    
    20,711
    
    
    
    23,709
    
    
    
    22,906Deferred income tax liabilities (Note 21)
    
    
    47
    
    
    
    138
    
    
    
    133831,795
    
    
    
    691,134
    
    
    
    667,698Total Liabilities
    
    
    1,628,645
    
    
    
    1,406,461
    
    
    
    1,358,768COMMITMENTS AND CONTINGENCIES (Note 23)SHAREHOLDERS EQUITY:Capital stock (Note 18)
    
    
    2,310,676
    
    
    
    2,310,676
    
    
    
    2,232,322Capital surplus (Note 18)
    
    
    340,777
    
    
    
    341,033
    
    
    
    329,469Other capital surplus
    
    
    (8,557
    )
    
    
    
    
    
    
    Accumulated deficit
    
    
    (871,614
    )
    
    
    (859,975
    )
    
    
    (830,813
    )Capital adjustments:Stock compensation (Note 19)
    
    
    5,916
    
    
    
    7,227
    
    
    
    6,982Valuation loss on available-for-sale securities, net
(Note 7)
    
    
    (6,806
    )
    
    
    (5,764
    )
    
    
    (5,569
    )Valuation loss on available-for-sale securities
using the equity method
    
    
    (7
    )
    
    
    
    
    
    
    Valuation loss on interest swap (Note 17)
    
    
    (13,058
    )
    
    
    (17,623
    )
    
    
    (17,025
    )Foreign-based operations translation debit
    
    
    (22
    )
    
    
    
    
    
    
    Minority interests
    
    
    598
    
    
    
    3,215
    
    
    
    3,105Total Shareholders Equity
    
    
    1,757,903
    
    
    
    1,778,789
    
    
    
    1,718,471Total Liabilities and Shareholders Equity
    
    W
    3,386,548
    
    
    W
    3,185,250
    
    
    $
    3,077,239
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



hanarotelecom incorporated (FORMERLY HANARO TELECOM, INC.)AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 Translation intoKorean Won
    
    
    U.S. Dollars (Note 2)2002
    
    
    2003
    
    
    2004
    
    
    2004(In thousands, except(In millions, except per share amount)
    
    
    per share amount)OPERATING REVENUE (Notes 22 and 24)
    
    W
    1,417,854
    
    
    W
    1,383,486
    
    
    W
    1,449,569
    
    
    $
    1,400,414OPERATING EXPENSES (Note 20)
    
    
    1,396,426
    
    
    
    1,312,792
    
    
    
    1,335,639
    
    
    
    1,290,348OPERATING INCOME
    
    
    21,428
    
    
    
    70,694
    
    
    
    113,930
    
    
    
    110,066NON-OPERATING INCOME:Interest income
    
    
    32,761
    
    
    
    18,465
    
    
    
    18,497
    
    
    
    17,870Dividend income
    
    
    2,935
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of short-term investment securities
    
    
    1,718
    
    
    
    315
    
    
    
    
    
    
    
    Gain on disposal of long-term investment securities
    
    
    2,658
    
    
    
    145
    
    
    
    109
    
    
    
    105Gain on disposal of property and equipment
    
    
    93
    
    
    
    1,102
    
    
    
    885
    
    
    
    855Gain on foreign currency transactions
    
    
    1,560
    
    
    
    267
    
    
    
    1,404
    
    
    
    1,356Gain on foreign currency translation
    
    
    17,064
    
    
    
    19
    
    
    
    33,823
    
    
    
    32,676Gain on early redemption of debentures (Note 15)
    
    
    
    
    
    
    870
    
    
    
    
    
    
    
    Gain on valuation of forward exchange contract
(Note 17)
    
    
    
    
    
    
    173
    
    
    
    
    
    
    
    Gain on transaction of forward exchange contract
(Note 17)
    
    
    186
    
    
    
    343
    
    
    
    242
    
    
    
    234Gain on disposal of intangible assets
    
    
    1,646
    
    
    
    
    
    
    
    
    
    
    
    Gain on realization of negative goodwill (Note 12)
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    6,651
    
    
    
    5,273
    
    
    
    7,215
    
    
    
    6,97170,365
    
    
    
    26,972
    
    
    
    62,175
    
    
    
    60,067NON-OPERATING EXPENSES:Interest expense (Note 15)
    
    
    169,412
    
    
    
    139,330
    
    
    
    100,882
    
    
    
    97,461Asset Backed Securities payable expense (Note 16)
    
    
    22,293
    
    
    
    9,028
    
    
    
    490
    
    
    
    473Loss on foreign currency transactions
    
    
    428
    
    
    
    764
    
    
    
    354
    
    
    
    342Loss on foreign currency translation
    
    
    260
    
    
    
    138
    
    
    
    11
    
    
    
    11Loss on disposal of short-term investment securities
    
    
    
    
    
    
    2,117
    
    
    
    86
    
    
    
    83Loss on disposal of long-term investment securities
    
    
    1,149
    
    
    
    
    
    
    
    1
    
    
    
    1Loss on valuation of trading securities
    
    
    2,838
    
    
    
    307
    
    
    
    
    
    
    
    Impairment loss on short-term investment securities
(Note 6)
    
    
    600
    
    
    
    940
    
    
    
    450
    
    
    
    435Impairment loss on long-term investment securities
(Note 7)
    
    
    6,357
    
    
    
    3,385
    
    
    
    2,539
    
    
    
    2,453Donations
    
    
    335
    
    
    
    800
    
    
    
    306
    
    
    
    296Loss on early redemption of debentures (Note 15)
    
    
    5,072
    
    
    
    308
    
    
    
    
    
    
    
    Loss on valuation using the equity method (Note 8)
    
    
    
    
    
    
    23,142
    
    
    
    
    
    
    
    Loss on disposal of property and equipment
    
    
    5,606
    
    
    
    1,326
    
    
    
    1,246
    
    
    
    1,204Loss on disuse of property and equipment (Note 11)
    
    
    
    
    
    
    61,333
    
    
    
    20,726
    
    
    
    20,023Loss on valuation of forward exchange contract
(Note 17)
    
    
    1,888
    
    
    
    
    
    
    
    33,975
    
    
    
    32,823Loss on transaction of forward exchange contract
(Note 17)
    
    
    
    
    
    
    
    
    
    
    173
    
    
    
    167Other (Note 2 and 12)
    
    
    3,233
    
    
    
    15,660
    
    
    
    1,017
    
    
    
    982219,471
    
    
    
    258,578
    
    
    
    162,256
    
    
    
    156,754ORIDINARY INCOME (LOSS) BEFORE INCOME TAX
    
    
    (127,678
    )
    
    
    (160,912
    )
    
    
    13,849
    
    
    
    13,379INCOME TAX EXPENSE (Note 21)
    
    
    (1,083
    )
    
    
    (302
    )
    
    
    (495
    )
    
    
    (478
    )MINORITY INTEREST SHARE OF LOSS (INCOME)
    
    
    3,736
    
    
    
    (85
    )
    
    
    (308
    )
    
    
    (297
    )NET INCOME (LOSS)
    
    W
    (125,025
    )
    
    W
    (161,299
    )
    
    W
    13,046
    
    
    $
    12,604BASIC AND DILUTED INCOME (LOSS) PER SHARE (Note 2)
    
    W
    (419
    )
    
    W
    (502
    )
    
    W
    28
    
    
    $
    0.03
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



hanarotelecom incorporated (FORMERLY HANARO TELECOM, INC.)AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 Korean Won (In millions)RetainedCommon
    
    
    Capital
    
    
    Earnings
    
    
    Capital
    
    
    MinorityStock
    
    
    Surplus
    
    
    (Deficit)
    
    
    Adjustments
    
    
    Interests
    
    
    TotalBalance at December 31, 2001
    
    W
    1,320,000
    
    
    W
    689,432
    
    
    W
    (590,365
    )
    
    W
    2,227
    
    
    W
    147,098
    
    
    W
    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 related to
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 related to
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 debit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Balance at December 31, 2003
    
    
    2,310,676
    
    
    
    332,220
    
    
    
    (871,614
    )
    
    
    (13,977
    )
    
    
    598
    
    
    
    1,757,903Net income for 2004
    
    
    
    
    
    
    
    
    
    
    13,046
    
    
    
    
    
    
    
    308
    
    
    
    13,354Effect of changes in
consolidated subsidiaries
    
    
    
    
    
    
    256
    
    
    
    (300
    )
    
    
    22
    
    
    
    2,309
    
    
    
    2,287Compensation expense related to
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,311
    
    
    
    
    
    
    
    1,311Valuation gain on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,042
    
    
    
    
    
    
    
    1,042Effect of changes in
investment securities using the equity
method
    
    
    
    
    
    
    8,557
    
    
    
    (1,107
    )
    
    
    7
    
    
    
    
    
    
    
    7,457Loss on valuation of interest
swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,565
    )
    
    
    
    
    
    
    (4,565
    )Balance at December 31, 2004
    
    W
    2,310,676
    
    
    W
    341,033
    
    
    W
    (859,975
    )
    
    W
    (16,160
    )
    
    W
    3,215
    
    
    W
    1,778,789Translation into U.S. Dollars
(In thousands) (Note 2)
    
    $
    2,232,322
    
    
    $
    329,469
    
    
    $
    (830,813
    )
    
    $
    (15,612
    )
    
    $
    3,105
    
    
    $
    1,718,471
 See accompanying notes to consolidated financial statements. F-6




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##### Table of Contents



hanarotelecom incorporated (FORMERLY HANARO TELECOM, INC.)AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 Translation intoKorean Won
    
    
    U.S. Dollars (Note 2)2002
    
    
    2003
    
    
    2004
    
    
    2004(In millions)
    
    
    
    
    
    
    (In thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    W
    (125,025
    )
    
    W
    (161,299
    )
    
    W
    13,046
    
    
    $
    12,604Addition of expenses not involving cash outflows:Stock compensation expense
    
    
    1,651
    
    
    
    1,375
    
    
    
    1,278
    
    
    
    1,235Provision for severance indemnities
    
    
    13,646
    
    
    
    13,444
    
    
    
    14,095
    
    
    
    13,617Amortization of discount on debentures
    
    
    26,787
    
    
    
    18,857
    
    
    
    10,698
    
    
    
    10,335Amortization of discount on long-term debt
    
    
    
    
    
    
    408
    
    
    
    4,983
    
    
    
    4,814Recognition of long-term accrued interest
    
    
    8,246
    
    
    
    6,171
    
    
    
    
    
    
    
    Employee fringe benefits
    
    
    2,070
    
    
    
    944
    
    
    
    1,302
    
    
    
    1,258Depreciation and amortization
    
    
    433,555
    
    
    
    428,528
    
    
    
    442,312
    
    
    
    427,313Loss on foreign currency translation
    
    
    260
    
    
    
    138
    
    
    
    11
    
    
    
    11Provision for doubtful accounts
    
    
    16,589
    
    
    
    25,744
    
    
    
    29,933
    
    
    
    28,918Loss on valuation of trading securities
    
    
    2,838
    
    
    
    307
    
    
    
    
    
    
    
    Loss on disposal of property and equipment
    
    
    5,606
    
    
    
    1,326
    
    
    
    1,246
    
    
    
    1,204Impairment loss on short-term investment securities
    
    
    600
    
    
    
    940
    
    
    
    450
    
    
    
    435Impairment loss on long-term investment securities
    
    
    6,357
    
    
    
    3,385
    
    
    
    2,539
    
    
    
    2,453Loss on disposal of short-term investment securities
    
    
    
    
    
    
    2,117
    
    
    
    86
    
    
    
    83Loss on disposal of long-term investment securities
    
    
    1,149
    
    
    
    
    
    
    
    1
    
    
    
    1Loss on valuation using the equity method
    
    
    
    
    
    
    23,142
    
    
    
    
    
    
    
    Loss on disuse of property and equipment
    
    
    
    
    
    
    61,333
    
    
    
    20,726
    
    
    
    20,023Loss on early redemption of debentures
    
    
    5,072
    
    
    
    308
    
    
    
    
    
    
    
    Loss on valuation of forward exchange contract
    
    
    1,888
    
    
    
    
    
    
    
    33,975
    
    
    
    32,823Minority interest income
    
    
    
    
    
    
    85
    
    
    
    308
    
    
    
    297Ordinary development cost and other
    
    
    13
    
    
    
    643
    
    
    
    634
    
    
    
    612526,327
    
    
    
    589,195
    
    
    
    564,577
    
    
    
    545,432Deduction of revenues not involving cash inflows:Gain on disposal of short-term investment securities
    
    
    1,718
    
    
    
    315
    
    
    
    
    
    
    
    Amortization of present value discount
    
    
    3,746
    
    
    
    2,019
    
    
    
    1,506
    
    
    
    1,455Gain on valuation of forward exchange contract
    
    
    
    
    
    
    173
    
    
    
    
    
    
    
    Gain on disposal of property and equipment
    
    
    93
    
    
    
    1,102
    
    
    
    885
    
    
    
    855Gain on disposal of intangibles
    
    
    1,646
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of long-term investment securities
    
    
    2,658
    
    
    
    145
    
    
    
    109
    
    
    
    105Gain on foreign currency translation
    
    
    17,064
    
    
    
    19
    
    
    
    33,823
    
    
    
    32,676Gain on realization of negative goodwill
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    Gain on early redemption of debentures
    
    
    
    
    
    
    870
    
    
    
    
    
    
    
    Minority interest loss
    
    
    3,736
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    27
    
    
    
    56
    
    
    
    224
    
    
    
    21733,781
    
    
    
    4,699
    
    
    
    36,547
    
    
    
    35,308Changes in assets and liabilities resulting from
operations:Increase in trade receivables
    
    
    (91,397
    )
    
    
    (37,260
    )
    
    
    (24,643
    )
    
    
    (23,807
    )Decrease in long-term trade receivables
    
    
    
    
    
    
    
    

    
    
    100
    
    
    
    96Decrease (Increase) in accounts receivable-other
    
    
    (2,816
    )
    
    
    2,693
    
    
    
    6,494
    
    
    
    6,274Decrease (Increase) in accrued income
    
    
    1,643
    
    
    
    (1,263
    )
    
    
    4,243
    
    
    
    4,099Decrease (Increase) in prepaid expenses
    
    
    22,260
    
    
    
    5,710
    
    
    
    (1,629
    )
    
    
    (1,574
    )Decrease (Increase) in prepaid income tax
    
    
    1,305
    
    
    
    1,367
    
    
    
    (671
    )
    
    
    (648
    )Increase in advanced payments
    
    
    (11,860
    )
    
    
    (1,370
    )
    
    
    (25,529
    )
    
    
    (24,663
    )Increase in inventories
    
    
    (55,892
    )
    
    
    (32,218
    )
    
    
    (30,929
    )
    
    
    (29,880
    )Decrease in prepaid V.A.T.
    
    
    5,905
    
    
    
    
    
    
    
    
    
    
    
    
 (continued) F-7




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##### Table of Contents



hanarotelecom incorporated (FORMERLY HANARO TELECOM, INC.)AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 Translation intoKorean Won
    
    
    U.S. Dollars (Note 2)2002
    
    
    2003
    
    
    2004
    
    
    2004(In millions)
    
    
    
    
    
    
    (In thousands)Changes in assets and liabilities resulting from operations:Decrease (Increase) in forward exchange contract
    
    W
    2,519
    
    
    W
    (1,888
    )
    
    W
    
    
    
    $
    Decrease in long-term prepaid expenses
    
    
    6,961
    
    
    
    1,097
    
    
    
    541
    
    
    
    523Decrease (Increase) in deferred income tax assets
    
    
    100
    
    
    
    (51
    )
    
    
    (402
    )
    
    
    (388
    )Decrease in trade payables
    
    
    (27,016
    )
    
    
    (38,320
    )
    
    
    (7,316
    )
    
    
    (7,068
    )Increase (Decrease) in other accounts payable
    
    
    (186,839
    )
    
    
    (28,698
    )
    
    
    20,347
    
    
    
    19,657Increase in advances received
    
    
    2,487
    
    
    
    347
    
    
    
    4,129
    
    
    
    3,989Increase (Decrease) in accrued expenses
    
    
    7,361
    
    
    
    18,512
    
    
    
    (6,948
    )
    
    
    (6,712
    )Increase (Decrease) in withholdings
    
    
    10,365
    
    
    
    7,314
    
    
    
    (6,441
    )
    
    
    (6,223
    )Increase (Decrease) in income tax payable
    
    
    1,749
    
    
    
    (1,436
    )
    
    
    474
    
    
    
    458Decrease in long-term advances received
    
    
    
    
    
    
    (1,189
    )
    
    
    (1,173
    )
    
    
    (1,133
    )Increase (Decrease) in deposits received
    
    
    7,756
    
    
    
    893
    
    
    
    (77
    )
    
    
    (74
    )Increase (Decrease) in long-term deposits received
    
    
    (4,306
    )
    
    
    1,013
    
    
    
    3,219
    
    
    
    3,110Increase (Decrease) in deferred income tax liabilities
    
    
    407
    
    
    
    (1
    )
    
    
    90
    
    
    
    87Increase (Decrease) in foreign based operations
translation credit
    
    
    (30
    )
    
    
    2
    
    
    
    
    
    
    
    Decrease in payments to National Pension
    
    
    76
    
    
    
    140
    
    
    
    23
    
    
    
    22Payments of severance indemnities
    
    
    (5,786
    )
    
    
    (15,556
    )
    
    
    (5,090
    )
    
    
    (4,917
    )(315,048
    )
    
    
    (120,162
    )
    
    
    (71,188
    )
    
    
    (68,772
    )Net cash flows provided by operating activities
    
    
    52,473
    
    
    
    303,035
    
    
    
    469,888
    
    
    
    453,956CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from disposal of short-term investment securities
    
    
    101,908
    
    
    
    34,143
    
    
    
    303
    
    
    
    293Collection of short-term financial instruments
    
    
    483,510
    
    
    
    842,882
    
    
    
    778,170
    
    
    
    751,782Redemption of short-term loans
    
    
    1,150
    
    
    
    6,771
    
    
    
    6,320
    
    
    
    6,106Redemption of long-term loans
    
    
    16,044
    
    
    
    2,734
    
    
    
    1,280
    
    
    
    1,237Proceeds from disposal of long-term investment securities
    
    
    8,528
    
    
    
    406
    
    
    
    9,002
    
    
    
    8,697Withdrawal of long-term financial instruments
    
    
    1,220
    
    
    
    
    
    
    
    3
    
    
    
    3Refund of key-money deposits
    
    
    16,039
    
    
    
    18,152
    
    
    
    14,642
    
    
    
    14,145Proceeds from disposal of property and equipment
    
    
    4,494
    
    
    
    9,304
    
    
    
    8,218
    
    
    
    7,939Proceeds from disposal of intangibles
    
    
    1,800
    
    
    
    
    
    
    
    
    
    
    
    Withdrawal of severance insurance deposits
    
    
    1,673
    
    
    
    1,009
    
    
    
    99
    
    
    
    96Acquisition of short-term financial instruments
    
    
    (484,050
    )
    
    
    (929,616
    )
    
    
    (751,564
    )
    
    
    (726,079
    )Purchase of short-term investment securities
    
    
    (70,098
    )
    
    
    (17,807
    )
    
    
    
    
    
    
    Extension of short-term loans
    
    
    (572
    )
    
    
    (614
    )
    
    
    (417
    )
    
    
    (403
    )Purchase of long-term investment securities
    
    
    (3,348
    )
    
    
    (1,132
    )
    
    
    (190
    )
    
    
    (184
    )Acquisition of long-term financial instruments
    
    
    (85
    )
    
    
    (2
    )
    
    
    (131
    )
    
    
    (127
    )Extension of long-term loans
    
    
    (2,854
    )
    
    
    (5,404
    )
    
    
    (2,755
    )
    
    
    (2,662
    )Payment of key-money deposits
    
    
    (9,111
    )
    
    
    (2,324
    )
    
    
    (42,083
    )
    
    
    (40,656
    )Acquisition of investment securities using the equity
method
    
    
    
    
    
    
    
    
    
    
    (3,734
    )
    
    
    (3,607
    )Acquisition of property and equipment
    
    
    (342,643
    )
    
    
    (196,053
    )
    
    
    (212,522
    )
    
    
    (205,315
    )Payment of intangibles
    
    
    (18,447
    )
    
    
    (13,118
    )
    
    
    (12,163
    )
    
    
    (11,751
    )Payment of severance insurance deposits
    
    
    (2,764
    )
    
    
    (124
    )
    
    
    (1,659
    )
    
    
    (1,603
    )Net cash flows used in investing activities
    
    
    (297,606
    )
    
    
    (250,793
    )
    
    
    (209,181
    )
    
    
    (202,089
    )
 (continued) F-8




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##### Table of Contents



hanarotelecom incorporated (FORMERLY HANARO TELECOM, INC.)AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 Translation intoKorean Won
    
    
    U.S. Dollars (Note 2)2002
    
    
    2003
    
    
    2004
    
    
    2004(In millions)
    
    
    
    
    
    
    (In thousands)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from short-term borrowings
    
    W
    63,000
    
    
    W
    338,000
    
    
    W
    
    
    
    $
    Proceeds from long-term debt
    
    
    236,424
    
    
    
    148,329
    
    
    
    322,549
    
    
    
    311,611Proceeds from issuance of debentures
    
    
    603,972
    
    
    
    261,013
    
    
    
    
    
    
    
    Proceeds from issuance of common stock
    
    
    76,223
    
    
    
    565,889
    
    
    
    
    
    
    
    Proceeds from Asset Backed Securities
    
    
    81,000
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from long-term deposits received
    
    
    
    
    
    
    1,487
    
    
    
    
    
    
    
    Increase in minority interests
    
    
    702
    
    
    
    
    
    
    
    
    
    
    
    Repayment of short-term borrowings
    
    
    (64,695
    )
    
    
    (230,000
    )
    
    
    (163,000
    )
    
    
    (157,473
    )Repayment of current portion of long-term debt
    
    
    (77,332
    )
    
    
    
    
    
    
    
    
    
    
    Repayment of long-term debt
    
    
    (507,548
    )
    
    
    (1,096,800
    )
    
    
    (421,961
    )
    
    
    (407,652
    )Decrease in Asset Backed Securities payable
    
    
    (117,207
    )
    
    
    (122,972
    )
    
    
    (32,510
    )
    
    
    (31,408
    )Repayment of bonds with warrants
    
    
    (39,348
    )
    
    
    
    
    
    
    
    
    
    
    Repayment of deposits received
    
    
    (1,899
    )
    
    
    
    
    
    
    
    
    
    
    Net cash flows provided by (used in) financing
activities
    
    
    253,292
    
    
    
    (135,054
    )
    
    
    (294,922
    )
    
    
    (284,922
    )INCREASE (DECREASE) FROM CHANGES IN
CONSOLIDATED SUBSIDIARIES
    
    
    (733
    )
    
    
    (23,758
    )
    
    
    3,013
    
    
    
    2,911NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    7,426
    
    
    
    (106,570
    )
    
    
    (31,202
    )
    
    
    (30,144
    )CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR
    
    
    298,692
    
    
    
    306,118
    
    
    
    199,548
    
    
    
    192,781CASH AND CASH EQUIVLAENTS, END OF YEAR
    
    W
    306,118
    
    
    W
    199,548
    
    
    W
    168,346
    
    
    $
    162,637
 (continued) F-9




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##### Table of Contents



hanarotelecom incorporated (FORMERLY HANARO TELECOM, INC.)AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Translation intoKorean Won
    
    
    U.S. Dollars (Note 2)2002
    
    
    2003
    
    
    2004
    
    
    2004(In millions)
    
    
    
    
    
    
    (In thousands)CASH PAID FOR INTEREST
    
    W
    143,755
    
    
    W
    125,291
    
    
    W
    82,453
    
    
    $
    79,657CASH REFUNDED (PAID) FOR INCOME TAX
    
    
    2,289
    
    
    
    (1,030
    )
    
    
    (1,348
    )
    
    
    (1,302
    )TRANSACTIONS NOT INVOLVING CASH:Transfer of long-term loans to current portion
    
    
    6,842
    
    
    
    13,830
    
    
    
    4,759
    
    
    
    4,598Transfer of inventories to property and equipment
    
    
    59,374
    
    
    
    41,801
    
    
    
    31,480
    
    
    
    30,413Transfer of debentures to current portion
    
    
    849,330
    
    
    
    264,688
    
    
    
    306,000
    
    
    
    295,624Transfer of long-term debt to current portion
    
    
    187,454
    
    
    
    103,271
    
    
    
    72,956
    
    
    
    70,482Transfer of long-term obligation under capital
lease to current portion
    
    
    38,376
    
    
    
    87,297
    
    
    
    53,108
    
    
    
    51,307Transfer of Asset Backed Securities payable to
current portion
    
    
    146,024
    
    
    
    32,510
    
    
    
    
    
    
    
    Recognition of loss on valuation of
available-for-sale securities as capital
adjustments
    
    
    (3,761
    )
    
    
    (3,496
    )
    
    
    (681
    )
    
    
    (658
    )Transfer of construction in progress to property
and equipment
    
    
    152,918
    
    
    
    125,045
    
    
    
    70,698
    
    
    
    68,301Transfer 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
    
    
    20,526
    
    
    
    98,230
    
    
    
    37,731
    
    
    
    36,452Transfer of other current liabilities to long-term
deposits received
    
    
    
    
    
    
    17,121
    
    
    
    
    
    
    
    Transfer of short-term loans to long-term loans
    
    
    10,028
    
    
    
    
    
    
    
    
    
    
    
    
 See accompanying notes to consolidated financial statements. F-10




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##### Table of Contents



hanarotelecom incorporated (FORMERLY HANARO TELECOM, INC.)AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2003 AND 2004 1. GENERAL: (1) hanarotelecom incorporated hanarotelecom incorporated (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 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 83 cities, including Seoul, Pusan, Ulsan and Incheon,
and 51 counties as of December 31, 2004. On December 12, 2002, hanaro received a license to
provide domestic long-distance calls and international calls from the MIC, and commenced providing
the service from July 1, 2004. hanaros headquarters is located in Joong-Gu, Seoul. hanaro has 26 domestic branches and also has
invested in several companies such as Hanaro Realty Development & Management Co., Ltd., Hanaro
Telephone & Internet Information, Inc. and Hanaro Dream Inc. in order to facilitate and strengthen
its services. hanaro changed its company name into hanarotelecom incorporated from Hanaro Telecom, Inc. at
the shareholders meeting on December 16, 2004. As of December 31, 2004, the shareholders of hanaro are as follows: Number of
    
    
    Percentage ofshares
    
    
    ownership (%)Newbridge Asia HT, L.P.
    
    
    49,535,799
    
    
    
    10.72AIF II NT, Ltd.
    
    
    38,456,250
    
    
    
    8.32Korea Investment Trust Co., Ltd
    
    
    28,540,408
    
    
    
    6.18AOF NT, Ltd.
    
    
    24,721,875
    
    
    
    5.35SK Telecom
    
    
    22,090,000
    
    
    
    4.78United Classic Investment Limited
    
    
    20,392,746
    
    
    
    4.41Dacom Corporation
    
    
    14,570,565
    
    
    
    3.15HT Holding IX, L.P.
    
    
    12,818,750
    
    
    
    2.77Daewoo Securities Co., Ltd.
    
    
    12,000,000
    
    
    
    2.60Employee stock ownership association
    
    
    2,673,628
    
    
    
    0.58Others
    
    
    236,335,159
    
    
    
    51.14462,135,180
    
    
    
    100.00
 (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. F-11




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##### Table of Contents



Year
    
    Ownershipcontrol was
    
    percentage (%)Subsidiaries
    
    obtained
    
    2003
    
    2004
    
    Primary businessHanaro Realty Development &
Management Co., Ltd.
    
    
    1999
    
    
    
    99.99
    
    
    
    99.99
    
    
    Property management for
hanarotelecom incorporatedHanaro Telephone & Internet
Information, Inc.
    
    
    2002
    
    
    
    99.99
    
    
    
    99.99
    
    
    Customer Q & A and serviceHanaro
WEB(n)TV
    
    
    2000
    
    
    
    90.91
    
    
    
    49.00
    
    
    Broadcasting & telecommunicationMedia Holdings, Inc.
    
    
    2004
    
    
    
    
    
    
    
    100.00
    
    
    Investment in broadcasting companyHanaro Telecom America, Inc.
    
    
    2000
    
    
    
    100.00
    
    
    
    
    
    
    Telecommunication serviceHanaro Dream, Inc.
    
    
    2004
    
    
    
    
    
    
    
    57.02
    
    
    Distribution of internet digital
contents
 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, Hanaro Dream, Inc., were excluded from the
consolidated financial statements as of December 31, 2003. hanaro purchased Hanaro Dream, Inc.s and Media Holdings, Inc.s shares during 2004 and included
those companies in the consolidated financial statements. hanaro reclassified Dreamline
Corporation into long-term investment securities from investment securities using the equity method
due to the decrease of ownership percentage to less than 20% as of December 31, 2004, and excluded
Hanaro Telecom America, Inc., which is in the process of liquidation and was recognized as
impaired, from the consolidated financial statements as of December 31, 2004. Also, hanaro disposed of
shares of Hanaro Web (n) TV (ownership percentage of 41.91%) to Media
Holdings, Inc. during 2004. 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 W1,035.10 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, 2004, 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: F-12




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##### Table of Contents



Adoption of Newly Effective Statements of Korea Accounting Standards The Company newly adopted the Statements of Korea Accounting Standards (SKAS) No. 13-Troubled
Debt Restructurings, effective from January 1, 2004, and certain amounts and accounts of prior
years financial statements are reclassified to conform to the current years presentation. This
reclassification does not affect the net loss and net assets of the prior period. 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 sales of customer premises equipment is recognized
when the equipment is delivered and installation is completed. The 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. Revenue from other services including leased line
services are recognized when the services are provided in accordance with the contract terms. 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 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 collectivity of 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, 2002, 2003 and 2004 are as follows (won in millions): 2002
    
    
    2003
    
    
    2004Beginning of year
    
    W
    5,022
    
    
    W
    21,170
    
    
    W
    41,089Provision
    
    
    16,589
    
    

    
    25,744
    
    
    
    29,933Write-offs
    
    
    (440
    )
    
    
    (1,569
    )
    
    
    (8,969
    )Changes in consolidated subsidiaries
    
    
    (1
    )
    
    
    (4,256
    )
    
    
    753End of year
    
    W
    21,170
    
    
    W
    41,089
    
    
    W
    62,806
 The Company reclassified the trade receivables from Onse Telecom into long-term trade receivables
due to the court arrangement of debt and accordingly, recorded the difference between the trade
receivables and the discounted present value as allowance for doubtful accounts in 2003. Also, in 2004, in accordance with the adoption of SKAS No. 13, the Company reclassified the
discount on present value of W 686 million of the receivables from Onse Telecom incurred during
2003 into allowance for doubtful accounts. F-13




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##### Table of Contents



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. Investment Securities Other than those Accounted for Using the Equity Method (1) Classification of Securities At acquisition, the Company classifies securities into one of 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 the 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 is recorded in current operations, up to the amount of the previously recognized
impairment loss, while with securities 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




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##### 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 a held-to-maturity security is classified into available-for-sale security, the
difference between fair value and book value is recorded as a capital adjustment. Whereas, in the
case of an available-for-sale security reclassified into held-to-maturity securities, the
difference is recorded as a capital adjustment and amortized using the 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
    
    40 ~ 50 yearsMachinery
    
    5 ~ 15 yearsVehicles and other
    
    4 ~ 8 years
 The Company changed the useful lives of tangible assets, effective from January 1, 2004, to improve
financial soundness and usefulness of accounting information, considering the rapid changes of
technologies in the telecommunication industry, the Companys accumulated business experience and
the average useful lives used by companies in the same industry. Such changes in accounting
estimates increased the Companys depreciation by W8 million for the year ended December 31, 2004,
in comparison with the calculation applying the previous useful lives. The changes in the estimated
useful lives are as follows: Previous useful lives
    
    Revised useful livesBuildings and structures
    
    50 years
    
    40 yearsMachinery (duct line)
    
    8 years
    
    15 yearsMachinery (terminal equipment)
    
    8 years
    
    6 yearsVehicles and other
    
    5 ~ 8 years
    
    4 years
 Long-Lived Assets Long-lived assets are subject to review for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An impairment loss is
recognized when estimated undiscounted future net cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying amount. If such assets are considered
to be impaired, the impairment to be recognized is measured as the amount by which the carrying
amount of the assets exceeds the fair value of the assets. F-15




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##### Table of Contents



Capitalization of Financing Costs Interest expense, discount and other financial charges, including certain foreign exchange
translation gain and loss 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. 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
    
    20 yearsLand rights
    
    20 yearsDevelopment costs
    
    1 yearOther intangibles
    
    3-5 years
 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 W25,649 million and W36,348 million as of December 31, 2003 and 2004,
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 W149 million and W127 million as of December 31, 2003 and 2004,
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. 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 W1,624 million and W3,289 million as of December 31,
2003 and 2004, respectively, is presented as a deduction from accrued severance indemnities. F-16




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##### Table of Contents



Changes in accrued severance indemnities for the years ended December 31, 2002, 2003 and 2004 are
as follows (won in millions): 2002
    
    
    2003
    
    
    2004Beginning of year
    
    W
    21,419
    
    
    W
    28,027
    
    
    W
    25,649Severance payments
    
    
    (5,786
    )
    
    
    (15,556
    )
    
    
    (5,090
    )Provision
    
    
    13,646
    
    
    
    15,224
    
    
    
    15,116Changes in consolidated subsidiaries
    
    
    (1,252
    )
    
    
    (2,046
    )
    
    
    67328,027
    
    
    
    25,649
    
    
    
    36,348National Pension Fund for employees
    
    
    (295
    )
    
    
    (149
    )
    
    
    (127
    )Severance insurance deposits
    
    
    (3,638
    )
    
    
    (1,624
    )
    
    
    (3,289
    )End of year
    
    W
    24,094
    
    
    W
    23,876
    
    
    W
    32,932
 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 W1,192.60 and W1,035.00 to US $1.00 at
December 31, 2003 and 2004, 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 values stock options granted in 2004 using the fair value method (binomial option
pricing model). Also, 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 (minimum value method) for the stock options granted in 2000. 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 Income (Loss) Per Share Net income (loss) per share is computed by dividing net income (loss), by the weighted average
number of common shares outstanding during the period. F-17




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##### Table of Contents



Basic and diluted income (loss) per share for the years ended December 31, 2002, 2003 and 2004 are
computed as follows: 2002
    
    
    2003
    
    
    2004Net income (loss) (won in millions)
    
    W
    (125,025
    )
    
    W
    (161,299
    )
    
    W
    13,046Weighted average number of common
shares outstanding (In thousands)
    
    
    298,251
    
    
    
    321,310
    
    
    
    462,135Basic and diluted income (loss)
per share (won)
    
    W
    (419
    )
    
    W
    (502
    )
    
    W
    28
 Bonds with warrants and stock options were not included in computing diluted income (loss) per
share in 2002, 2003 and 2004, respectively, because their effects were anti-dilutive. 3. CASH AND CASH EQUIVALENTS: Cash and cash equivalents as of December 31, 2003 and 2004 are as follows (won in millions): Interest rate per annum (%)2004
    
    
    2003
    
    
    2004Cash on hand
    
    
    
    
    
    W
    5
    
    
    W
    7Current deposit
    
    
    
    
    
    
    
    
    
    
    50Passbook accounts
    
    
    0.1
    
    
    
    3,797
    
    
    
    4,045Time deposits
    
    
    3.35 ~ 3.55
    
    
    
    
    
    
    
    37,000Commercial paper
    
    
    2.85 ~ 4.1
    
    
    
    194,234
    
    
    
    11,586Money Market Funds
    
    
    3.2 ~ 3.53
    
    
    
    
    
    
    
    96,762Repurchase agreements
    
    
    3.5
    
    
    
    
    
    
    
    5,000Certificate of deposit
    
    
    3.4
    
    
    
    
    
    
    
    10,000Money Market Deposit Account
    
    
    2.2 ~ 3.6
    
    
    
    1,512
    
    
    
    3,896W
    199,548
    
    
    W
    168,346
 4. SHORT-TERM AND LONG-TERM FINANCIAL INSTRUMENTS: (1) Short-term financial instruments as of December 31, 2003 and 2004 are as follows (won in
millions): Interest rate per annum (%)2004
    
    
    2003
    
    
    2004Time deposits
    
    
    2.9 ~ 4.6
    
    
    W
    186,120
    
    
    W
    144,005Repurchase agreements
    
    
    3.43 ~ 4.7
    
    
    
    7,000
    
    
    
    29,521Money Market Deposit
Account
    
    
    
    
    
    
    26,752
    
    
    
    Commercial paper
    
    
    2.85
    
    
    
    
    
    
    
    5,190Certificate of deposit
    
    
    3.4 ~ 3.5
    
    
    
    
    
    
    
    15,000W
    219,872
    
    
    W
    193,716
 (2) Long-term financial instruments as of December 31, 2003 and 2004 are as follows (won in
millions): Interest rate per annum (%)2004
    
    
    2003
    
    
    2004Deposits for checking accounts
    
    
    
    
    
    W
    7
    
    
    W
    68
 F-18




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##### Table of Contents



5. RESTRICTED DEPOSITS: As of December 31, 2003 and 2004, the following deposits are subject to withdrawal restriction as
guarantee for the payment of borrowings, checking accounts and other reasons (won in millions). 2003
    
    
    2004Short-term financial instruments
    
    W
    212,272
    
    
    W
    117,267Long-term financial instruments
    
    
    7
    
    
    
    68W
    212,279
    
    
    W
    117,335
 6. SHORT-TERM INVESTMENT SECURITIES: Short-term investment securities as of December 31, 2003 and 2004 are as follows (won in millions): 2003
    
    
    2004Acquisition cost
    
    
    Book value
    
    
    Acquisition cost
    
    
    Book valueTrading securities:Money market funds
    
    W
    579
    
    
    W
    273
    
    
    W
    
    
    
    W
    Held-to-maturity securities:Collateralized bond obligation
    
    
    1,540
    
    
    
    
    
    
    
    1,570
    
    
    
    1,120Government bonds
    
    
    116
    
    
    
    116
    
    
    
    1
    
    
    
    11,656
    
    
    
    116
    
    
    
    1,571
    
    
    
    1,121W
    2,235
    
    
    W
    389
    
    
    W
    1,571
    
    
    W
    1,121
 The Company recorded W600 million, W940 million and W450 million of impairment loss on short-term
investment securities for the years ended December 31, 2002, 2003 and 2004, respectively. 7. LONG-TERM INVESTMENT SECURITIES: (1) Long-term investment securities as of December 31, 2003 and 2004 consist of the following
(won in millions): 2003
    
    
    2004Ownership
    
    
    
    
    
    
    Ownershippercentage (%)
    
    
    Amount
    
    
    percentage (%)
    
    
    AmountAvailable-for-sale securities:Listed equity securities:LG Telecom, Ltd.
    
    
    0.37
    
    
    W
    3,764
    
    
    
    0.37
    
    
    W
    4,143Summit Technology Co., Ltd.
    
    
    0.63
    
    
    
    11
    
    
    
    
    
    
    
    Netsecure Technology, Inc.
    
    
    2.35
    
    
    
    108
    
    
    
    0.38
    
    
    
    18C.C.S., Inc.
    
    
    7.22
    
    
    
    1,894
    
    
    
    7.22
    
    
    
    1,6985,777
    
    
    
    
    
    
    
    5,859Non-listed equity securities:Korea Information Assurance, Inc.
    
    
    0.47
    
    
    
    100
    
    
    
    0.47
    
    
    
    100Dreamline Corporation
    
    
    
    
    
    
    
    
    
    
    14.18
    
    
    
    16,935CCR Inc.
    
    
    2.08
    
    
    
    484
    
    
    
    2.08
    
    
    
    484Dauinternet, Inc.
    
    
    0.71
    
    
    
    28
    
    
    
    0.71
    
    
    
    28Korea Digital Cable Media Center
    
    
    12.35
    
    
    
    550
    
    
    
    4.75
    
    
    
    550others
    
    
    
    
    
    
    3,310
    
    
    
    
    
    
    
    2,0984,472
    
    
    
    
    
    
    
    20,195
 F-19




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##### Table of Contents



2003
    
    
    2004Ownership
    
    
    
    
    
    
    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
    
    
    
    2,598Others
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    1303,175
    
    
    
    
    
    
    
    2,74213,424
    
    
    
    
    
    
    
    28,796Held-to-maturity securities:Investments in funds:Hana Dream Limited Co.
    
    
    5.00
    
    
    
    1
    
    
    
    
    
    
    
    Hanafos Securitization Specialty Co., Ltd.
    
    
    2.00
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Debt securities:Government and municipal bond
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    18G.P.S. Korea Inc.
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Hanafos Securitization Specialty Co., Ltd.
    
    
    
    
    
    
    9,000
    
    
    
    
    
    
    
    Best Pool Securitization Specialty Co., Ltd.
    
    
    
    
    
    
    201
    
    
    
    
    
    
    
    New KB STAR Guarantee ABS Specialty Co.,
Ltd.
    
    
    
    
    
    
    1,120
    
    
    
    
    
    
    
    10,339
    
    
    
    
    
    
    
    2010,340
    
    
    
    
    
    
    
    20W
    23,764
    
    
    
    
    
    
    W
    28,816
 (2) Listed equity securities as of December 31, 2003 and 2004 are as follows (won in millions): 2003
    
    
    2004Acquisition cost
    
    
    Fair value
    
    
    Acquisition cost
    
    
    Fair valueLG Telecom Co., Ltd.
    
    W
    5,396
    
    
    W
    3,764
    
    
    W
    5,396
    
    
    W
    4,143Summit Technology Co.,
Ltd.
    
    
    800
    
    
    
    11
    
    
    
    
    
    
    
    Netsecure Technology, Inc.
    
    
    1,399
    
    
    
    108
    
    
    
    1,399
    
    
    
    18C.C.S., Inc.
    
    
    4,740
    
    
    
    1,894
    
    
    
    4,740
    
    
    
    1,698W
    12,335
    
    
    W
    5,777
    
    
    W
    11,535
    
    
    W
    5,859
 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, 2003 and 2004 are as follows (won in
millions): 2003
    
    
    2004Acquisition
    
    
    Net asset
    
    
    Book
    
    
    Acquisition
    
    
    Net asset
    
    
    Bookcost
    
    
    value
    
    
    value
    
    
    cost
    
    
    value
    
    
    valueKorea Information Assurance,
Inc.
    
    W
    100
    
    
    W
    85
    
    
    W
    100
    
    
    W
    100
    
    
    W
    81
    
    
    W
    100Dreamline Corporation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,530
    
    
    
    18,837
    
    
    
    16,935CCR Inc.
    
    
    1,780
    
    
    
    484
    
    
    
    484
    
    
    
    1,780
    
    
    
    277
    
    
    
    484Dauinternet, Inc.
    
    
    1,100
    
    
    
    28
    
    
    
    28
    
    
    
    1,100
    
    
    
    20
    
    
    
    28Korea Digital Cable Media Center
    
    
    550
    
    
    
    399
    
    
    
    550
    
    
    
    550
    
    
    
    469
    
    
    
    550Others
    
    
    13,261
    
    
    
    2,373
    
    
    
    3,310
    
    
    
    8,172
    
    
    
    1,351
    
    
    
    2,098W
    16,791
    
    
    W
    3,369
    
    
    W
    4,472
    
    
    W
    51,232
    
    
    W
    21,035
    
    
    W
    20,195
 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, W3,385
million and W2,539 million of impairment loss on long-term investment securities charged to current
operations for the years ended December 31, 2002, 2003 and 2004, respectively. F-20




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##### Table of Contents



(4) Debt securities as of December 31, 2003 and 2004 are as follows (won in millions): 2003
    
    
    2004Acquisition cost
    
    
    Book value
    
    
    Acquisition cost
    
    
    Book valueGovernment and municipal bonds:
    
    W
    16
    
    
    W
    16
    
    
    W
    18
    
    
    W
    18Corporate bonds:G.P.S. Korea Inc.
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2Subordinate debt investments:Hanafos Securitization
Specialty Co., Ltd.
    
    
    9,000
    
    
    
    9,000
    
    
    
    
    
    
    
    Best Pool Securitization
Specialty Co., Ltd.
    
    
    450
    
    
    
    201
    
    
    
    
    
    
    
    New KB STAR Guarantee ABS
Specialty Co., Ltd.
    
    
    1,120
    
    
    
    1,120
    
    
    
    
    
    
    
    W
    10,588
    
    
    W
    10,339
    
    
    W
    20
    
    
    W
    20
 8. INVESTMENT SECURITIES USING THE EQUITY METHOD:  (1)
    
    Investment securities using the equity method as of December 31, 2003 and 2004 are as follows
(won in millions): 2003
    
    
    2004Ownership
    
    
    
    
    
    
    Ownershippercentage (%)
    
    
    Book value
    
    
    percentage (%)
    
    
    Book valueDreamline Corporation
    
    
    26.28
    
    
    W
    9,565
    
    
    
    
    
    
    W
    
 The Company reclassified investment securities of Dreamline Corporation into long-term investment
securities from investment securities using the equity method due to the decrease of ownership
percentage to less than 20% as of December 31, 2004. As of December 31, 2003, Dreamline
Corporations 37.19%-owned subsidiary, Hanaro Dream, Inc., was recorded as investment securities
using the equity method by Dreamline Corporation.  (2)
    
    Loss on valuation using the equity method for the year ended December 31, 2003 is as follows
(won in millions): Loss on valuation
    
    
    Changes inAcquisition
    
    
    Net asset
    
    
    Beginning
    
    
    using the equity
    
    
    consolidated
    
    
    Capital
    
    
    Book2003
    
    cost
    
    
    Value
    
    
    of period
    
    
    method
    
    
    subsidiaries
    
    
    adjustment
    
    
    ValueDreamline
Corporation
    
    W
    39,530
    
    
    W
    24,894
    
    
    W
    
    
    
    W
    (23,142
    )
    
    W
    41,272
    
    
    W
    (8,565
    )
    
    W
    9,565
 9. LOANS TO EMPLOYEES: Short-term and long-term loans to employees as of December 31, 2003 and 2004 are as follows (won in
millions): 2003
    
    
    2004Interest perannum (%)
    
    
    Short-term
    
    
    Long-term
    
    
    Short-term
    
    
    Long-termLoans to employees for share ownership
    
    
    
    
    
    W
    8,808
    
    
    W
    4,588
    
    
    W
    4,486
    
    
    W
    8,634Loans to employees for housing
    
    
    2.0
    
    
    
    1,382
    
    
    
    8,226
    
    
    
    1,524
    
    
    
    8,450Other
    
    
    
    
    
    
    98
    
    
    
    41
    
    
    
    128
    
    
    
    6710,288
    
    
    
    12,855
    
    
    
    6,138
    
    
    
    17,151Less: discount on present value
    
    
    
    
    
    
    (401
    )
    
    
    (2,069
    )
    
    
    (149
    )
    
    
    (2,495
    )W
    9,887
    
    
    W
    10,786
    
    
    W
    5,989
    
    
    W
    14,656
 F-21




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##### 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. 11. PROPERTY AND EQUIPMENT: Changes in property and equipment for the years ended December 31, 2003 and 2004 are as follows
(won in millions): Changes inBeginning of
    
    
    
    
    
    
    
    
    
    
    consolidated2003:
    
    year
    
    
    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
 Changes inBeginning of
    
    
    
    
    
    
    
    
    
    
    consolidated2004:
    
    year
    
    
    Increase
    
    
    Decrease
    
    
    subsidiaries
    
    
    End of yearLand
    
    W
    157,962
    
    
    W
    7,584
    
    
    W
    
    
    
    W
    
    
    
    W
    165,546Buildings
    
    
    304,749
    
    
    
    7,999
    
    
    
    177
    
    
    
    
    
    
    
    312,571Structures
    
    
    246
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246Machinery
    
    
    3,293,862
    
    
    
    259,718
    
    
    
    52,121
    
    
    
    1,973
    
    
    
    3,503,432Vehicles
    
    
    431
    
    
    
    47
    
    
    
    38
    
    
    
    
    
    
    
    440Other
    
    
    47,009
    
    
    
    8,107
    
    
    
    9,831
    
    
    
    1,150
    
    
    
    46,435Construction in progress
    
    
    23,848
    
    
    
    69,551
    
    
    
    70,698
    
    
    
    
    
    
    
    22,701Machinery in transit
    
    
    61
    
    
    
    394
    
    
    
    194
    
    
    
    
    
    
    
    2613,828,168
    
    
    
    353,400
    
    
    
    133,059
    
    
    
    3,123
    
    
    
    4,051,632Less: Accumulated
depreciationBuildings
    
    
    23,069
    
    
    
    8,544
    
    
    
    15
    
    
    
    
    
    
    
    31,598Structures
    
    
    38
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    51Machinery
    
    
    1,228,566
    
    
    
    408,119
    
    
    
    24,102
    
    
    
    273
    
    
    
    1,612,856Vehicles
    
    
    198
    
    
    
    202
    
    
    
    38
    
    
    
    
    
    
    
    362Other
    
    
    25,376
    
    
    
    16,384
    
    
    
    8,314
    
    
    
    474
    
    
    
    33,9201,277,247
    
    
    
    433,262
    
    
    
    32,469
    
    
    
    747
    
    
    
    1,678,787W
    2,550,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W
    2,372,845
 Depreciable assets are insured for fire and other casualty losses up to W1,614,632 million and
W2,301,912 million as of December 31, 2003 and 2004, respectively. F-22




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##### 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 W159,855 million and W180,809 million as of December 31, 2003 and
2004, respectively. The Company recorded W61,333 million and W20,726 million of loss on disuse of property and
equipment for the years ended December 31, 2003 and 2004, respectively, due to discontinuance of
service, decrease of customer demand and deterioration of certain machinery. 12. INTANGIBLES:  (1)
    
    Intangibles as of December 31, 2003 and 2004 are as follows (won in millions): 2003
    
    
    2004Goodwill
    
    W
    3,287
    
    
    W
    5,775Industrial property rights
    
    
    15
    
    
    
    47Cable line usage rights
    
    
    45,397
    
    
    
    47,748Development costs
    
    
    2,716
    
    
    
    1,466Land rights
    
    
    66
    
    
    
    62Other intangibles
    
    
    
    
    
    
    1,167W
    51,481
    
    
    W
    56,265
 The Company recorded W86 million of impairment loss on intangibles as non-operating expense-other
for the year ended December 31, 2004.  (2)
    
    Amortization of intangibles for the years ended December 31, 2002, 2003 and 2004 is as
follows (won in millions): 2002
    
    
    2003
    
    
    2004Goodwill
    
    W
    481
    
    
    W
    3,455
    
    
    W
    3,855Industrial property rights
    
    
    7
    
    
    
    17
    
    
    
    22Cable line usage rights
    
    
    1,825
    
    
    
    2,415
    
    
    
    2,609Development costs
    
    
    6,886
    
    
    
    3,346
    
    
    
    2,625Land rights
    
    
    4
    
    
    
    4
    
    
    
    4Other intangibles
    
    
    510
    
    
    
    
    
    
    
    323W
    9,713
    
    
    W
    9,237
    
    
    W
    9,438
  (3)
    
    Changes in development costs (intangibles) for the years ended December 31, 2002, 2003 and
2004 are as follows (won in millions): 2002
    
    
    2003
    
    
    2004Beginning of year
    
    W
    3,113
    
    
    W
    999
    
    
    W
    2,716Increase
    
    
    6,633
    
    
    
    5,063
    
    
    
    1,375Amortization
    
    
    (6,886
    )
    
    
    (3,346
    )
    
    
    (2,625
    )Changes in
consolidated
subsidiaries
    
    
    (1,861
    )
    
    
    
    
    
    
    End of year
    
    W
    999
    
    
    W
    2,716
    
    
    W
    1,466
  (4)
    
    W4,784 million, W4,891 million and W3,960 million of ordinary research and development costs
were charged to expense as incurred for the years ended December 31, 2002, 2003 and 2004,
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 Corporation from 32.18% to 26.28%. F-23




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##### Table of Contents



Changes in negative goodwill for the years ended December 31, 2002, 2003 and 2004 are as
follows (won in millions): 2002
    
    
    2003
    
    
    2004Beginning of year
    
    W
    29,938
    
    
    W
    26,845
    
    
    W
    Changes in
consolidated
subsidiaries
    
    
    
    
    
    
    (26,845
    )
    
    
    Amortization
    
    
    (3,093
    )
    
    
    
    
    
    
    End of year
    
    W
    26,845
    
    
    W
    
    
    
    W
    
 13. LEASES:  (1)
    
    The Company has operating lease agreements for the rights to use automobiles. The payment
schedule for the operating leases is as follows (won in millions): Year
    
    Amount2005
    
    W
    8942006
    
    
    4942007
    
    
    75W
    1,463
  (2)
    
    The Company also has capital lease agreements with Korea HP Financial Service Co., LG Card
Services Corp., Star Leases Co., Ltd., Korea Development Leases Co., Ltd. and Cisco Systems
Capital Korea Ltd. for certain machinery and equipment. As of December 31, 2003 and 2004, the
acquisition cost of machinery and equipment under capital lease was W193,959 million and
W175,336 million, respectively, and depreciation expenses related to the these capital leases
for the years ended December 31, 2002, 2003 and 2004 amount to W11,071 million, W20,071
million and W19,719 million, respectively.The future annual payments under these capital lease agreements as of December 31, 2004 are as
follows (won in millions and dollar in thousands): Year
    
    Principal
    
    
    Interest
    
    
    Total2005
    
    W
    47,313
    
    
    W
    3,516
    
    
    W
    50,8292006
    
    
    23,497
    
    
    
    1,200
    
    
    
    24,6972007
    
    
    8,899
    
    
    
    226
    
    
    
    9,1252008
    
    
    145
    
    
    
    3
    
    
    
    14879,854
    
    
    W
    4,945
    
    
    W
    84,799Less: Current portion
    
    
    (47,313
    )W
    32,541
 14. SHORT-TERM BORROWINGS: Short-term borrowings as of December 31, 2003 and 2004 are as follows (won in millions): Interest rate per annum (%)2004
    
    
    2003
    
    
    2004General loans
    
    
    
    
    
    W
    3,000
    
    
    W
    Syndication loans
    
    
    
    
    
    
    60,000
    
    
    
    Issuance of commercial paper
    
    
    
    
    
    
    100,000
    
    
    
    W
    163,000
    
    
    W
    
 F-24




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##### Table of Contents



15. LONG-TERM DEBT AND DEBENTURES:  (1)
    
    Long-term debt in local currency as of December 31, 2003 and 2004 is as follows (won in
millions): Interest rate per annum (%)
    
    
    Amount2004
    
    
    2003
    
    
    2004Information promotion fund
    
    
    3.78 ~ 7.25
    
    
    W
    163,813
    
    
    W
    66,651General loans
    
    
    6.99
    
    
    
    55,000
    
    
    
    40,000Syndication loans
    
    
    6.61 ~ 6.80
    
    
    
    24,952
    
    
    
    102,304Asset backed loan (ABL)
    
    
    
    
    
    
    25,902
    
    
    
    269,667
    
    
    
    208,955Less: Current portion
    
    
    
    
    
    
    (98,970
    )
    
    
    (66,756
    )Discount on present value
    
    
    
    
    
    
    (844
    )
    
    
    (2,691
    )W
    169,853
    
    
    W
    139,508
  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 have some 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. W11,864 million,
W7,538 million and W398 million were recorded as interest expense for the years ended
December 31, 2002, 2003 and 2004, respectively. ABL repayment was completed during 2004.(2)
    
    Long-term debt in foreign currency as of December 31, 2003 and 2004 is as follows (won in
millions, dollar in thousands): Interest rateper annum(%)
    
    
    U.S. dollars
    
    
    Won equivalent2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004Syndication loans
    
    
    5.54
    
    
    $
    63,065
    
    
    $
    258,568
    
    
    W
    75,212
    
    
    W
    267,618Less: Discount on
present value
    
    
    
    
    
    
    (2,131
    )
    
    
    (7,703
    )
    
    
    (2,542
    )
    
    
    (7,972
    )$
    60,934
    
    
    $
    250,865
    
    
    W
    72,670
    
    
    W
    259,646
  (3)
    
    On November 13, 2003, the Company entered into a 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 approximated W720 billion (won currency loan of
W224,684 million and US$ currency loan of US$ 416,232 thousand), which includes a term loan of
W660 billion with a maturity of five years and a revolving loan of W60 billion. The
outstanding balance of this syndication loan as of December 31, 2004 is W369,922 million
(long-term debt in local currency of W102,304 million and long-term debt in foreign currency
of W267,618 million).In relation to the above syndication loans, the Companys buildings are pledged as collateral
up to W531,411 million; machinery of which book value is W1,702,960 million as of September 30,
2004 are provided as assignable mortgage; some intellectual property rights are pledged as
collateral. F-25




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##### Table of Contents



(4)
    
    Debentures as of December 31, 2003 and 2004 are as follows (won in millions): Interest rate per annum (%)
    
    
    Due
    
    
    2003
    
    
    200415th
    
    
    
    
    
    
    2001~2004
    
    
    W
    15,000
    
    
    W
    17-1st
    
    
    
    
    
    
    2002~2004
    
    
    
    60,000
    
    
    
    17-2nd
    
    
    
    
    
    
    2002~2004
    
    
    
    40,000
    
    
    
    19-1st
    
    
    
    
    
    
    2002~2004
    
    
    
    80,000
    
    
    
    19-2nd
    
    
    6.00
    
    
    
    2002~2005
    
    
    
    20,000
    
    
    
    20,00020th
    
    
    5.42
    
    
    
    2002~2005
    
    
    
    100,000
    
    
    
    100,00021st
    
    
    6.00
    
    
    
    2002~2005
    
    
    
    170,000
    
    
    
    170,00023rd
    
    
    6.00
    
    
    
    2003~2006
    
    
    
    190,000
    
    
    
    190,00024th
    
    
    8.59
    
    
    
    2003~2005
    
    
    
    16,000
    
    
    
    16,000691,000
    
    
    
    496,000Less: Current
portion
    
    
    
    
    
    
    
    
    
    
    (195,000
    )
    
    
    (306,000
    )Discount
on present value
    
    
    
    
    
    
    
    
    
    
    (14,247
    )
    
    
    (482
    )W
    481,753
    
    
    W
    189,518
  The Company early repaid the full amount of the 13thand the 25thbonds
with warrants and recognized a loss on early redemption of W5,072 million in 2002. 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.On September 2, 2003, the Company early repaid bonds with stock warrants (18th
debenture) and recorded W870 million of gain on early redemption of debentures. The warrants
on the bonds with stock warrants carry the rights to buy US$ 15,000,000 of stock (3,963,600
shares) and may be exercised until January 26, 2007. The exercise price is W5,000 at an
exchange rate of W1,321.20 to US$1.00.As of December 31, 2004, for the warrants on the bonds with stock warrants (13th
debenture), US$ 62,000 thousand (15,322,680 shares) has been exercised and US$ 38,000 thousand
(9,391,320 shares) remains unexercised and exercisable until February 6, 2006.According to the covenants, debentures of 19-2nd, 20th, 21st
and 23rd require the Company to keep the debt ratio lower than 250 percent ~ 300
percent and the Company should not dispose of its property and equipment more than the amount
of W750 billion ~ W1,000 billion in each fiscal year. The Company complies with the covenants
requirements as of December 31, 2004.(5)
    
    The schedule of principal payments of debentures and long-term debt (excluding capital lease
obligations explained in Note 13) as of December 31, 2004 is as follows (won in millions and
dollar in thousands): Long-term debt
    
    
    Long-term debt in foreign currencyYear
    
    Debentures
    
    
    in local currency
    
    
    U.S. dollar
    
    
    Won equivalent
    
    
    Total2005
    
    W
    306,000
    
    
    W
    66,756
    
    
    $
    
    
    
    W
    
    
    
    W
    372,7562006
    
    
    190,000
    
    
    
    37,877
    
    
    
    38,785
    
    
    
    40,143
    
    
    
    268,0202007
    
    
    
    
    
    
    50,360
    
    
    
    103,427
    
    
    
    107,047
    
    
    
    157,4072008
    
    
    
    
    
    
    52,377
    
    
    
    116,356
    
    
    
    120,428
    
    
    
    172,8052009
    
    
    
    
    
    
    1,585
    
    
    
    
    
    
    
    
    
    
    
    1,585W
    496,000
    
    
    W
    208,955
    
    
    $
    258,568
    
    
    W
    267,618
    
    
    W
    972,573
  (6)
    
    Other than collateral provided to the syndication loan consortium described in the Note
15(3), property and equipment of W80,566 million and short-term financial instruments of
W34,410 million are pledged as collateral for short-term borrowings, long-term debt and
debentures as of December 31, 2004. F-26




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##### 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 have some 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. The ABS repayment was completed during 2004 and, W18,382 million,
W9,028 million and W490 million were recorded as Asset Backed Securities payable expense for the
years ended December 31, 2002, 2003 and 2004, respectively. In May 2002, Dreamline Corporation 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 have some 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 Corporation was excluded from the Companys consolidated financial statements
as of December 31, 2003. W3,911 million was recorded as Asset Backed Securities payable expense for
the year ended December 31, 2002. 17. DERIVATIVES:  (1)
    
    Swap ContractIn relation to the Companys issuance of the 20th debenture (Floating Rate Note) and
syndication loan in foreign currency, the Company entered into swap contracts (fixed interest
rate) with Industrial Bank of Korea (IBK) and Korea Development Bank (KDB) to hedge the risk of
floating interest rates. As a result of the valuation of this swap contract, the Company
recorded W13,058 million and W17,623 million of valuation loss as capital adjustments and
liability as of December 31, 2003 and 2004, respectively (won in millions and dollar in
thousands). Valuation lossFinancial
    
    
    
    
    
    
    
    
    
    Fixed rate
    
    
    
    
    

on
interest swapinstitution
    
    Contract period
    
    
    Floating rate (%)
    
    
    (%)
    
    
    Contract amount
    
    
    2003
    
    
    2004IBK
    
    
    2002.5~2005.5
    
    
    Government bond rate+1.95
    
    
    9.90
    
    
    W
    100,000
    
    
    W
    4,419
    
    
    W
    1,496KDB
    
    
    2003.12~2008.11
    
    
    LIBOR+3.25
    
    
    7.72
    
    
    $
    63,065
    
    
    
    8,639
    
    
    
    4,556KDB
    
    
    2004.2~2008.11
    
    
    LIBOR+3.25
    
    
    7.60
    
    
    $
    138,744
    
    
    
    
    
    
    
    9,325KDB
    
    
    2004.9~2008.11
    
    
    LIBOR+3.25
    
    
    6.70
    
    
    $
    56,759
    
    
    
    
    
    
    
    2,246W
    13,058
    
    
    W
    17,623
  (2)
    
    Forward Exchange ContractThe Company entered into foreign currency forward contracts, relating to time deposits and
syndication loan in foreign currency, with Development Bank of Singapore (DBS) and Korea
Development Bank (KDB) to hedge the exposure to changes in the foreign currency exchange rate.
The Company recorded W33,975 million of loss on forward exchange valuation for the year ended
December 31, 2004 and W33,802 million of forward exchange contracts (current liabilities) as of
December 31, 2004 (dollar in thousands). Contract period
    
    Fixed exchange rate
    
    
    Contract amount2003.12~2008.11
    
    W
    1,190.00 /$
    
    
    US$
    63,0652004.2~2008.11
    
    W
    1,166.20 /$
    
    
    
    138,7442004.9~2008.11
    
    W
    1,146.70 /$
    
    
    
    56,759US$
    258,568
 F-27




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##### Table of Contents



Also, the Company recorded W186 million, W343 million and W242 million of gain on transaction
of forward exchange contract for the years ended December 31, 2002, 2003 and 2004,
respectively, and W173 million of loss on transaction of forward exchange contract for the year
ended December 31, 2004. 18. SHAREHOLDERS EQUITY: The Company has authorized 700,000,000 common shares of W5,000 par value, of which 462,135,180
shares have been issued as of December 31, 2004. 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, 2004 are
as follows: Number of
    
    
    ExerciseGrant company
    
    Grant date
    
    
    shares
    
    
    price/share
    
    
    Methods
    
    
    Exercise periodhanarotelecom incorporated
    
    
    1999. 3. 1
    
    
    
    50,000
    
    
    W
    5,630
    
    
    New stock issue
    
    
    2002.3.1~2007.2.281999.10. 1
    
    
    
    120,000
    
    
    
    19,910
    
    
    New stock issue
    
    
    2002.10.1~2007.9.302000. 3.17
    
    
    
    1,551,153
    
    
    
    17,750
    
    
    New stock issue
    
    
    2003.3.18~2008.3.172004.12.16
    
    
    
    19,772,890
    
    
    
    5,000
    
    
    New stock issue or cash payment
    
    
    2006.12.17~2011.12.16Hanaro Dream, Inc.
    
    
    2003.1.16
    
    
    
    30,000
    
    
    
    8,000
    
    
    New stock issue
    
    
    2005.1.16~2007.1.15
 hanaro values stock options granted on December 16, 2004 using the fair value method (binomial
option-pricing model) and in relation to the stock options granted in 2000, hanaro uses the minimum
value method (see Note 2). Total compensation expense of W16,645 million is allocated over the
vesting period. The compensation expense charged to operations for the year ended December 31, 2004
is W1,311 million and W7,227 million was recorded as capital adjustment as of December 31, 2004.
Also, in relation to the stock options granted in 1999, hanaro did not recognize compensation
expense, which is 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 hanaros stock option plans, which were granted in 2000, been
determined based on the fair value method at the grant dates, the Companys ordinary income (loss),
net income (loss), ordinary income (loss) per share and net income (loss) per share would have been
reduced as follows (won in millions, except per share amount): 2002
    
    
    2003
    
    
    2004Ordinary income (loss)
    
    W
    (130,060
    )
    
    W
    (162,657
    )
    
    W
    12,695Net income (loss)
    
    W
    (127,406
    )
    
    W
    (163,044
    )
    
    W
    11,893Ordinary income (loss) per share
    
    W
    (436
    )
    
    W
    (506
    )
    
    W
    27Net income (loss) per share
    
    W
    (427
    )
    
    W
    (507
    )
    
    W
    26
 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 would be calculated as W18,389 million. F-28




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##### Table of Contents



20. OPERATING EXPENSES: Significant accounts of operating expenses for the years ended December 31, 2002, 2003 and 2004 are
as follows (won in millions): 2002
    
    
    2003
    
    
    2004Salaries and wages
    
    W
    97,715
    
    
    W
    92,370
    
    
    W
    103,030Provision for severance indemnities
    
    
    11,959
    
    
    
    13,444
    
    
    
    14,095Welfare
    
    
    22,274
    
    
    
    19,380
    
    
    
    24,994Rent
    
    
    19,624
    
    
    
    14,746
    
    
    
    6,075Depreciation
    
    
    433,475
    
    
    
    428,528
    
    
    
    442,312Advertising
    
    
    42,487
    
    
    
    27,457
    
    
    
    39,514Ordinary research and development cost
    
    
    4,784
    
    
    
    4,891
    
    
    
    3,960Utilities
    
    
    17,578
    
    
    
    19,487
    
    
    
    22,023Telecommunication equipment lease expenses
    
    
    188,867
    
    
    
    165,716
    
    
    
    140,820Bad debt
    
    
    13,690
    
    
    
    25,744
    
    
    
    29,933Maintenance
    
    
    46,274
    
    
    
    42,583
    
    
    
    51,451Selling expenses
    
    
    47,259
    
    
    
    6,408
    
    
    
    6,791Sales commissions
    
    
    220,336
    
    
    
    195,997
    
    
    
    178,380Interconnection charges
    
    
    95,883
    
    
    
    131,114
    
    
    
    141,964Commissions
    
    
    83,874
    
    
    
    70,859
    
    
    
    68,460Outsourcing services
    
    
    15,607
    
    
    
    20,519
    
    
    
    24,722Other
    
    
    34,740
    
    
    
    33,549
    
    
    
    37,115W
    1,396,426
    
    
    W
    1,312,792
    
    
    W
    1,335,639
 21. INCOME TAX AND DEFERRED INCOME TAXES: Income Tax The statutory corporate income tax rate (including resident surtax) applicable to the Company is
approximately 29.7% in 2002, 2003 and 2004. Income tax is calculated as follows (won in millions): 2002
    
    
    2003
    
    
    2004Income taxes currently payable
    
    W
    577
    
    
    W
    341
    
    
    W
    806Changes in temporary differences
    
    
    506
    
    
    
    (39
    )
    
    
    (311
    )Income tax expense
    
    W
    1,083
    
    
    W
    302
    
    
    W
    495
 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




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##### Table of Contents



Accumulated temporary differences and deferred taxes as of December 31, 2003 and 2004 are as
follows (won in millions): 2003
    
    
    2004Accrued severance indemnities
    
    W
    16,796
    
    
    W
    22,154Valuation loss on marketable securities
    
    
    307
    
    
    
    Bad debts
    
    
    37,851
    
    
    
    59,500Present value discount
    
    
    (1,963
    )
    
    
    (7,745
    )Valuation loss on investment securities
    
    
    13,809
    
    
    
    39,489Loss on valuation of forward exchange contract
    
    
    
    
    
    
    33,975Forward contracts
    
    
    (173
    )
    
    
    Valuation loss on investment securities using
the equity method
    
    
    21,400
    
    
    
    Loss on disuse of property and equipment
    
    
    61,333
    
    
    
    13,840Accrued income
    
    
    (6,313
    )
    
    
    (2,067
    )Depreciation
    
    
    259
    
    
    
    1Severance insurance deposits and other
    
    
    (1,155
    )
    
    
    (4,664
    )142,151
    
    
    
    154,483Loss carryforward
    
    
    659,846
    
    
    
    703,694Less: Unrecognized
    
    
    (801,373
    )
    
    
    (855,970
    )624
    
    
    
    2,207Tax rate (%)
    
    
    29.7
    
    
    
    27.5Deferred income tax assets, net
    
    W
    185
    
    
    W
    607
  As of December 31, 2003 and 2004, hanaro did not recognize deferred income tax assets 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 2003 and 2004 are as
follows (won in millions): 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
 2004
    
    Revenue
    
    
    Expenses
    
    
    Key-money deposits
    
    
    PayablesHanaro Realty Development &
Management Co., Ltd.
    
    W
    183
    
    
    W
    19,181
    
    
    W
    1,551
    
    
    W
    799Hanaro Telephone & Internet
Information, Inc.
    
    
    13
    
    
    
    34,457
    
    
    
    
    
    
    
    3,235Hanaro Web
(n) TV
    
    
    155
    
    
    
    3,980
    
    
    
    227
    
    
    
    176Hanaro Telecom America, Inc.
    
    
    
    
    
    
    512
    
    
    
    
    
    
    
    Hanaro Dream, Inc.
    
    
    3,300
    
    
    
    14,438
    
    
    
    636
    
    
    
    3,660W
    3,651
    
    
    W
    72,568
    
    
    W
    2,414
    
    
    W
    7,870
 F-30




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##### Table of Contents



(2)
    
    Transactions with shareholders for the years ended December 31, 2003 and 2004 are as follows
(won in millions):Revenues: Transaction
    
    
    2003
    
    
    2004Samsung
    
    Service fee
    
    W
    44
    
    
    W
    45Dacom
    
    
    
    
    
    
    18,320
    
    
    
    18,472SK Telecom
    
    
    
    
    
    
    9,239
    
    
    
    12,844LG
    
    
    
    
    
    
    2,669
    
    
    
    3,058W
    30,272
    
    
    W
    34,419
  Purchases: Transaction
    
    
    2003
    
    
    2004Samsung
    
    Purchase of machinery and equipment, other
    
    W
    7,285
    
    
    W
    10,789Dacom
    
    Interconnection charges, other
    
    
    31,831
    
    
    
    25,896SK Telecom
    
    Interconnection charges, other
    
    
    38,236
    
    
    
    42,367LG
    
    Purchase of machinery and equipment, other
    
    
    20,371
    
    
    
    24,853W
    97,723
    
    
    W
    103,905
  Balances with shareholders as of December 31, 2003 and 2004 are as follows (won in millions): Assets
    
    
    Liabilities2003
    
    
    2004
    
    
    2003
    
    
    2004Samsung
    
    W
    
    
    
    W
    
    
    
    W
    5,156
    
    
    W
    7,784Dacom
    
    
    
    
    
    
    783
    
    
    
    308
    
    
    
    1,015SK Telecom
    
    
    783
    
    
    
    2,457
    
    
    
    6,889
    
    
    
    8,186LG
    
    
    234
    
    
    
    288
    
    
    
    4,593
    
    
    
    12,064W
    1,017
    
    
    W
    3,528
    
    
    W
    16,946
    
    
    W
    29,049
 23. COMMITMENTS AND CONTINGENCIES:  (1)
    
    The Company has been provided US$ 1,000 thousand of payment guarantees by the Korea Exchange
Bank in connection with the issuance of letters of credit.  (2)
    
    The Company has provided three blank promissory notes as collateral to KDB Capital Corp. and
LG Card Services Corp. in connection with its borrowings and lease agreements.  (3)
    
    The Company has entered into the network supply agreements for the right to use various
underground facilities to house its fiber-optic cable network, leased lines and
telecommunication equipments with Seoul Metropolitan Subway Corporation, Seoul Metropolitan
Rapid Transit Corp., Powercomm Corp., Dacom Corp., KEPCO, Dreamline Corp. and others, and the
related rental expenditure is recorded as telecommunication equipment lease expenses. F-31




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##### 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, 2002, 2003 and 2004 is as follows (won in
millions): 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
 2004
    
    Voice
    
    
    Leased Line
    
    
    Broadband
    
    
    Others
    
    
    TotalRevenue
    
    W
    291,186
    
    
    W
    39,717
    
    
    W
    985,428
    
    
    W
    133,238
    
    
    W
    1,449,569Operating income (loss)
    
    
    (23,552
    )
    
    
    2,775
    
    
    
    150,978
    
    
    
    (16,271
    )
    
    
    113,930Tangible and intangible assets
    
    
    452,215
    
    
    
    66,963
    
    
    
    1,627,321
    
    
    
    282,611
    
    
    
    2,429,110Capital expenditures and
advanced payments for
property and equipment
    
    
    48,392
    
    
    
    10,042
    
    
    
    208,122
    
    
    
    28,113
    
    
    
    294,669Depreciation and amortization
    
    
    49,710
    
    
    
    8,889
    
    
    
    323,676
    
    
    
    60,037
    
    
    
    442,312
 Capital expenditures and advanced payments for property and equipment include increase of property
and equipment by capital lease obligation, which is W20,526 million, W98,230 million and W37,731
million for the years ended December 31, 2002, 2003 and 2004, respectively. 25. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE:  (1)
    
    On February 1, 2005, the Company issued foreign bonds of US$ 500,000,000 with a maturity of
seven years at annual interest rate of 7.00% for the repayment of existing debt and the
acquisition of Korea Thrunet Co., Ltd. (Thrunet).  (2)
    
    At the board of directors meeting on February 3, 2005, the Company resolved to acquire
Thrunets newly issued shares of stock of W248,100 million (99,240,000 shares, W2,500 per
share) and corporate bonds of W223,290 million. F-32




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##### Table of Contents



26. 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 income (loss) or shareholders equity. (1) Companies Included in the Consolidation for the year ended December 31, 2002 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, as of December 31, 2002, 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 (see Note 1(2)). 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 Hanafos and Hanadream 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. Hanafos and Hanadream were liquidated during 2004 and summarized financial information of Hanafos
and Hanadream as of and for the year ended December 31, 2003 is as follows (won in millions): F-33




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##### Table of Contents



Current assets
    
    W
    42,314Non-current assets
    
    
    58,201Total assets
    
    W
    100,515Current liabilities
    
    W
    86,104Non-current liabilities
    
    
    17,417Total liabilities
    
    W
    103,521Net assets
    
    W
    (3,006
    )Operating revenue
    
    W
    15,742Operating income
    
    
    (2,566
    )Net loss
    
    
    (1,697
    )
 (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. The amount that Company expects to pay the future benefits to its employees upon their retirement
at normal retirement age is as follows (won in millions): Year
    
    Amount2005
    
    W
    2006
    
    
    2007
    
    
    172008
    
    
    2009
    
    
    482010~2014
    
    
    88
 The above amounts were determined based on recent salary rates and do not include amounts that
might be paid to employees that will cease working with the Company before their normal retirement
age or amounts to be paid to employees that their normal retirement age extends beyond the year
2014. F-34




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##### Table of Contents



(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 27.5% 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:  (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. F-35




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##### Table of Contents



Information included in short-term and long-term investment securities as of December 31, 2003 and
2004 is as follows: 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 investment
securitiesAvailable-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
 Korean wonUnrealized gains
    
    
    Unrealized lossesAcquisition
    
    
    Over 12
    
    
    Under 12
    
    
    Over 12
    
    
    Under 122004:
    
    cost
    
    
    months
    
    
    months
    
    
    months
    
    
    months
    
    
    Fair value(In millions)(1) Short-term investment
securitiesTrading securities
    
    W
    
    
    
    W
    
    
    
    W
    
    
    
    W
    
    
    
    W
    
    
    
    W
    Debt securities
    
    
    1,571
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450
    
    
    
    1,1211,571
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450
    
    
    
    1,121(2) Long-term investment
securitiesAvailable-for-sale securities
    
    
    65,509
    
    
    
    2,541
    
    
    
    378
    
    
    
    36,797
    
    
    
    2,835
    
    
    
    28,796Debt securities
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2065,529
    
    
    
    2,541
    
    
    
    378
    
    
    
    36,797
    
    
    
    2,835
    
    
    
    28,816W
    67,100
    
    
    W
    2,541
    
    
    W
    378
    
    
    W
    36,797
    
    
    W
    3,285
    
    
    W
    29,937
 (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. (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, 2003 and 2004 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)]
 F-36




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##### Table of Contents



(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. 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 Won2002
    
    
    2003
    
    
    2004(In millions)Reported net income (loss) under U.S. GAAP
    
    W
    (162,525
    )
    
    W
    (165,988
    )
    
    W
    16,703Stock-based employee compensation
expense included in reported net
income (loss)
    
    
    2,890
    
    
    
    
    
    
    
    Adjusted net income (loss) under U.S. GAAP
    
    W
    (159,635
    )
    
    W
    (165,988
    )
    
    W
    16,703
 F-37




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##### Table of Contents



A summary of status of hanaro and Hanaro Dream, Inc.s stock option plans as of December 31, 2002,
2003 and 2004, and the changes during the years ended on those dates are presented below. hanaro: 2002
    
    
    2003
    
    
    2004Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-average
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageShares
    
    
    exercise price
    
    
    Shares
    
    
    exercise price
    
    
    Shares
    
    
    exercise priceOutstanding at beginning
of year
    
    
    1,810,642
    
    
    W
    17,558
    
    
    
    1,810,642
    
    
    W
    17,558
    
    
    
    1,712,153
    
    
    W
    17,549Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,772,890
    
    
    
    5,000Cancelled
    
    
    
    
    
    
    
    
    
    
    (89,489
    )
    
    
    17,750
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    1,810,642
    
    
    
    17,558
    
    
    
    1,721,153
    
    
    
    17,549
    
    
    
    21,494,043
    
    
    
    6,005Options exercisable at
year-end
    
    
    170,000
    
    
    
    
    
    
    
    1,721,153
    
    
    
    
    
    
    
    1,721,153Weighted-average fair
value of
options granted during
the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    457
 Hanaro Dream, Inc.: 2002
    
    
    2003
    
    
    2004Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-average
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageShares
    
    
    exercise price
    
    
    Shares
    
    
    exercise price
    
    
    Shares
    
    
    exercise priceOutstanding at beginning
of year
    
    
    
    
    
    W
    
    
    
    
    
    
    
    W
    
    
    
    
    80,000
    
    
    W
    8,000Granted
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    8,000
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    8,000Outstanding at end of year
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    8,000
    
    
    
    30,000
    
    
    
    8,000Options exercisable at
year-end
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average fair
value of
options granted during
the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,108
    
    
    
    
    
    
    
    
 The following table summarizes information about hanaro and Hanaro Dream, Inc.s stock
options as of December 31, 2004. hanaro: Number of
    
    
    Weighted-average remaining
    
    
    Weighted-averageRanges of exercise price
    
    options outstanding
    
    
    contractual life (years)
    
    
    exercise priceW5,000
    
    
    19,772,890
    
    
    
    2.4
    
    
    W
    5,000W5,630
    
    
    50,000
    
    
    
    0.0
    
    
    
    5,630W17,750 to W19,910
    
    
    1,671,153
    
    
    
    0.7
    
    
    
    17,905W5,000 to W19,910
    
    
    21,494,043
    
    
    
    2.2
    
    
    
    6,005
 Hanaro Dream, Inc.: Number of
    
    
    Weighted-average remaining
    
    
    Weighted-averageRanges of exercise price
    
    options outstanding
    
    
    contractual life (years)
    
    
    exercise priceW8,000
    
    
    8,000
    
    
    
    0.0
    
    
    W
    8,000
 (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-38




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##### 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 income (loss) for the years ended December 31, 2002, 2003 and 2004 is summarized as
follows: Korean Won2002
    
    
    2003
    
    
    2004(In millions)Net income (loss) as adjusted in accordance with U.S.GAAP
    
    W
    (162,525
    )
    
    W
    (165,988
    )
    
    W
    16,703Other comprehensive income (loss), net of tax :Unrealized gains (losses) on investments
    
    
    (2,121
    )
    
    
    (1,062
    )
    
    
    2,087Less : reclassification adjustment
    
    
    (1,640
    )
    
    
    (1,321
    )
    
    
    (1,038
    )Net unrealized gains (losses) on investments
    
    
    (3,761
    )
    
    
    (2,383
    )
    
    
    1,049Foreign-based operations translation credit (debit)
    
    
    (30
    )
    
    
    2
    
    
    
    44Less : reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    (22
    )Net foreign-based operations translation credit (debit)
    
    
    (30
    )
    
    
    2
    
    
    
    22Net interest rate swap
    
    
    (5,633
    )
    
    
    (7,425
    )
    
    
    (4,565
    )Comprehensive income (loss) as adjusted in accordance with
U.S.GAAP
    
    W
    (171,949
    )
    
    W
    (175,794
    )
    
    W
    13,209
 F-39




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##### Table of Contents



(18) Statements of Cash Flows Statements of cash flows for the years ended December 31, 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, 2002, 2003 and 2004 are set out below. Korean Won2002
    
    
    2003
    
    
    2004(In millions)Net cash provided by (used in):Operating activities
    
    W
    (64,496
    )
    
    W
    293,080
    
    
    W
    432,067Investing activities
    
    
    (260,360
    )
    
    
    (256,719
    )
    
    
    (171,360
    )Financing activities
    
    
    341,966
    
    
    
    (118,106
    )
    
    
    (294,921
    )Decrease due to changes in consolidated
subsidiaries
    
    
    (700
    )
    
    
    
    
    
    
    (39,278
    )Increase (decrease) in cash and cash equivalents
    
    
    16,410
    
    
    
    (81,745
    )
    
    
    (73,492
    )Cash and cash equivalents, beginning of year
    
    
    307,173
    
    
    
    323,583
    
    
    
    241,838Cash and cash equivalents, end of year
    
    W
    323,583
    
    
    W
    241,838
    
    
    W
    168,346
 (19) Recently Issued Accounting Pronouncements 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 adoption of this statement
did not have a significant impact on the financial statements. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R).
SFAS 123R replaces SFAS No.123, Accounting for Stock-Based Compensation and supersedes APB
Opinion No.25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based
payments to employees to be recognized in the financial statements based on their fair value. The
Company will adopt SFAS 123R effective January 1, 2006 using the modified prospective method of
transition. This method requires SFAS 123R to be applied to new awards and awards modified,
repurchased or cancelled after the effective date. Additionally, compensation expense attributable
to any unvested awards outstanding at the date of adoption must be recognized over the remaining
requisite service period. As the Company previously adopted the fair value recognition provisions
of SFAS No.123, the Company does not expect the adoption of SFAS 123R to have a significant impact
on the Companys financial position, operating results or cash flows. In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary Assets, an amendment of APB
Opinion No.29, Accounting for Nonmonetary Transaction. SFAS No.153 amends the APB Opinion No.29
exception to fair value measurement for nonmonetary exchanges to apply only to those exchanges
which lack commercial substance, as defined in the standard. SFAS No. 153 is effective for
nonmonetary asset exchanges that the Company enters into on or after July 1, 2005. The adoption of
this standard is not expected to have a material impact on the Companys financial position,
operating results or cash flows. F-40




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In July 2004, the EITF issue No. 02-14, Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock if the Investor Has the Ability to Exercise
Significant Influence over the Operating and Financial Policies of the Investee. EITF Issue
No.02-14 was effective for reporting periods beginning after September 15, 2004 and requires the
use of the equity method of accounting for investments that are in-substance common stock when the
investor has the ability to exercise significant influence over the investee. The adoption of this
guidance is not expected to have a material impact on the Companys financial position, operating
results or cash flows. In March 2004, the EITF supplement EITF Issue No.03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. EITF Issue No.03-1 provides guidance for
evaluating whether an investment is other-than-temporarily impaired and requires disclosures about
unrealized losses on available for sale debt and equity securities. In September 2004, the FASB
issued FASB Staff Position (FSP) EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF
Issue 03-1, which deferred the effective date of the recognition and measurement provisions of the
consensus until further guidance is issued. The impact on future earnings, if any, of the
recognition and measurement provisions of EITF Issue No.03-1 will not be known until the FASB
issues its guidance. In December 2003, the AICPA issued SOP 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer. SOP 03-3 addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an initial investment in loans or debt
securities acquired in a transfer if those differences relate, at least in part, to a deterioration
of credit quality. It includes such loans acquired in purchase business combinations but does not
apply to loans originated by the entity. SOP 03-3 prohibits companies from carrying over valuation
allowances in the initial accounting for such loans and limits the yield that may be accredited to
the excess of the estimate of undiscounted expected principal, interest, and other cash flows over
the initial investment in the loan. The SOP requires that the excess of contractual cash flows over
the initial investment in the loan. The SOP requires that the excess of contractual cash flows over
cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or
valuation allowance. SOP 03-3 also prohibits investors from displaying accreditable yield and
nonaccreditable differences in the balance sheet. Subsequent increases in cash flows expected to be
collected generally should be recognized prospectively through adjustment of the loans yield over
its remaining life. Decreases in cash flows expected to be collected should be recognized as
impairment. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15,
2004. The application of SOP 03-3 is not expected to have a significant impact on the Companys
financial position, results of operations or cash flows. (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, net asset value proportionate to
the Companys ownership percentage is used as estimated fare value. However, 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, debentures and long-term obligation under capital lease: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-41




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##### Table of Contents



The estimated fair values of the Companys financial instruments as of December 31 are summarized
as follows: Korean Won2003
    
    
    2004Carrying amount
    
    
    Fair value
    
    
    Carrying amount
    
    
    Fair value(In millions)Cash and cash equivalents and short-term
investment securities
    
    W
    199,937
    
    
    W
    199,937
    
    
    W
    169,467
    
    
    W
    169,467Short-term financial instruments
    
    
    219,872
    
    
    
    219,872
    
    
    
    193,716
    
    
    
    193,716Long-term financial instruments
    
    
    7
    
    
    
    7
    
    
    
    68
    
    
    
    68Long-term investment securities
    
    
    23,764
    
    
    
    22,661
    
    
    
    28,816
    
    
    
    29,656Short-term borrowings
    
    
    163,000
    
    
    
    163,000
    
    
    
    
    
    
    
    Long-term debt, including current portion
    
    
    339,795
    
    
    
    342,307
    
    
    
    465,910
    
    
    
    466,922Debentures, including current portion
    
    
    673,277
    
    
    
    678,257
    
    
    
    488,975
    
    
    
    502,972Long-term obligations under capital
lease, including current portion
    
    
    112,000
    
    
    
    109,528
    
    
    
    79,854
    
    
    
    79,285Interest rate swap
    
    
    13,058
    
    
    
    13,058
    
    
    
    17,623
    
    
    
    17,623
 (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 26- 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-42




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(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)2002
    
    
    2003
    
    
    2004
    
    
    2004(In thousands, except(In millions, except per share amount)
    
    
    per share amount)Net income (loss) under Korean GAAP
    
    W
    (125,025
    )
    
    W
    (161,299
    )
    
    W
    13,046
    
    
    $
    12,604Adjustments:Development costs
    
    
    252
    
    
    
    (1,717
    )
    
    
    1,250
    
    
    
    1,208Interest capitalization
    
    
    
    
    
    
    3,168
    
    
    
    1,387
    
    
    
    1,340Stock compensation expense
    
    
    (2,890
    )
    
    
    
    
    
    
    
    
    
    
    Revenue recognition
    
    
    346
    
    
    
    346
    
    
    
    282
    
    
    
    272Bonds with stock warrants
    
    
    (37,328
    )
    
    
    (7,066
    )
    
    
    
    
    
    
    Changes in consolidated subsidiaries
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    Consolidation of SPE
    
    
    1,689
    
    
    
    155
    
    
    
    
    
    
    
    Amortization of goodwill
    
    
    425
    
    
    
    425
    
    
    
    738
    
    
    
    713Deferred tax effect of current
years U.S.GAAP adjustments
    
    
    11,084
    
    
    
    1,393
    
    
    
    (3,061
    )
    
    
    (2,957
    )Valuation allowance against
deferred tax assets created by
U.S.GAAP adjustments
    
    
    (11,084
    )
    
    
    (1,393
    )
    
    
    3,061
    
    
    
    2,957(37,500
    )
    
    
    (4,689
    )
    
    
    3,657
    
    
    
    3,533Net loss under U.S.GAAP
    
    W
    (162,525
    )
    
    W
    (165,988
    )
    
    W
    16,703
    
    
    $
    16,137Basic and diluted income (loss) per
share under U.S.GAAP (in Korean won
and U.S. dollars)
    
    W
    (545
    )
    
    W
    (517
    )
    
    W
    36
    
    
    $
    0.035Shareholders equity under Korean GAAP
    
    W
    1,515,498
    
    
    W
    1,757,903
    
    
    W
    1,778,789
    
    
    $
    1,718,471Adjustments:Licensing cost paid by shareholders
    
    W
    35,250
    
    
    W
    35,250
    
    
    W
    35,250
    
    
    $
    34,055Development costs
    
    
    (999
    )
    
    
    (2,716
    )
    
    
    (1,465
    )
    
    
    (1,416
    )Interest capitalization
    
    
    
    
    
    
    3,168
    
    
    
    4,555
    
    
    
    4,401Loans to employees
    
    
    (12,900
    )
    
    
    (12,574
    )
    
    
    (12,067
    )
    
    
    (11,658
    )Bonds with stock warrants
    
    
    7,066
    
    
    
    
    
    
    
    
    
    
    
    Changes in consolidated subsidiaries
    
    
    (786
    )
    
    
    
    
    
    
    
    
    
    
    Consolidation of SPE
    
    
    2,159
    
    
    
    2,314
    
    
    
    
    
    
    
    Revenue recognition
    
    
    (628
    )
    
    
    (282
    )
    
    
    
    
    
    
    Goodwill
    
    
    425
    
    
    
    850
    
    
    
    1,589
    
    
    
    1,535Deferred tax effect of U.S.GAAP
adjustments
    
    
    (12,853
    )
    
    
    (11,454
    )
    
    
    (10,980
    )
    
    
    (10,608
    )Valuation allowance against
deferred tax assets created by
U.S.GAAP adjustments
    
    
    12,853
    
    
    
    11,454
    
    
    
    10,980
    
    
    
    10,608Changes in minority interest
applying U.S.GAAP
    
    
    (145,477
    )
    
    
    (598
    )
    
    
    (3,215
    )
    
    
    (3,106
    )Minority interests under U.S.GAAP
    
    
    (19
    )
    
    
    (19
    )
    
    
    
    
    
    
    (115,909
    )
    
    
    25,393
    
    
    
    24,647
    
    
    
    23,811Shareholders equity under U.S.GAAP
    
    W
    1,399,589
    
    
    W
    1,783,296
    
    
    W
    1,803,436
    
    
    $
    1,742,282
 F-43




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##### 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)2003
    
    
    2004
    
    
    2004(In millions)
    
    
    (In thousands)Current assetsAs reported
    
    W
    679,236
    
    
    W
    624,797
    
    
    $
    603,610U.S. GAAP adjustments:Short-term loans
    
    
    (9,618
    )
    
    
    (4,373
    )
    
    
    (4,225
    )Accrued income
    
    
    (5,036
    )
    
    
    
    
    
    
    Prepaid expenses
    
    
    5,041
    
    
    
    3,585
    
    
    
    3,463Consolidation of SPEs
    
    
    42,314
    
    
    
    
    
    
    
    Deferred income tax assets
    
    
    799
    
    
    
    170
    
    
    
    164As adjusted
    
    
    712,736
    
    
    
    624,179
    
    
    
    603,012Non-current assetsAs reported
    
    
    2,707,312
    
    
    
    2,560,453
    
    
    
    2,473,629U.S. GAAP adjustments:Long-term loans
    
    
    (4,135
    )
    
    
    (7,693
    )
    
    
    (7,431
    )Long-term prepaid expenses
    
    
    6,442
    
    
    
    4,210
    
    
    
    4,067Intangibles
    
    
    33,385
    
    
    
    35,374
    
    
    
    34,174Interest capitalization
    
    
    3,168
    
    
    
    4,554
    
    
    
    4,400Consolidation of SPEs
    
    
    (9,000
    )
    
    
    
    
    
    
    Deferred income tax assets
    
    
    11,545
    
    
    
    11,213
    
    
    
    10,833As adjusted
    
    
    2,748,717
    
    
    
    2,608,111
    
    
    
    2,519,672Total assets based on U.S.GAAP
    
    W
    3,461,453
    
    
    W
    3,232,290
    
    
    $
    3,122,684Current liabilitiesAs reported
    
    W
    796,850
    
    
    W
    715,327
    
    
    $
    691,070U.S.GAAP adjustments:Unearned income
    
    
    5,322
    
    
    
    3,585
    
    
    
    3,463Consolidation of SPEs
    
    
    24,784
    
    
    
    
    
    
    
    Deferred income tax liabilities
    
    
    799
    
    
    
    170
    
    
    
    164As adjusted
    
    
    827,755
    
    
    
    719,082
    
    
    
    694,697Long-term liabilitiesAs reported
    
    
    831,795
    
    
    
    691,134
    
    
    
    667,698U.S.GAAP adjustments:Unearned income
    
    
    6,444
    
    
    
    4,210
    
    
    
    4,068Deferred income tax liabilities
    
    
    11,545
    
    
    
    11,213
    
    
    
    10,833As adjusted
    
    
    849,784
    
    
    
    706,557
    
    
    
    682,599Total liabilities based on U.S.GAAP
    
    W
    1,677,539
    
    
    W
    1,425,639
    
    
    $
    1,377,296Minority interests based on U.S.GAAP
    
    W
    618
    
    
    W
    3,215
    
    
    $
    3,106
 F-44




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##### 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 Won2003
    
    
    2004Current
    
    
    Non-current
    
    
    Current
    
    
    Non-current(In millions)Deferred tax assets:Development costs
    
    W
    807
    
    
    W
    
    
    
    W
    403
    
    
    W
    Revenue recognition
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    Total deferred income tax assets
    
    
    891
    
    
    
    
    
    
    
    403
    
    
    
    Valuation allowance
    
    
    (92
    )
    
    
    11,545
    
    
    
    (233
    )
    
    
    11,213Net deferred income tax assets
    
    
    799
    
    
    
    11,545
    
    
    
    170
    
    
    
    11,213Deferred tax liabilities:License fee
    
    
    
    
    
    
    (10,469
    )
    
    
    
    
    
    
    (9,694
    )Consolidation of SPEs
    
    
    (681
    )
    
    
    
    
    
    
    
    
    
    
    Interest capitalization
    
    
    (118
    )
    
    
    (823
    )
    
    
    (170
    )
    
    
    (1,082
    )Goodwill
    
    
    
    
    
    
    (253
    )
    
    
    
    
    
    
    (437
    )Total deferred income tax liabilities
    
    
    (799
    )
    
    
    (11,545
    )
    
    
    (170
    )
    
    
    (11,213
    )Net deferred income tax assets
    
    W
    
    
    
    W
    
    
    
    W
    
    
    
    W
    
 At December 31, 2003 and 2004, the Company has available loss carryforwards of W752,757 million and
W703,781 million, respectively, which may be applied against future taxable income through 2008 and
2009, respectively. The income tax expenses under U.S.GAAP for the years ended December 31, 2002, 2003 and 2004 are as
follows: Korean Won2002
    
    
    2003
    
    
    2004(In millions)Income tax currently
payable
    
    W
    323
    
    
    W
    354
    
    
    W
    806Deferred income taxes
    
    
    127
    
    
    
    (52
    )
    
    
    (311
    )Income tax expense
    
    W
    450
    
    
    W
    302
    
    
    W
    495
 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-45




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##### 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 2002, 2003 and 2004 is
attributable to the following: Korean Won2002
    
    
    2003
    
    
    2004(In millions)Income tax benefit at statutory Korean
corporate income tax rate of 29.7% in 2002,
2003 and 2004
    
    W
    (48,113
    )
    
    W
    (49,184
    )
    
    W
    5,199Non-deductible meals and entertainment and other
    
    
    708
    
    
    
    1,143
    
    
    
    576Change in valuation allowance
    
    
    45,957
    
    
    
    47,692
    
    
    
    (4,928
    )Other
    
    
    1,898
    
    
    
    651
    
    
    
    (352
    )Actual income tax expense
    
    W
    450
    
    
    W
    302
    
    
    W
    495
 F-46




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##### Table of Contents



EXHIBIT INDEX Exhibits
    
    Description1.1.
    
    Articles of Incorporation, as amended on March 25, 2005 (English translation)4.1.
    
    Agreement for Acquisition of Korea
Thrunet Co. Ltd. dated February 4, 2005 (English translation)4.2.
    
    Indenture dated as of
February 1, 2005 relating to $500 million principal amount of 7% notes due 20124.3.
    
    Senior Secured Credit Facility dated April 21, 20058.1.
    
    List of hanarotelecoms
significant subsidiaries (See Item 4.C. Organizational
Structure.)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 Certifications required by Rule 13a-14(b) and 18 U.S.C. Section 1350