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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549
 FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003Commission File Number: 000-30540 GIGAMEDIA LIMITED  REPUBLIC OF SINGAPORE
(Jurisdiction of incorporation or organization) 122 TUNHUA NORTH ROAD, TAIPEI, TAIWAN, R.O.C.
(Address of principal executive offices) Registrants telephone number, including area code
886-2-8770-7966 Securities registered or to be registered pursuant to Section 12(b) of
the Exchange Act: None Securities registered or to be registered pursuant to Section 12(g) of the
Exchange Act: Ordinary shares, par value NT$10 per share 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: 50,154,000 ordinary shares, par value NT$10 per share. Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes x No o Indicate by check mark which financial statement item the Registrant has
elected to follow. Item 17 o Item 18 x




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TABLE OF CONTENTS PagePART I
    
    
    3ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    3ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3. KEY INFORMATION
    
    
    3ITEM 4. INFORMATION ON THE COMPANY
    
    
    12ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    24ITEM 6. SENIOR MANAGEMENT AND EMPLOYEES
    
    
    34ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    39ITEM 8. FINANCIAL INFORMATION
    
    
    41ITEM 9. THE OFFER AND LISTING
    
    
    43ITEM 10. ADDITIONAL INFORMATION
    
    
    44ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    54ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    54PART II
    
    
    55ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    55ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    55ITEM 15. CONTROLS AND PROCEDURES
    
    
    55ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    56ITEM 16B. CODE OF ETHICS
    
    
    56ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    56ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    57ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    57PART III
    
    
    57ITEM 17. FINANCIAL STATEMENTS
    
    
    57ITEM 18. FINANCIAL STATEMENTS
    
    
    57ITEM 19. EXHIBITS
    
    
    57SIGNATURES
    
    
    60EX-4.38 FINAL SETTLEMENT AGREEMENT AND RELEASEEX-4.39 STOCK PURCHASE AGREEMENTEX-8.1 LIST OF SUBSIDIARIESEX-11 CODE OF BUSINESS CONDUCT AND ETHICSEX-12.1 CEO CERTIFICATIONEX-12.2 CFO CERTIFICATIONEX-13 CERTIFICATION OF CEO AND CFO
  USE OF CERTAIN TERMS In this annual report, all references to (i) we, us, our, our
Company or GigaMedia are to GigaMedia Limited and, unless the context
requires otherwise, its subsidiaries, (ii) Koos Group are to a group of
companies controlled by members of the Koo family, (iii) Shares are to
ordinary shares of our Company, par value NT$10, and (iv) Hoshin GigaMedia
are to Hoshin GigaMedia Center Inc., a company incorporated under the laws of
Taiwan, Republic of China, or ROC. All references in this annual report to US
dollar, $ and US$ are to United States dollars, all references to NT
dollar and NT$ are to New Taiwan dollars. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that involve risks
and uncertainties. These statements are generally indicated by the use of
forward-looking terminology such as believe, expect, anticipate,
estimate, plan, project, may, will or other similar words. These
forward-looking statements are based on our own information and on information
from other sources we believe to be reliable. Our actual results may differ
materially from those expressed or implied by these forward-looking statements
as a result of risk factors and other factors noted throughout this annual
report. We undertake no obligation to release publicly any versions to any
forward-looking statements to reflect events or circumstances after the date of
this annual report or to reflect the occurrence of unanticipated event. Given
this level of uncertainty, you are advised not to place undue reliance on such
forward-looking statements. 2




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION EXCHANGE RATES In this annual report, we have translated certain New Taiwan dollar
amounts into U.S. dollars for the convenience of investors. All translations
from New Taiwan dollars to United States dollars were made (unless otherwise
indicated) on the basis of the noon buying rates of the U.S. Federal Reserve
Bank of New York, or the Noon Buying Rate, of NT$33.92 = US$1.00 on December
31, 2003, which was the last trading day in 2003. All amounts translated into
United States dollars as described above are provided solely for the
convenience of the reader, and we make no representation that the New Taiwan
dollar or United States dollar amounts referred to in this annual report could
have been or could actually be converted into United States dollars or New
Taiwan dollars at that rate or at any other particular rate, or at all. The
following table sets forth the Noon Buying Rates for New Taiwan dollars
expressed in New Taiwan dollar per US$1.00 for the periods indicated below. Average
    
    High
    
    LowYear Ended
    
    (of month-end
    
    (of month-end
    
    (of month-end
    
    AtDecember 31,
    
    rates)
    
    rates)
    
    rates)
    
    Period-End1998
    
    
    33.50
    
    
    
    34.39
    
    
    
    32.20
    
    
    
    32.271999
    
    
    32.28
    
    
    
    33.17
    
    
    
    31.39
    
    
    
    31.392000
    
    
    31.37
    
    
    
    33.17
    
    
    
    30.48
    
    
    
    33.172001
    
    
    33.91
    
    
    
    35.13
    
    
    
    32.23
    
    
    
    35.002002
    
    
    34.53
    
    
    
    35.11
    
    
    
    33.46
    
    
    
    34.702003
    
    
    34.40
    
    
    
    34.85
    
    
    
    33.78
    
    
    
    33.99
  Average
    
    High
    
    Low(of day-end
    
    (of day-end
    
    (of day-end
    
    AtMonth Ended
    
    rates)
    
    rates)
    
    rates)
    
    Period-End(NT$ per US$1.00)January 31, 2004
    
    
    33.68
    
    
    
    33.98
    
    
    
    33.33
    
    
    
    33.39February 29, 2004
    
    
    33.21
    
    
    
    33.36
    
    
    
    33.10
    
    
    
    33.28March 31, 2004
    
    
    33.25
    
    
    
    33.42
    
    
    
    33.00
    
    
    
    33.00April 30, 2004
    
    
    32.97
    
    
    
    33.27
    
    
    
    32.73
    
    
    
    33.27May 31, 2004
    
    
    33.44
    
    
    
    33.70
    
    
    
    33.14
    
    
    
    33.36June 30, 2004 (only
through June 25)
    
    
    33.55
    
    
    
    33.80
    
    
    
    33.35
    
    
    
    33.57
 A. Selected Financial Data The selected consolidated balance sheet data as of December 31, 2002 and
2003 and the selected consolidated statement of operations data for the years
ended December 31, 2001, 2002 and 2003 have been derived from our audited
consolidated financial statements included elsewhere in this annual report. The
selected consolidated balance sheet data as of December 31, 1999, 2000 and
2001, and the selected consolidated statement of operations data for the years
ended December 31, 1999 and 2000 have been derived from our audited
consolidated financial statements, which are not included in this annual
report. The consolidated 3




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financial statements have been prepared and presented in accordance with
generally accepted accounting principles in the United States, or U.S. GAAP.
The selected consolidated financial data set forth below should be read in
conjunction with Item 5. Operating and Financial Review and Prospects and the
consolidated financial statements and the notes to those statements included
elsewhere in this annual report. For the Years Ended December 31,
(in thousands except for loss per share amounts) 1999
    
    2000
    
    2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    US$(Unaudited)STATEMENT OF OPERATIONSDATA:OPERATING REVENUESSales/rental/installation
    
    
    16,831
    
    
    
    126,810
    
    
    
    7,490
    
    
    
    1,864,128
    
    
    
    2,559,008
    
    
    
    75,442Access revenues
    
    
    19,661
    
    
    
    155,035
    
    
    
    389,801
    
    
    
    638,916
    
    
    
    647,716
    
    
    
    19,095Web development revenue
    
    
    1,429
    
    
    
    28,978
    
    
    
    7,190
    
    
    
    
    
    
    
    
    
    
    
    Advertising and
promotional revenues
    
    
    71
    
    
    
    26,762
    
    
    
    5,039
    
    
    
    32,801
    
    
    
    54,894
    
    
    
    1,618Other revenues
    
    
    
    
    
    
    3,603
    
    
    
    1,432
    
    
    
    19,964
    
    
    
    18,505
    
    
    
    545Total
    
    
    37,992
    
    
    
    341,188
    
    
    
    410,952
    
    
    
    2,555,809
    
    
    
    3,280,123
    
    
    
    96,700COSTS AND EXPENSESCosts of
sales/rental/installation
    
    
    (24,429
    )
    
    
    (278,974
    )
    
    
    (143,420
    )
    
    
    (1,686,256
    )
    
    
    (2,244,196
    )
    
    
    (66,162
    )Operating costs
    
    
    (238,113
    )
    
    
    (987,331
    )
    
    
    (1,636,820
    )
    
    
    (634,872
    )
    
    
    (623,318
    )
    
    
    (18,376
    )Web development expenses
    
    
    (1,150
    )
    
    
    (23,182
    )
    
    
    (12,233
    )
    
    
    
    
    
    
    
    
    
    
    Product development and
engineering
    
    
    (20,939
    )
    
    
    (56,625
    )
    
    
    (106,458
    )
    
    
    (64,444
    )
    
    
    (41,673
    )
    
    
    (1,229
    )Selling and marketing
expenses
    
    
    (84,192
    )
    
    
    (383,948
    )
    
    
    (285,590
    )
    
    
    (427,310
    )
    
    
    (499,820
    )
    
    
    (14,734
    )General and administrative
expenses
    
    
    (328,440
    )
    
    
    (235,934
    )
    
    
    (215,663
    )
    
    
    (211,944
    )
    
    
    (274,278
    )
    
    
    (8,086
    )Bad debt expenses
    
    
    (892
    )
    
    
    (1,686
    )
    
    
    (40,250
    )
    
    
    (32,167
    )
    
    
    (5,362
    )
    
    
    (158
    )Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (242,938
    )
    
    
    (25,389
    )
    
    
    (748
    )Impairment loss on
intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80,627
    )
    
    
    
    
    
    
    Impairment loss on
property, plant and
equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,567
    )
    
    
    (1,579
    )Other costs
    
    
    
    
    
    
    (3,881
    )
    
    
    (1,203
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (698,155
    )
    
    
    (1,971,561
    )
    
    
    (2,441,637
    )
    
    
    (3,380,558
    )
    
    
    (3,767,603
    )
    
    
    (111,072
    )Net loss
    
    
    (657,933
    )
    
    
    (1,206,372
    )
    
    
    (1,811,324
    )
    
    
    (637,990
    )
    
    
    (484,857
    )
    
    
    (14,295
    )Loss per share basic and
diluted (in dollars) Net
Loss
    
    
    (18.06
    )
    
    
    (24.73
    )
    
    
    (36.12
    )
    
    
    (12.72
    )
    
    
    (9.67
    )
    
    
    (0.29
    )
 As of December 31,
(in thousands except for loss per share amounts) 1999
    
    2000
    
    2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    US$(Unaudited)BALANCE SHEET DATA:Total Current Assets
    
    
    1,170,428
    
    
    
    8,066,547
    
    
    
    6,132,875
    
    
    
    2,877,715
    
    
    
    2,639,778
    
    
    
    77,824Property, plant and
equipment- net
    
    
    170,981
    
    
    
    535,090
    
    
    
    705,570
    
    
    
    738,938
    
    
    
    531,155
    
    
    
    15,659Intangible assets-net
    
    
    
    
    
    
    948,004
    
    
    
    12,631
    
    
    
    242,012
    
    
    
    210,583
    
    
    
    6,208Total Assets
    
    
    2,869,142
    
    
    
    9,710,398
    
    
    
    8,062,552
    
    
    
    4,696,038
    
    
    
    4,069,342
    
    
    
    119,968Total shareholders equity
    
    
    1,514,433
    
    
    
    9,357,436
    
    
    
    7,845,126
    
    
    
    3,619,877
    
    
    
    3,069,619
    
    
    
    90,495
 4




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B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors We have a limited operating history, which may make it difficult for you to
evaluate our business We began offering our online access services in Taiwan in late 1998. Our
operating history in respect of retail music distribution and online gaming is
even more limited since we only acquired our two music store chains in 2002 and
acquired Grand Virtual in April 2004. Our financial success will depend on the
commercial acceptance and profitability of our services. If we are unsuccessful
in addressing these risks or in executing our business strategy, our business
and financial results will suffer. We have a history of losses and may incur substantial losses in future periods We have never been profitable. We have incurred substantial costs to
operate and grow our Internet access services and our retail music business. We
incurred a net loss of approximately NT$484.9 million (US$14.3 million) in 2003
and as of December 31, 2003, we had an accumulated net loss of approximately
NT$5.5 billion (US$163.3 million). Our limited operating history and market
conditions make predicting our results of operations difficult, and we may
incur substantial losses in the future. In addition, after the adoption of a new accounting standard in 2002, we
are required to perform annual impairment tests of goodwill. As a result, we
wrote off goodwill associated with the music businesses we acquired in 2002 in
the amount of NT$242.9 million, which reduced our profitability in 2002. Any
similar write-off in the future may have a negative impact on our financial
results. Our efforts to improve the performance of our retail music distribution
business may be unsuccessful We operate Taiwans two major music store chains. This business
experienced substantial operating losses in 2002 and 2003. We are currently
taking several steps with a view to improving the performance of this business,
including, among other things, reducing costs, improving our management
information systems with a view to operating the business more efficiently and
improving our operating margins. If our strategies for our retail music
business prove unsuccessful, this business will likely experience continuing
losses, which would likely have a material and adverse effect on our financial
condition and results of operations. The cyclical nature of the music industry, the impact of technological
innovations and the prevalence of piracy could materially and adversely affect
our business, financial condition or results of operations Our retail music business is affected by the release of hit music
titles, which can create cyclical trends in sales distinctive to the music
industry. It is not possible to determine the timing of these cycles or the
future availability of hit titles. Our business is also affected by changes
in music entertainment technology. While technological advances such as CDs
have had a favorable impact on industry growth in the past, there is no
assurance that future advances will continue to have a favorable impact on
music entertainment product retailers. In particular, the Internet and cable
set-top boxes, coupled with high quality digital recording technologies,
facilitate and encourage direct downloading of recorded music by consumers,
reducing the demand for CDs, thus negatively impacting the physical retail
music distribution channels. In addition, Taiwan continues to experience
relatively high levels of physical and online music piracy, which has further
eroded the retail music distribution industry. If the music industry
experiences a lull in hit music titles, or such technological innovations
were to result in significant changes in existing distribution channels for
pre-recorded music, or music piracy continues to be flagrant in Taiwan, our
business, financial condition or results of operations could be materially and
adversely affected. 5




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Our results of operations are subject to significant fluctuations, which may
adversely affect our business and financial results Our revenues, expenses and results of operations have varied in the past
and may fluctuate significantly in the future due to a variety of factors, many
of which are beyond our control. The key factors affecting our retail music
distribution business include the frequency with which hit music titles are
introduced, the seasonality of market demand for our retail music products and
our ability to enter into and maintain strategic alliances with major record
companies. The main factors affecting our online business include price
competition in the Internet access business, the rate at which new customers
subscribe to our services, subscriber turnover rates and the pace of rollout of
our service to our cable partners. In addition, our operating expenses are
based on our expectations of the future demand for our services and are
relatively fixed in the short term. We may be unable to adjust spending quickly
enough to offset any unexpected demand shortfall. A shortfall in revenues in
relation to our expenses could have a material and adverse effect on our
business and financial results. Our businesses face intense competition, which may adversely affect our
revenues, profitability and planned business expansion We face competition from many competitors, and we expect to face
competition from additional potential competitors, including competitors with:  
    
    significantly greater technological financial, sales and marketing resources;
    
    larger customer bases, longer operating histories;
    
    greater name recognition; and
    
    more established relationships with music label companies, cable
partners, advertisers, content and application providers and/or other
strategic partners than we have. COMPETITION IN THE RETAIL MUSIC DISTRIBUTION BUSINESS. Taiwans retail
music distribution industry is fragmented and competitive. In addition to our
Rose Records and Tachung Records chains, there are several other record
distribution chains operating in Taiwan as well as convenience stores,
individual music stores and night markets. Hypermarket chains, such as
Carrefour and specialty entertainment chains, such as FNAC, reflect a small,
but growing, segment of the market; some of these competitors have greater
financial and other resources than our Company and have been expanding into our
markets. Alternative distribution channels, such as Internet sale of physical
recorded music and Internet-based music downloads, which enjoy lower inventory
and distribution costs, have also begun to emerge in recent years as
competitive distribution channels and have adversely affected our popular music
sales. Going forward, we anticipate that an increasing proportion of popular
music sales is likely to continue to be effected through such alternative
distribution channels, particularly Internet-based downloading, which will
further erode our sales of popular music. Further, we expect continued growth
in competing home entertainment options, including the Internet and large
numbers of television and music channels offered by cable companies. In
addition, the prevalent practice of physical and online piracy in Taiwan
presents a continuing threat to the growth of the music distribution industry
in Taiwan. Such competition may reduce sales at music stores, put pressure on
gross margins, increase operating expenses and reduce profit margins. There can
be no assurance that the retail music business will continue to be a viable
business, that retail stores will continue to be a primary distribution channel
for recorded music, or that we will continue to compete successfully within the
retail music store sector or the retail music business generally. COMPETITION IN THE INTERNET ACCESS BUSINESS. Our main competitors are
fixed-line service providers in Taiwan that offer asymmetrical digital
subscriber line, or ADSL, broadband services, including Chunghwa Telecoms
HiNet, the dominant provider of broadband services. Our competitors also
include cable-based Internet access companies that have developed their own
cable-based services and market those services to cable operators. We also
compete with other cable-based data service providers that are seeking to
contract with cable operators to bring their services into geographic areas
that are not covered by an exclusive relationship between our Company and our
cable partners. In recent years, we have experienced a reduction in the number
of our new subscribers. The primary basis of competition in the online business
industry is price. We can offer no assurance that we will be able to attract
new subscribers or retain existing subscribers, as a result of which our
revenues may decline. Due to this intense competition, there may be a limited
market opportunity for our broadband access services. We cannot assure you that
we will be successful in achieving widespread acceptance of our services before
our competitors offer services similar to our current or prospective offerings, which might preclude or delay purchasing decisions by potential
subscribers. 6




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COMPETITION IN THE INTERNET GAMING SOFTWARE BUSINESS. The Internet gaming
software industry is characterized by rapid technological change and we face
significant and intense competition in the area of software development and
provision of application services. Some of our competitors are more
established, enjoy greater market recognition, are substantially larger and
have substantially greater resources and distribution capabilities than we do.
We also face the likelihood of new competitors offering Internet gaming
software technology entering this industry. There is no assurance that we will
be able to compete successfully with existing and future competitors, which
could have a material and adverse effect on our business, financial condition
or results of operations. The benefits of our exclusive agreements with the cable partners may be
substantially diminished by open-access proposals, which would require our
exclusive cable partners to grant our competitors access to their systems We have entered into exclusive agreements with 11 out of 19 of our cable
partners (not including Original Equipment Manufacturers, or OEM, partners) to
provide services through their cable systems. Under a regulation in Taiwan, our
cable partners must obtain leased-circuit licenses to lease their circuits to
us in order for us to provide two-way cable services. In addition, any holder
of leased-circuit licenses, including any of the cable partners having
exclusive relationships with us, may be required to grant our competitors
access to its cable system if it is deemed to be a dominant leased-circuit
operator. In that event:  
    
    Other Internet and online service providers could potentially
provide services over these cable partners cable systems that compete
with our services;
    
    our rights as the exclusive broadband Internet access provider over
these cable partners systems could be lost; and
    
    our business, financial condition and results of operations would
likely be adversely affected. Our controlling shareholder has significant influence in determining the
outcome of any corporate transaction or other matters submitted to the
shareholders for approval, and their interests may conflict with your interests Members of the Koos Group currently beneficially own approximately 28.7%
of our outstanding shares. Accordingly, the Koos Group has significant
influence in determining the outcome of any corporate transaction or other
matters submitted to the shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, and also
the power to prevent or cause a change in control. The interests of the Koos
Group may differ from or conflict with your interests. Our relationship with our major shareholders may not benefit us in the future,
and the expected benefits
to be derived from our affiliations with our major shareholders may never
materialize We have entered into alliances with several members of the Koos Group.
These alliances have enabled us to obtain services relating to our access and
content businesses. We expect to enter into additional alliances with members
of the Koos Group in the future as we expand our operations. However, we cannot
assure you that we will succeed in entering into such alliances or that the
alliances with the Koos Groups members will be beneficial to us. Our transactions with affiliates may not benefit us and may harm our Company We have entered into several transactions with our affiliates. Our policy
is that transactions with affiliates are to be conducted on an arms-length
basis and on terms substantially as favorable to us as with non-affiliates.
However, we cannot assure you that all our future transactions with affiliates
will be beneficial to us. Out of our 19 cable partners, 11 are members of the Koos Group, our
controlling shareholder. We cannot assure you that future transactions between
our Company and those related cable partners will be on arms-length terms, or
that we could not have obtained more favorable terms in negotiations with
independent third parties. See Item 7. Major Shareholders and Related Party
TransactionsRelated Party Transactions. 7




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We may need additional capital in the future and it may not be available on
acceptable terms The development of our business may require significant additional capital
in the future to:  
    
    fund our operations;
    
    enhance and expand the range of products and services we offer; and
    
    respond to competitive pressures and perceived opportunities, such
as investment, acquisition and international expansion activities. We cannot assure you that additional financing will be available on terms
favorable to us, if at all. If adequate funds are not available on acceptable
terms, we may be forced to curtail or cease our operations. Moreover, even if
we are able to continue our operations, any failure to obtain additional
financing could have a material and adverse effect on our business, financial
condition and results of operations and we may need to delay the deployment of
our services. See Item 5. Operating and Financial Review and Prospects  B.
Liquidity and Capital Resources. We may be subject to claims of intellectual property right infringement, and
our limited intellectual property protection causes us to be vulnerable to
competitors infringing upon or misappropriating our proprietary rights As a distributor of Internet content, we face the same types of risks that
apply to all businesses that publish or distribute information, such as
potential liability for copyright, patent or trademark infringement,
defamation, indecency and other similar claims. Any imposition of liability
that is not covered by insurance, is in excess of insurance coverage or for
which we are not indemnified by a content provider, could have a material
adverse effect on our business and results of operations. We rely on a combination of copyright and trademark laws, trade secret
protection, confidentiality and non-disclosure agreements, and other
contractual provisions to protect our proprietary software, trade secrets and
similar intellectual property. These are especially critical to our online
gaming software and application services business. We can offer no assurance
that our efforts will prove to be sufficient or that third parties will not
infringe upon or misappropriate our proprietary rights. We may have to engage
in litigation to enforce and protect our trade secrets and other intellectual
property rights. We may also be sued for allegedly infringing the rights of
others or to determine the scope and validity of their intellectual property
rights. Any litigation involving proprietary rights could be costly, require us
to seek licenses from third parties and prevent us from selling our products
and services, any of which could have a material adverse effect on us. Defects in our online gaming software and application services could harm our
reputation and thus our business The performance of our online gaming software and application service is
critical to the success of Grand Virtuals business, the failure of which
exposes us to serious potential risks. These risks include:  
    
    the risk of defects in our software and application service or
system failures, which could result in losses to our licensees,
end-users and to us; and
    
    the risk from claims resulting from losses to end-users, which
could damage our reputation and subject us to liability. If we are unable to successfully protect our computer systems from online
security risks, our business could suffer While we have implemented industry-standard security measures, our network
may still be vulnerable to unauthorized access, computer viruses, denial of
service attacks and other disruptive problems. A party that is able to
circumvent security measures could misappropriate proprietary information and,
perhaps, most importantly, cause interruptions in our operations. Internet and
online service providers have, in the past, 8




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experienced and may, in the future, experience, interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. We may be required to expend significant capital or
other resources to protect against the threat of security breaches or to
alleviate problems caused by such breaches. There can be no assurance that any
measures implemented will not be circumvented in the future. The markets for our Internet access and online gaming software and application
services are characterized by rapid technological changes, and our inability to
respond quickly and sufficiently to new Internet technologies or standards may
have a material and adverse effect on our business The markets for our Internet access and online gaming software and
application services are characterized by rapid technological advances,
evolving industry standards, changes in user requirements and frequent new
service introductions and enhancements. If we are unable to effectively use
leading technologies, continue to develop our technological expertise, enhance
our current services and continue to improve the performance, features and
reliability of our products and services, or we are unable to respond quickly
and sufficiently to new Internet technologies or standards, then our business
and financial results may be materially and adversely affected. Our Internet access and online gaming software and application services
businesses depend on the reliability of our network infrastructure, which is
subject to physical, technological and other risks The development and operation of our online networks are subject to
physical, technological and other risks which may result in interruption in
service or reduced capacity for customers. These risks include physical damage,
power loss, telecommunications failure, capacity limitation, hardware or
software failures or defects and breaches of security by computer viruses,
break-ins or otherwise. The occurrence of any of these events could result in
interruptions, delays or cessation in service to users of our online services,
which could have a material adverse effect on our business and operating
results. An increase in the volume of usage of online services could strain the
capacity of our software and hardware employed, which could result in slower
response time or systems failures. We do not have redundant facilities in the event of an emergency, but we
have a variety of backup servers at our primary site to deal with system
failures. The licensees of our Internet gaming software and application services business
depend on credit card transactions for a substantial portion of the deposits or
payments by their customers Our Internet gaming software and application services business derives
most of its revenues from its licensees. A substantial portion of the deposits
or payments made to licensees are made through credit card transactions. If
credit card companies were to stop processing online gaming transactions,
either generally or in jurisdictions where our licensees operate, our Internet
gaming software and application services business could be materially and
adversely affected. Many issuing banks of major credit cards (such as Visa and Mastercard)
have announced that they will decline authorization to U.S. persons who attempt
to use their credit cards for online gaming. U.S. and non-U.S. banks which
process online gaming transactions for U.S. persons face potential criminal
proceedings under the U.S. Patriot Act, as U.S. jurisdiction under the Patriot
Act extends to non-U.S. banks that have correspondent accounts in the United
States. This could result in issuing banks deciding not to process online
gaming transactions generally. In addition, it is possible that other
jurisdictions may enact legislation or take other actions which result in
credit card companies being unwilling or unable to process online gaming
transactions. Furthermore, there is a higher incidence of fraud associated with online
credit card payments than with respect to other types of transactions, which
could further discourage issuing banks from processing online gaming
transactions. The worldwide legal and regulatory environment in which our Internet gaming
business operates embodies uncertainties that could adversely affect our
business and operating results The licensees of our software products and our business of software
development and application service provision itself are subject to applicable
laws and regulations in various jurisdictions. Companies and consumers involved
in Internet gaming are located around the world, including the end-users of our
licensees. As such, it is 9




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in many cases uncertain which governments have authority to regulate or
legislate with respect to different aspects of this industry. The Internet
gaming industry is still in an early stage of development, and as such, the
worldwide legal and regulatory environment in which the business operates is
highly fluid, and subject to change. Most foreign jurisdictions have some form
of legal framework applicable to games of chance, but few provide any guidance
on how this framework applies to Internet gaming. Issues such as physical
location of the gaming event, foreign jurisdictional law, Cyberlaws, and
control of the Internet all make traditional legal and regulatory laws
difficult to apply. In addition, the very nature of Internet gaming creates new
and unique forms of entertainment that were neither contemplated nor feasible
in the past. Due to the uncertainties in the worldwide legal and regulatory
environment in which our Internet gaming business operates, we cannot assure
you that our status or operations as an application service provider to the
gaming industry is in compliance with all laws and regulations of the
jurisdictions in which we operate, or that changes in such laws and
regulations, or in their interpretation, will not adversely affect our business
and operating results. Our Company and the industry as a whole may be affected by efforts by
members of the U.S. Congress to ban certain Internet gambling. Early in the
108th Congress, U.S. Congressman Jim Leach (R-IA) introduced HR 21, the
Unlawful Internet Gambling Funding Prohibition Act, which attempts to prohibit
Internet gambling by forbidding the use of credit instruments of United States
banks from being used to make bets or wagers over the Internet. Shortly
afterwards, U.S. Senator Jon Kyl (R-AZ) introduced similar legislation, S. 627
in the U.S. Senate. In June 2003, HR 21 was reintroduced as HR 2143 by U.S.
Congressman Spencer Bachus (R-AL) without any civil and criminal sanctions in
order to bypass the U.S. House of Representatives Committee on Judiciary. After
a very close vote on an amendment to HR 2143, the House of Representatives
passed that legislation. In late July 2003, the U.S. Senates Committee on
Banking voted to report an altered version of S. 627. We continue to monitor
this situation since the passage of this legislation could have a substantial
impact on the business of our licensees and ultimately our Company. If this
legislation passes and becomes law, it would have an immediate detrimental
effect on the industry and would pose a serious threat to the continued
operation of our online gaming business. In March 2003, the World Trade Organization held in favor of Antigua and
Barbuda and against the U.S. with regard to unlawful trade restrictions
relating to Internet gaming. Due to the recent timing of this ruling and
without the ruling being published in full, it is too early to determine what,
if any, influence this may have on United States-led legislation. Our operating results and financial condition are affected by general economic
conditions and levels of consumer spending as well as the occurrence of natural
disasters Our operating results and financial condition, particularly in relation to
our retail music business and our online entertainment business, are directly
dependent upon general economic conditions and levels of consumer spending.
Political unrest, war, acts of terrorism and other instability, as well as
natural disasters such as earthquakes and typhoons which are common in Taiwan,
can result in disruption to our business or the businesses of our customers.
Similar occurrences in the future could result in increased volatility in or
damage to the global financial markets, which in turn may adversely affect our
business and results of operations. Past economic downturns have resulted in
lower levels of consumer spending, thus negatively impacted our sales and
profit. There can be no assurance that rising interest rates, an economic
recession, other adverse economic developments or natural disasters will not
have a material adverse effect on our cashflow, profitability or financial
condition. There are economic risks associated with doing business in Taiwan, particularly
due to the tense relationship between Taiwan and China Our principal executive offices and our operations in respect of our
online and retail music businesses are located in Taiwan and all of our net
revenues in respect of our online and retail music businesses are derived from
customers in Taiwan. Taiwan, as part of the Republic of China, has a unique
international political status. The Peoples Republic of China, or the PRC,
asserts sovereignty over mainland China and Taiwan and does not recognize the
legitimacy of the Taiwan government. Although significant economic and cultural
relations have been established during recent years between Taiwan and the PRC,
the PRC government has indicated that it may use military force to gain control
over Taiwan if Taiwan declares independence or if any foreign power interferes
in Taiwans affairs. Relations between Taiwan and the PRC and other factors
affecting the political or economic conditions of Taiwan could also affect our
online and retail music businesses. 10




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We may be subject to heightened scrutiny by Taiwans Fair Trade Commission due
to our sizeable share of the recorded music retail distribution market in Taiwan, which could result
in new regulations that may negatively impact our results of operations Since we hold a sizeable market share of Taiwans recorded music retail
distribution market, we could be deemed a monopoly by Taiwans Fair Trade
Commission. This could result in heightened scrutiny of our retail music
distribution operations and regulations. Any existing or new regulations that
govern the activities of a monopoly could restrict the scope of our music
distribution business, which could negatively impact our financial condition
and results of operations. Fluctuations in the exchange rate between New Taiwan dollars and U.S. dollars
could increase our costs relative to our revenues, which could adversely affect
our profitability Historically, all of our revenues and a majority of our expenses and
liabilities have been denominated in New Taiwan dollars, the currency of
Taiwan. We also generate expenses and liabilities in U.S. dollars. In the
future, we may also conduct business in additional foreign countries and
generate revenues, expenses and liabilities in other foreign currencies. As a
result, we are subject to the effects of exchange rate fluctuations with
respect to any of these currencies. We have not entered into agreements or
purchase instruments to hedge our exchange rate risks although we may do so in
the future. If we do so in the future, these agreements and instruments may not
help us to hedge our exchange rate risks completely. Any future outbreak of severe acute respiratory syndrome, or SARS, may
materially and adversely affect our business and results of operations Since March 2003, several economies in Asia, including China, Hong Kong,
Singapore and Taiwan, have been affected by the outbreak of SARS, a highly
contagious form of atypical pneumonia. SARS has caused damage to the trade and
tourism industries as well as to the economies and financial markets of the
affected countries, including Taiwan. The SARS outbreak had a significant
negative impact on our retail music business and operating results. Any
economic downturn as a result of any future SARS outbreak may have an adverse
effect on consumer confidence, and may in turn result in a decrease in the
demand for our products and services, which would adversely and materially
affect our business and results of operations. We believe that we were a passive foreign investment company for the taxable
year 2003 and are likely to be treated as a passive foreign investment company
for the taxable year 2004. As a result, you may be subject to materially
adverse tax consequences with respect to our shares Based on the composition of our assets and the nature of our income, we
believe that for U.S. federal income tax purposes we were a passive foreign
investment company for the taxable year 2003 and are likely to be treated as a
passive foreign investment company for the taxable year 2004 unless the market
value of our shares increases significantly or we make substantial active
investments, or both, during the taxable year 2004. We have limited control
over the market value of our shares and do not currently have plans to make
significant active investments. If you are a U.S. person holding our shares,
because we are a passive foreign investment company, you will be subject to
special U.S. federal income tax rules that may have materially adverse tax
consequences and will require annual reporting. See Item 10. Additional
Information  E. Taxation  United States Federal Income Tax Considerations For
U.S. Holders  Passive Foreign Investment Company Rules. We depend on dividends from our subsidiary in Taiwan to meet our cash needs,
and our subsidiarys ability to distribute dividends to us may be subject to
restrictions under Singapore and Taiwan laws We are a holding company, and our primary assets constitute our ownership
interests in our subsidiaries in Taiwan, including Hoshin GigaMedia, Rose
Records and Tachung Records. Accordingly, our primary internal sources of funds
to meet our cash needs is our share of the dividends, if any, paid by these
subsidiaries in Taiwan. The distribution of dividends from these subsidiaries
in Taiwan to us is subject to restrictions imposed by Taiwan and Singapore
corporate and tax regulations, which are more fully described in Item 5.
Operating and Financial Review and Prospects  B. Liquidity and Capital
Resources  Dividends from Our Subsidiaries in Taiwan. In addition, although
there are currently no foreign exchange control regulations, which restrict the
ability of our subsidiaries in Taiwan to distribute dividends to us, the
relevant regulations may be changed and the ability of these subsidiaries to
distribute dividends to us may be restricted in the future. 11




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We are a Singapore company, and because the rights of shareholders under
Singapore law differ from those under U.S. law, you may have difficulty
protecting your shareholder rights Our corporate affairs are governed by our Memorandum and Articles of
Association and by the laws governing corporations incorporated in Singapore.
The rights of our shareholders and the responsibilities of members of our board
of directors under Singapore law are different from those applicable to a
corporation incorporated in the United States and, therefore, our shareholders
may have more difficulty protecting their interests in connection with actions
by the management, members of our board of directors or our controlling
shareholders than they would as shareholders of a corporation incorporated in
the United States. There are anti-takeover provisions under the Singapore Securities and Futures
Act (Chapter 289) and the Singapore Code on Takeovers and Mergers that may
delay, deter or prevent a future takeover or change of control of our Company,
which may adversely affect the price of our shares There are provisions under the Singapore Securities and Futures Act
(Chapter 289) and the Singapore Code on Take-overs and Mergers that may delay,
deter or prevent a future takeover or change of control of our Company. Anyone
acquiring an interest, either on his own or together with parties acting in
concert with him, in 30% or more of our voting shares must extend a takeover
offer for the remaining voting shares. A person holding between 30% and 50% of
our voting shares, either on his own or together with parties acting in concert
with him, must also make a takeover offer if that person acquires additional
voting shares in excess of 1% of the total number of voting shares in any
6-month period. These provisions may discourage or prevent transactions that
involve an actual or threatened change of control of our Company. This may harm
you because a transaction of that kind may allow you to sell your shares at a
price above the prevailing market price. You may be subject to Singapore taxes You should consult your tax advisors concerning the overall tax
consequences of acquiring, owning or selling the shares. Singapore tax law may
differ from the tax laws of other jurisdictions, including the United States. 
 ITEM 4. INFORMATION ON THE COMPANY A. History and Development of our Company Our legal and commercial name is GigaMedia Limited. We were incorporated
in September 1999 as a company limited by shares organized under the laws of
the Republic of Singapore. Our Singapore company registration number is
199905474H. Our principal executive offices are located at 14th Floor, 122
TunHua North Road, Taipei, Taiwan, and our telephone number is country/city
code 886 and number 8770-7966. Our Web site address is: www.giga.net.tw. We are a holding company and, prior to the finalization of our acquisition
of Taiwans two leading music store chains in February, September and December
of 2002, respectively, all our operations were conducted primarily through our
wholly-owned subsidiary, Hoshin GigaMedia Center Inc., or Hoshin GigaMedia.
Hoshin GigaMedia commenced operations in October 1997 and was incorporated in
October 1998 in Taiwan. Hoshin GigaMedia, as an unlisted Taiwanese company,
could not publicly offer its shares to investors outside of Taiwan. To enable
us to offer our shares to international investors, we were incorporated in
Singapore in September 1999 and acquired 99.99% of Hoshin GigaMedia in November
1999. In October 2002, we acquired the 0.01% of Hoshin GigaMedia we did not
own. We completed the initial public offering of our shares on February 24,
2000. Our shares trade on the Nasdaq National Market under the symbol GIGM.
We are the first Internet company based in Taiwan to list on the Nasdaq
National Market. In 2002, we acquired Rose Records (formerly described as Point Records
Co., Ltd.) and Tachung Records (formerly described as Music King Co., Ltd.),
Taiwans two largest music store chains, respectively, with a view to expanding
our business to retail entertainment services. In April 2004, we acquired Grand Virtual, a privately-held online gaming
software developer and application service provider based in the Boston area of
the U.S., with a view to enhancing our diversified entertainment products
portfolio. 12




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B. Business Overview We are a holding company and, through several subsidiaries, distribute
recorded music and provide broadband Internet access services and online
entertainment services in Taiwan. Our core retail music business is operated
through our subsidiary G-Music Limited, or G-Music, which controls Taiwans two
largest music store chains. Our online broadband businesses are operated
through our subsidiary, Hoshin GigaMedia Center Inc., and Hoshin GigaMedias
subsidiary Koos Broadband Telecom Limited, or KBT, which are focused on
consumer and corporate users, respectively. Prior to 2002, our primary business was to provide broadband Internet
access services in Taiwan. After we acquired Taiwans two largest music store
chains, Rose Records and Tachung Records, in 2002, and our acquisition of Grand
Virtual in 2004, we became a diversified provider of entertainment services and
Internet access services. Our online/retail business model provides us with
multiple distribution channels. We believe this business model will provide us
deep customer relationships and the ability to meet future market demand as
technology drives new media and entertainment industry change. We operate Taiwans two largest music store chains, Rose Records and
Tachung Records, through our subsidiary, G-Music. As of December 31, 2003, we
operated a total of 52 stores with a total floor area of approximately 124,494
square feet. Our estimated market share of the physical retail music
distribution industry in Taiwan in 2003 was between 35% and 45%. While seeking
to preserve our market share, we are also aiming to reduce costs and improve
our management information systems with a view to operating this business more
efficiently, and increasing our operating margins. Our retail music
distribution business generated revenues of NT$2.6 billion (US$76.9 million)
and a loss from operation of NT$243.5 million (US$7.2 million) in 2003. Online, we operate a broadband ISP via our subsidiary Hoshin GigaMedia,
which provides Internet access service and broadband content with multiple
delivery technologies. Our access products consist of ADSL and cable modem
offerings, giving us the ability to deliver broadband connections island-wide.
We offer broadband Internet access at speeds of up to 100 times faster than
traditional dial-up services. With 19 cable system partners, our cable modem
business passes more than 3.1 million Taiwan households, as well as 417,000
small and medium-sized businesses. We offer interactive Chinese-language
multimedia Web sites through our Web destination http://www.gigigaga.com. In
addition, another subsidiary of our Company, Koos Broadband Telecom Limited, or
KBT, provides broadband service to corporate customers. Our online business
generated revenues of NT$671.3 million (US$19.8 million) and a loss from
operations of NT$188.9 million (US$5.6 million) in 2003. In April 2004, we acquired Grand Virtual in a private transaction for an
all-cash consideration of US$32.5 million. Grand Virtual is a software
developer and application service provider based in the Boston area of the
U.S.. Grand Virtual develops software for online entertainment services,
including online gaming and social networking. As an application service
provider, Grand Virtual offers turnkey solutions for games of skill and
chance, which it licenses predominantly to online gaming companies in Europe
and Asia. We believe that our acquisition of Grand Virtual will be accretive to
our cash flows and earnings, and will enhance our diversified entertainment
products business portfolio. We are controlled by the Koos Group, a major conglomerate in Taiwans
finance, manufacturing, telecommunications, media, and cable industries. Retail Music Distribution Services Overview We operate a retail music distribution business through our indirect
ownership of Taiwans two largest retail music distribution chains, Rose
Records and Tachung Records. Our stores sell recorded music as well as DVDs,
VCDs and ancillary equipment such as personal stereo headphones. As of December
31, 2003, we operated a total of 52 stores with a total floor area of
approximately 124,494 square feet. We estimate that in 2003 we had a market
share of between 35% and 45% of Taiwans physical retail music distribution
business. While seeking to preserve our market share, we are also aiming to
improve the operating results and financial condition of this business by
reducing costs, improving our management information systems with a view to
operating this business more efficiently, and increasing our operating margins. 13




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We hold our retail music distribution business through G-Music Limited,
our 58.58% owned subsidiary. We acquired the stores operated by Rose Records
and Tachung Records in a series of transactions in February 2002, September
2002 and December 2002, and have consolidated the results of operations of the
acquired businesses from the respective dates of acquisition. See Note 3 of our
consolidated financial statements for additional information. Our retail music
distribution business, which we refer to in our consolidated financial
statements as our offline business, generated revenues of NT$2.6 billion
(US$76.9 million) and a loss from operations of NT$243.5 million (US$7.2
million) in 2003. Industry Overview Taiwans retail music distribution industry is relatively fragmented. In
addition to our Rose Records and Tachung Records chains, there are several
other record distribution chains operating in Taiwan. Hypermarket chains, such
as Carrefour and specialty entertainment chains, such as FNAC, reflect a small,
but growing, segment of the market, with the balance consisting of convenience
stores, individual music stores and night markets. Alternative distribution
methods, such as Internet sale of physical recorded music and Internet-based
music downloads have also begun to emerge in recent years as competitive
distribution channels. While no formal industry statistics are available, based on information
provided to us by record companies and knowledge of our own revenues, we
estimate that our market share in 2003 was between 35% and 45% of the total
physical retail music distribution industry. This total does not include
Internet-based music downloads or illegal physical or online piracy, which we
believe to be significant but about which we do not have reliable information. The retail music distribution industry in Taiwan has been undergoing
significant change in recent years. The development of new technologies, such
as Internet-based music downloading and changing consumer buying habits, have
contributed to a significant global reduction in the size of recorded music
sales during the past several years. This trend has also adversely affected the
retail music distribution industry in Taiwan. In addition, Taiwan continues to
experience relatively high levels of physical and online music piracy, which
has further eroded the retail music distribution industry. We believe that these changes are likely to continue to impact the retail
music distribution industry going forward. Historically, purchases of popular
music have constituted a significant portion of ours and our competitors
sales. Going forward, we anticipate that an increasing proportion of these
sales is likely to be effected through alternative distribution channels,
particularly Internet-based downloading. Consequently, we anticipate that an
increasing proportion of physical retail music distribution will comprise
specialized areas of music, such as classical and jazz, whose purchasers demand
the higher sound quality of physical recordings and who we believe are
generally less price-sensitive than purchasers of popular music. Taiwans retail music distribution industry has also been affected in
recent years by relatively lower levels of new popular artists and albums than
has been the case in some prior periods, which we believe has adversely
affected our sales and those of our competitors. Stores and Store Formats As of December 31, 2003, we operated 52 stores with a total floor area of
approximately 124,494 square feet. These stores range in size from
approximately 2,130 square feet to approximately 3,560 square feet. The stores
typically offer a broad selection of album titles across a range of musical
genres. Our stores are located principally in Taipei, Taichung, Kaoshiung and
Taiwans other major urban areas, although we also operate certain stores in
rural areas. Historically, we have sought to locate our stores in high-traffic
areas and near transportation hubs such as Mass Rapid Transit, railway and bus
stations, with a view to attracting young purchasers of popular music. These
areas also tend to be characterized by higher store rental costs. We currently
have 22 stand-alone music stores in the North of Taiwan, nine in Central Taiwan
and 10 in the South of Taiwan. In addition, 11 of our Rose records retail
outlets are located in either hypermarkets or department stores throughout
Taiwan. We believe that in the future, younger purchasers of popular music are
likely to turn increasingly to alternative music distribution channels, such as
Internet-based downloads, and that an increasing proportion of the physical
retail music distribution will comprise more specialized areas of music, such
as classical and jazz. 14




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In light of the trends we perceive in this business, we are in the process
of experimenting with alternative store formats and locations. These include:  
    
    Joint Stores these are stores co-located with other businesses,
which attract customers who we believe are likely to purchase our
products. We are currently negotiating a joint store arrangement with a
major operator of fitness centers in Taiwan and are exploring other
similar opportunities. In addition, we may elect to operate coffee
shops or similar businesses in our stores. We intend to open or convert
several existing stores to joint stores in the second half of 2004.
    
    Specialized Stores these are stores which specialize in one or
more particular styles of music, such as classical or jazz. These
stores will offer a broader and deeper selection of music of a
particular genre and will feature more knowledgeable store personnel.
The stores will be located in areas designed to attract
less-price-sensitive consumers of these types of music, such as in
business districts. We plan to open several specialty stores in the
second half of 2004.
    
    Community Stores these are located in rural and other areas
where they serve a local community which is not otherwise served by a
music store. Due to their locations, these stores generally face less
direct competition and, consequently, permit more aggressive pricing
strategies. As of December 31, 2003, we operated two community stores.
We plan to open several additional community stores in the second half
of 2004.
    
    Other Formats we are currently developing and evaluating other
possible store formats, including flagship stores which integrate our
retail music distribution business with other entertainment-related
businesses. We also offer and sell physical CDs, DVDs and VCDs to retail purchasers
through Internet Web sites which we operate. Revenue from our Internet store
represents a small fraction of our total music distribution revenue. In the
future, we may consider establishing an Internet-based music download business,
although we have no current plans to do so. Purchasing and Distribution Other than major record releases,which are procured by our headquarters,
each of our retail music stores, through its store manager, currently makes its
own purchase of CDs, DVDs and VCDs either directly from the major record
companies or through other suppliers. Following the implementation of our Point
of Sale system (which is discussed below), we plan to centralize procurement
for all of our retail music stores at our headquarters in Taipei, which we
believe will strengthen our position in negotiating terms, discounts and
in-store advertising with the major record companies. From the data collected
by our POS system, we will be able to identify fast-selling CDs which we should
purchase more of, and be alerted when inventories of slow-moving CDs become too
high. Currently, merchandise purchased by our retail music stores is also
separately distributed by the major record companies or the other suppliers, as
the case may be, directly to our individual retail music stores. Following the
centralization of our procurement, we expect our suppliers to continue to ship
the merchandise directly to each of our retail music stores. Consistent with retail music industry practice in Taiwan, CD purchases
from major record companies are in general not returnable for full credit. The
principal exception relates to major record releases, where the first batch of
purchases are usually returnable for full credit. CD purchases from suppliers
other than major record companies are usually returnable for full credit. Merchandising and Marketing The primary source of revenue for our retail music stores is the sale of
recorded music on CDs. Each of our stores carries a wide selection of CDs
purchased from major and independent record companies, which, except for new
releases and special promotions, are generally arranged in our stores according
to genre and alphabetically by artist or group. Our music stores also receive
marketing/sales promotional revenue from store media, that is, in-store
promotion by record companies. Record companies typically allocate a portion of
their album marketing budgets as marketing/sales promotional revenues to
music stores in return for prominent in- 15




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store placement of CDs and/or posters as well as record company-sponsored
promotional events. In 2003, we recognized a total amount of NT$54.0 million
(US$1.6 million) in advertising and promotional revenues. In light of the changing trends we perceive in the retail music industry,
as part of our marketing strategy we plan to launch a co-branded credit card
and loyalty program. We believe that a co-branded credit card will help promote
sales and, more importantly, build customer loyalty. We will also be able to
collect valuable data regarding our customers music preferences, for example,
jazz or classical music, which will help us to tailor the offerings of our
specialty stores to meet their needs. We are currently in negotiations with a
major bank in Taiwan to develop and launch a co-branded credit card and loyalty
program, which we expect to launch in the fourth quarter of 2004. Management Information System We are in the process of implementing our new point of sale, or POS,
system for our retail music stores. This is a centralized management
information system that allows tracking from purchase through to sale,
providing us with real-time information on what is being sold at each of our
retail music stores. The new POS system is expected to enable us to implement a
centralized purchasing system, perform inventory swap among our stores and
monitor our inventory movement more accurately and efficiently. We expect our
new POS system to greatly reduce manpower costs in terms of our purchasing and
also improve our billing system. Our new POS system is currently being tested
at two of our retail music stores, and we expect to begin implementing the
system at all of our stores beginning in the third quarter of 2004. We also
plan to conduct training programs to prepare our store staff in connection with
the implementation of our new POS system. We believe that implementation of our
POS system should ultimately enable us to achieve a more efficient division of
labor between staff performing stock-taking and other operational functions and
more knowledgeable sales staff to improve customer service. Competition The retail music distribution business in Taiwan is highly competitive. We
believe that the principal bases of competition are store location, selection
and price of CDs. We compete in the music chain store business with Asia Record
and Guan Nan Record. Our music stores also compete with independent operators
and convenience stores. We are also facing increasing competition from
hypermarkets, such as Carrefour, as well as specialized entertainment chains,
such as FNAC, some of which have greater financial and other resources than our
Company. We expect competition from hypermarkets to increase in the future, as
this reflects the expected shift in customers from high-traffic areas like bus
and train stations to areas with available and accessible parking lots, such as
hypermarkets and business areas. Some of our larger competitors have exclusive
distribution arrangements with music label companies and the operation of these
arrangements prevent us from distributing certain popular music products. In
addition, we compete with music distribution channels that employ modern
technology, such as online download and streaming, which enjoy lower inventory
and distribution costs. Furthermore, the prevalent practice of physical and
online piracy in Taiwan presents a continuing threat to the growth of the music
distribution industry in Taiwan. Seasonality Retail music sales in Taiwan are typically higher during the Chinese New
Year and in the summer due to increased store traffic and buying by students
and youths on school vacation. Rose Records and Tachung Records are similarly
exposed to this trend in seasonality of sales, and rely heavily on the Chinese
New Year and summer sales to achieve annual financial targets. Online  Internet Access Services We provide Internet access services in the form of ADSL devices and cable
modems. Access Services Offerings ADSL. GigaMedias ADSL services offer different levels of performance from
512Kbps download with 64Kbps upload to 3Mbps download with 640 Kbps upload. The
high performance of our products is designed to better support file sharing,
video and other broadband Internet applications. We were the first company in
Taiwan to offer ADSL services with a standard fixed IP-address feature, which
enables users to build their own multimedia Web sites, participate in online
meetings, set up servers and utilize Voice-over-IP. As of December 31, 2003, we had 77,837 ADSL customers, as compared to 73,573 ADSL
customers as at December 31, 2002. 16




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CABLE MODEMS. We also offer our cable modem-based broadband Internet
access at transmission speeds of up to 6 Mbps. Our cable modem-based broadband
access services allow subscribers to more efficiently use (1)
bandwidth-intensive multimedia applications, such as interactive games,
high-quality audio, video and distance learning, and (2) electronic commerce
applications, such as retailing, financial services and online software
distribution. As of December 31, 2003, we had 25,119 cable modern-based
broadband customers, as compared to 35,658 cable modem-based broadband
customers as at December 31, 2002. Markets of Access Services RESIDENTIAL ACCESS SERVICES. We receive access fees from residential
subscribers of our cable modem-based broadband Internet access services under
revenue sharing arrangements with our cable partners with respect to each
subscribers monthly access fee. We recognize our access revenues net of
payments to our cable partners. Our 2-way cable modem-based broadband service packages are offered at
NT$1,199 for premium service; NT$850 for a mid-tier package; and NT$699 for
basic service. We also offer selected subscribers discounts on their monthly
access fees and quarterly payment options to further promote our access
services. We recognize our revenue from access fees net of split with cable
partners and these discounts. In the future, our product mix may change in
response to market dynamics. During 2003, we offered different tiers of ADSL service options with
monthly access fees ranging from NT$410 to NT$1099, which from time to time
have been revised for promotion purposes, including providing subscribers
periods of free Internet access service. Unlike our cable access fees, our ADSL
access revenues are not shared. The number of subscribers of our Internet access services declined during
2003. The table below sets forth the number of our subscribers on the dates
specified. Despite the declines in our subscribers in 2003, our access revenues
increased by 1.4% for 2003 as compared to that for 2002, primarily because more
subscribers were using higher specification products. We do not expect to see
significant growth in our subscriber base in the future. Number of SubscribersDate
    
    2001
    
    2002
    
    200331-Mar
    
    
    70,437
    
    
    
    128,946
    
    
    
    103,37530-Jun
    
    
    82,200
    
    
    
    124,919
    
    
    
    100,67730-Sep
    
    
    99,109
    
    
    
    112,242
    
    
    
    99,83731-Dec
    
    
    119,130
    
    
    
    108,016
    
    
    
    102,940
 COMMERCIAL ACCESS SERVICES. KBT offers and sells dedicated and high speed
Internet access to corporate customers over fiber optical lines. KBT offers
various speeds of leased line services, ranging from 1Mbps to 1Gbps, to
different kinds of subscribers like ISPs, ICPs, corporates, SMEs (small and
medium enterprises), and cyber cafes. KBT charges its customers monthly fees
for access services depending on the level of bandwidth. CABLE MODEM Original Equipment Manufacturers (OEM) SERVICES. Besides
directly providing cable modem-based Internet services under GigaMedias brand
name to end-users, we also provide trunk bandwidth and backend systems, which
include a customer provisioning system, billing system and network management
system, to independent cable operators that wish to operate their cable
modem-based Internet service under their own brand names. We receive fees from
these OEM cable systems under various revenue sharing arrangements. As of
December 31, 2003, we had nine OEM cable partners. Other Services Our Web destination offers users a wide variety of rich, multimedia
Internet content in Chinese optimized for broadband access. Our Web destination
allows users to personalize across multiple online content channels using only
one unified log-in password, which enables the users to customize their own
viewing priority and preferences. Through our network, our Web destination
delivers to users textual data, near-CD-quality audio and 17




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high-quality digital video. In addition, our Web destination provides
users with a broad range of community services and other online services. To
enable our users to enjoy a comprehensive online experience, our Web
destination also features extensive Web-based community services, including
free electronic mail, bulletin boards, photo albums and video and text
integrated chat rooms. These community services are available to all users who
are registered members of our Web destination. The registration is free of
charge, conducted online and used by us to establish a user database. Our Broadband Network  Cable and ADSL Network Over the past years, we have built an island-wide network infrastructure
which is based on Gigabit Ethernet technologies and has covered 20 major
districts out of a total 25 districts in Taiwan. In these 20 districts, we have
built regional data centers to host both the cable Internet and ADSL headend
equipments. These centers also act as service hubs for:  
    
    the provision of key community services, including electronic mail,
usenet news and personal Web hosting, to subscribers;
    
    the management of network performance;
    
    the replication of content and applications; and
    
    the provision of a cost-efficient infrastructure to cache data. NETWORK OPERATIONS CENTERS. We provide centralized network management
through our network operations centers, which represents the nerve center of
our whole network. Our centers use advanced proprietary network management
tools and systems to monitor the network infrastructure 24 hours a day, 7 days
a week, enabling us to effectively address network problems before they
adversely affect our subscribers. Data Backbone Ongoing privatization of the telecommunications market by Taiwans
government has expanded the number of telecommunications operators. Including
Chunghwa Telecom, there are currently four fixed-line telecommunications
operators in Taiwan. It is our policy to continually monitor the usage pattern,
adjust the network architecture, and select better leased-line circuits
providers to optimize the user experience and service economics. Private peer to peer relationships among Internet service providers (i.e.,
private direct cable connections as opposed to public Internet connections)
have become the most effective solutions to resolve the problems of packet loss
and latency resulting from the significant traffic volume through Internet
networks. We have peering arrangements with most of Taiwans major networks and
Internet service providers, providing us with what we believe to be the most
comprehensive Internet connections in Taiwan. According to Taiwan Network
Information Center, or TWNIC, GigaMedia had the best aggregate peering
bandwidth among all commercial organizations in Taiwan as of June 20, 2003. Our
extensive peering arrangements have enabled us to route most of our traffic
over the less congested private peering links, through which we passed most of
our traffic in 2002 and 2003. This enhances the efficiency of our network and
allows us to provide better, faster access services to our subscribers. Through our peering arrangements with several Internet service providers
and networks, we currently connect to Taiwans Internet backbone from our
network operations center. We have installed direct Internet connections at
each of our regional data centers to minimize backbone traffic flow and to
provide Internet connection redundancies. We currently connect to the
international Internet through a direct trans-Pacific submarine cable link. As
the competition in the trans-Pacific submarine cable segment provides better
price economics, we are able to significantly increase our bandwidth without
incurring additional cost. In 2003, we upgraded our infrastructure from STM-4
connection to Gigabit connections to provide faster connections. Information System We have established a versatile, scalable, real-time information system
that integrates service provisioning, customer management, billing, data
gathering and usage tracking functions. With independent multiple 18




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processing layers, we are able to quickly respond to increases in user,
subscriber or service data by expanding our information systems capacity on
demand. Sales And Marketing RESIDENTIAL ACCESS SERVICES. We plan to continue utilizing bundled
marketing with our strategic partners to minimize costs. We primarily use the
following means to market our services:  
    
    television, magazine and newspaper advertisements;
    
    Web-based banners;
    
    Internet newsletters;
    
    inserts in cable television guides;
    
    participation in computer, technology and telecommunications tradeshows;
    
    free trial promotions through waiving monthly access fees for one or two months; and
    
    demonstration centers in computer superstores and other locations. COMMERCIAL ACCESS SERVICES. With the unique optical Ethernet MAN
infrastructure and solution, KBT is able to provide corporate customers,
one-megabit increment, on-demand leased line service. We primarily use the
direct sale force to reach our potential customers. CABLE MODEM OEM SERVICES. For cable operators that are interested in
providing or improving upon their cable Internet services, we will form a team
composed of sales personnel, network engineers, backend software engineers and
customer service specialists to provide free consultancy and turnkey
solutions. We believe that direct sales contact and site visits to existing OEM
partners and referrals by our existing OEM partners are the most efficient
methods of marketing our cable modem OEM services. Customer Service and Billing  Online Access Business We provide our subscribers with a comprehensive range of customer service,
including assistance on cable modem installations, continuous post-installation
technical support and prompt responses to billing and service requests. Our customer service department is divided into two groups: technical
support and general customer service. Our customer service department operates
a toll-free help desk with extended hours of operation. Our subscribers may
also contact us via electronic mail or through accessing our interactive
self-service Web site. Our general customer service staff assist subscribers
with cable modem questions and problems, as well as basic computer and software
configuration questions and billing inquiries. Our technical support group
handles technical problems referred by the general customer service staff. We typically prepare and mail the bill for our services, which we send to
the subscribers under our own name and logo, on a monthly basis. We offer our
subscribers a wide variety of payment options, including automatic credit card
payments, direct debits from their bank accounts and post office savings
accounts, pre-payment or over-the-counter payment at post offices and
convenience stores. We also seek to provide detailed information on the bills
to enable our subscribers to obtain all relevant information relating to their
services. Competition The Internet access service industry is highly competitive. We mainly compete with broadband Internet service providers, which provide
basic Internet access to residential and commercial users generally through the
provision of ADSL services using existing telephone networks or cable
modem-based services operating over cable television networks. The Internet
access service industry in Taiwan is very competitive and challenging. The
broadband Internet access service industry in 19




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Taiwan is dominated by the main fixed-line telecommunication company,
Chunghwa Telecom. Chunghwa Telecoms HiNet broadband service is the current
broadband ISP market leader with approximately 75% of the market share, while
we have only managed to capture approximately 5% of the market share. The
primary basis for competition is price. The prevalence of competitors offering
similar access services at competitive prices has and will continue to saturate
the Internet access market, making it difficult for us to attract new
subscribers and/or retain existing ones. We also compete with other broadband technologies, including integrated
services digital networks, wireless and satellite data services. We believe
that our access services have both technological and cost advantages over these
alternative broadband means. In the cable modem-based Internet access market, we believe that our close
relationships with a large number of cable partners and our exclusive access to
a substantial portion of Taiwans households and businesses provide us with a
competitive advantage. Our competitors in the Internet access service include
all the four direct-line operators in Taiwan as well as SeedNet. Some of our major competitors, including Chunghwa Telecom, have advantages
over us in terms of financial and marketing resources, established customer
relationships, brand awareness, customer access and telecommunications
infrastructure. Acquisition of Grand Virtual We acquired Grand Virtual in April 2004. Grand Virtual is an application
service provider and software developer which develops and licenses software
for online entertainment services, including online gaming and social
networking. In addition, Grand Virtual develops and licenses turnkey packages
to licensees who, in turn, offer online gaming to end users. Licensees of the gaming services provider platform in essence outsource
to Grand Virtual, on a revenue sharing basis, the key operations required for
the provision of online gaming, with the exception of marketing. As licensor,
Grand Virtual provides the gaming engine software, as well as transaction and
payment processing services, jurisdictional and fraud control, database
management, player support and Web hosting. Intellectual Property and Proprietary Rights While we regard our intellectual property and proprietary rights as
important, we believe that our future success is dependent primarily on the
innovative skills, technological expertise and management abilities of our
employees rather than on patent, copyright and trademark protection, and,
accordingly, we do not consider any particular intellectual property or
proprietary right to be material to our business. 20




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REGULATION A. Telecommunications Regulation In Taiwan The Ministry of Transportation and Communications and the Directorate
General of Telecommunications of Taiwan regulate Taiwans telecommunications
industry primarily under the Telecommunications Law of Taiwan. The Telecommunications Law authorizes the Directorate General of
Telecommunications to regulate two types of telecommunications companies, Type
I operators and Type II operators. Type I operators, such as Chunghwa Telecom,
are enterprises that have established their own switching and transmission
facilities to provide telecommunications services. These facilities-based
services are similar to common carrier services or basic services in the United
States. Type II operators, such as Hoshin GigaMedia, comprise all
telecommunications operators other than Type I operators, including companies
which generate fees from providing Internet access, online information,
electronic mail and electronic commerce services. Regulation of Type II Operators. Type II operators typically provide
telecommunications services to customers by using the telecommunications
facilities of Type I operators and are not permitted to engage in the buildup
of telecommunications facilities. Type II telecommunications services can be
further divided into special Type II telecommunications services and general
Type II telecommunications services. A special Type II telecommunications
license is required for any Type II operator which provides voice simple
resale, Internet telephony, and other international telecommunications services
by leasing international circuit(s). A general Type II telecommunications
license is required for any Type II operator which provides telecommunications
services other than those specified above. Hoshin GigaMedia currently holds a
general Type II telecommunication license. -      License. A Type II license is valid for ten years, and may be renewed
six months before its expiration. The license is nontransferable. Hoshin
GigaMedias license is due to expire in 2008. -      Tariff Regulation. Type II operators are required to establish tariffs
for major rates and charges. These tariffs and any changes must be filed with
the Directorate General of Telecommunications before they become effective.
Tariff information must include the types of services provided, terms and fee
schedules for all service items, rights and obligations of customers, contract
termination events and other matters affecting the right and obligations of
customers, all to be included in the operators business plans. -      Change in Business. Under Taiwans Regulations Governing Type II
Telecommunications Operators, any change of type or scope of business must be
approved by the Directorate General of Telecommunications. For change of the
systems structure stated in the business plan, a report shall be filed with the
Directorate General of Telecommunications for recordation within one month from
the effective date of change of such system structure. In addition, Type II
operators must report to the Directorate General of Telecommunications and
inform their customers in advance of any plan to suspend or terminate any of
their businesses. -      Technical Standards. Type II operators are required to retain qualified
senior telecommunications engineers to install and maintain telecommunications
equipment. Any telecommunications equipment used by a Type II operator must
also satisfy technical standards adopted by the Directorate General of
Telecommunications. Regulation of Type I Operators. Type I operators are more heavily
regulated than Type II operators, and the government of Taiwan has broad powers
to limit the number of operators and their business scope and markets. Under
the Telecommunications Law, Type I operators must satisfy required levels of
capital adequacy and, to ensure that they meet their facilities rollout
obligations, are subject to pre-licensing merit review of their business plans
and tariff rates. In addition, the Telecommunications Law prescribes that any
adjustment to the tariff rates of a Type I operator is subject to a price cap
set according to the coefficient of the annual fluctuations of the consumer
product index promulgated by the Directorate General of Budget, Account and
Statistics under the Executive Yuan of Taiwan. Liberalization of Type I Fixed Network Licensing. The Directorate General
of Telecommunications adopted Fixed Network Regulations in 1999 to govern the
issuance of fixed network communication licenses. Type I fixed network
communications licenses are subdivided into comprehensive network, local
network, long distance network, international network and lease-circuit
licenses. These regulations have been designed to grant 21




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additional comprehensive network licenses to encourage competition with
Chunghwa Telecom, which is a state-owned company and currently the dominant
fixed-line network operator in Taiwan. Content Liability. In the event that the content sent, transmitted or
received via the Internet through an operators system is found to be obscene,
defamatory or in violation of public order or national security, the relevant
operator would be liable for the content only if it knew or should have known
that the content is obscene, defamatory or in violation of public order or
national security. In addition, carriers must provide telecommunications
services on a fair and equal basis and may not refuse to receive or transmit
telecommunications information unless the content would endanger the national
security or offend against the public order of Taiwan. B. Cable Regulation In Taiwan Regulation on Shareholding. Respectively in 2000 and 2001, the Cable
Television and Broadcast Law has been modified. Under the modified regulations,
the original regulation of a single shareholder cannot own more than 10% of
the total issued shares of a cable operator, and no shareholder and its
related parties may collectively own more than 20% of a cable operators total
issued shares has already been eliminated. Instead, the shares of a cable
operator directly or indirectly held by foreign shareholders cannot exceed
sixty (60) percent of all outstanding shares of the cable operator.
Furthermore, foreign shareholders who directly hold shares of a cable operator
are limited to foreign corporations and the total shares held by them cannot
exceed twenty (20) percent of all outstanding shares of the cable operator. Operating Licenses.To obtain an operating license, a cable operator must
first apply for a rollout permit. After receiving this permit, the cable
operator generally has three years to complete the cable system rollout as set
forth in its permit application. Upon the satisfactory completion of the
rollout, the Government Information Office will issue an operating license to
the cable operator. If the cable operator has not received an operating license
before its rollout permit expires, its right to engage in the cable television
business will be terminated immediately. The term of an operating license is nine years. A review committee
established by the Government Information Office conducts periodic review of
the performance of each licensed cable operator on the basis of its business
and operating plans every three years. Following a review, a licensed cable
operator may be instructed by the Government Information Office to make
requested improvements in its business within a specified period. A failure to
timely comply with the instruction could result in revocation of the cable
operators license. Market Share Limitations. Under the Cable Television and Broadcast Law,
the number of subscribers of all affiliated cable operators may not exceed
one-third of the total number of cable television subscribers in Taiwan. In
addition, the number of all affiliated cable operators may not exceed one-third
of the total number of all cable operators in Taiwan. Competition. Under the Cable Television and Broadcast Law, the Government
Information Office is authorized to issue additional licenses in a franchised
area if it believes that the existing license holders in that area are engaging
in anti-competitive or unfair competition practices. In addition, service fees
charged by cable operators must be approved by local government authorities on
an annual basis. Open Access Regulation. Under the Fixed Network Regulation described
above, cable operators must obtain leased-circuit licenses issued by the
Directorate General of Telecommunications in order to lease their circuits to
companies that provide services through their cable systems. The Directorate
General of Telecommunications began to accept applications for these licenses
from cable operators in June 1999 and most of the cable operators have been
granted with leased-circuit licenses to lease out their cable capacities to
Type I operators and Type II operators, including Hoshin GigaMedia. As a
condition to holding these licenses, any licensed cable operator that is deemed
to be a dominant leased-circuit carrier may be required by the Directorate
General of Telecommunications to allow all parties to provide services,
including Internet access services, through their cable systems on
substantially similar terms. Any imposition of this requirement from the
Directorate General of Telecommunications on the cable partners having
exclusive relationships with us will eliminate the benefits associated with our
exclusive rights. 22




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C. Organization Structure We are a holding company incorporated in Singapore in September 1999.
Prior to 2002, our primary business was to provide broadband Internet access
services in Taiwan. After we acquired Taiwans two largest music store chains,
Rose Records and Tachung Records in 2002, we became a diversified provider of
music products and Internet access services in Taiwan. The table below sets
forth for each of our principal subsidiaries, the name, year and country of
incorporation and our percentage holding and principal activities as of May 31,
2004: Place ofYear of
    
    Incorporation
    
    Our PercentageEntity
    
    Incorporation
    
    /Operation
    
    Holding
    
    Principal ActivitiesHoshin GigaMedia
Center Inc
    
    
    1998
    
    
    Taiwan
    
    
    100
    %
    
    Cable based broadband and
ADSL Internet access
services and Internet
content services and
other online servicesG-Music Limited
    
    
    2002
    
    
    Cayman
Islands/Taiwan
    
    
    58.58
    %
    
    Holding companyMusic
King Co., Ltd.
    
    
    2000
    
    
    Taiwan
    
    
    58.58
    %
    
    Retail music distributionPoint
Records Co., Ltd.
    
    
    1997
    
    
    Taiwan
    
    
    58.58
    %
    
    Retail music distributionKoos Broadband
Telecom Limited
    
    
    2001
    
    
    Taiwan
    
    
    100
    %
    
    Broadband Internet access
services targeting
business clientsGigaMusic.com.Ltd
    
    
    2000
    
    
    Cayman
Islands/Taiwan
    
    
    100
    %
    
    On-line music distributionGigaMedia (HK)
Limited
    
    
    2004
    
    
    Hong Kong
    
    
    100
    %
    
    Holding companyGigaMedia International Limited
    
    
    2004
    
    
    British Virgin
Islands
    
    
    100
    %
    
    Holding companyGrand Virtual Inc
    
    
    1997
    
    
    Delaware,
U.S.A.Massachusetts, U.S.A.
    
    
    100
    %
    
    Development of software
and provision of
application service for
online entertainment
services
 D. Property, Plant and Equipment Our principal executive office and operating office are located at 14th
Floor, 122 TunHua North Road, Taipei, Taiwan, where we lease approximately
24,178.96 square feet. We also lease office and other space, as well as space
for our servers, in various other locations. In addition, we operate from
G-Musics headquarters at 10F, No. 171, Chen-Kung Road, Sanchung City, in
Taipei County where we lease approximately 9,200 square feet and from KBTs
offices at 6F, No. 20, Lane 478, Rueiguang Road, Neihu District, Taipei, 114,
Taiwan, where we lease approximately 13,060 square feet. 23




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As of December 31, 2003, we operated 52 stores with a total floor area of
approximately 124,493 square
feet. These stores range in size from approximately 2,130 square feet to
approximately 3,562 square feet. All of our retail music stores are leased. The
leases typically provide for a term of between three to five years with no
renewal option. All of our retail music store leases are on a fixed rate basis.
The terms of our 39 leases as of May 31, 2004 expire as follows: Lease Terms to Expire during(12 months ending on or about May 31)
    
    Number of Stores2004
    
    
    102005
    
    
    92006
    
    
    82007
    
    
    62008
    
    
    42009
    
    
    2
 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS A. Operating Results Unless stated otherwise, the discussion and analysis of our financial
condition and results of operations in this section apply to our financial
statements as prepared in accordance with U.S. GAAP. You should read the
following discussion of our financial condition and results of operations
together with the financial statements and the notes to these statements
included elsewhere in this annual report. Overview We are a holding company. Through our subsidiaries, we distribute recorded
music and provide broadband Internet access services and online entertainment
services in Taiwan. Our core retail music business is operated through our
subsidiary G-Music Limited, which controls Taiwans two largest music store
chains. Our online broadband businesses are operated through our subsidiary
Hoshin GigaMedia, and Hoshin GigaMedias subsidiary, KBT, which are focused on
consumer and corporate users, respectively. In April 2004, we acquired Grand
Virtual, a developer of software for online entertainment and social networking
services and an application service provider of turnkey solutions for games of
skill and chance. Retail Music Business. We operate our retail music distribution business
through G-Music Limited, our 58.58% owned subsidiary, which owns Taiwans two
largest retail music distribution chains, Rose Records and Tachung Records. We
acquired our interests in Rose Records and Tachung Records in a series of
transactions in February 2002, September 2002 and December 2002, and have
consolidated the results of operations of the acquired businesses from the
respective dates of acquisition. See Note 3 of our consolidated financial
statements for additional information. Our retail music distribution business,
which we refer to in our consolidated financial statements as our offline
business, generated revenues of NT$2.6 billion (US$76.9 million) and a loss
from operations of NT$243.5 million (US$7.2 million) in 2003. Some of the key factors affecting Taiwans retail music distribution
industry are technological developments and changing consumer buying habits,
which have resulted and are likely to continue to result in an increasing
proportion of popular music sales being made through alternative distribution
channels, particularly Internet-based downloading. Consequently, we anticipate
that an increasing proportion of physical retail music distribution will
comprise specialized areas of music, such as classical and jazz, whose
purchasers demand higher sound quality of physical recordings and who we
believe are generally less price-sensitive than purchasers of popular music.
The prevalent practice of physical and online music piracy is another factor
that has eroded the retail music distribution industry in Taiwan. Our retail music distribution business continued to operate in a
challenging environment in 2003. Our revenues in the first and second quarters
of 2003 were adversely affected by the SARS outbreak, which particularly
impacted our sales from April through July, and decisions by major record
companies to defer the release of popular titles until the containment of the
SARS outbreak contributed to a smaller than usual seasonal increase in revenues
during the summer school vacation season. Our operating environment improved
somewhat in the fourth quarter of 2003. 24




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Although we are seeking to reduce costs and improve our management
information systems with a view to operating this business more efficiently and
increasing our operating margins, we believe that our retail music distribution
business is likely to continue to face a difficult operating environment going
forward. Online Business. Online, we operate a major broadband ISP via our
subsidiary Hoshin GigaMedia, which provides Internet access service and
broadband content with multiple delivery technologies. Our Internet access
products consist of premium ADSL and cable modem offerings. Our ADSL service
accounted for approximately 52.7% of our online revenues in 2003. Our online
business generated revenues of NT$671.3 million (US$19.8 million) and a loss
from operations of NT$188.9 million (US$5.6 million) in 2003. Our online
business continues to operate in a very competitive and challenging
environment. Our principal competitor, Chunghwa Telecoms HiNet service, is
the dominant provider of ADSL broadband services in Taiwan and has
significantly greater resources than we do. The availability of similar
services at competitive prices has made it difficult for us to attract and
retain ADSL subscribers. We believe that our cable modem business offers a product which is to some
extent differentiable from competing ADSL services, and are seeking to further
develop this business by restructuring the terms of our agreements with our
cable partners. In recognition of declining costs of cable modem hardware, we
reached an agreement in principle with our cable partners in May 2004 for all
of our new cable subscribers to be provided with two-way cable Internet
services. This agreement in principle involves an equal sharing of revenues
between GigaMedia and our cable partners, thus providing our cable partners
with additional economic incentives to provide two-way cable services through
their systems. Two-way cable systems allow us to offer subscribers higher
upstream transmission speeds and always on Internet access capabilities,
eliminating the time consuming dial-up procedures and allow our subscribers to
maintain full use of their telephones and televisions while online. We also offer interactive Chinese-language multimedia Web sites through
our Web destination http://www.gigigaga.com. Another subsidiary of our Company,
KBT, provides broadband service to corporate customers. Acquisition of Grand Virtual. In April 2004, we acquired all of the issued
and outstanding shares of Grand Virtual in a private transaction for an
all-cash consideration of US$32.5 million. Grand Virtual is a developer of
software for online entertainment and social networking services and an
application service provider of turnkey solutions for games of skill and chance
based in the Boston area of the U.S. We believe that our acquisition of Grand
Virtual will be accretive to our cash flows and earnings, and will enhance our
diversified entertainment products portfolio. Application of Critical Accounting Policies The discussion and analysis of our financial condition and results of
operations are derived from our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the U.S., or U.S. GAAP. The preparation of these financial statements requires
our Company and our subsidiaries to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities. We continually
evaluate our estimates and assumptions, which are based on historical
experience and other various factors that we believe are reasonable under the
circumstances. The results of these estimates and assumptions form the basis
for making judgments about the carrying values of certain assets and
liabilities. Our actual results could differ significantly from those estimates
under different assumptions and conditions. We believe that the following
discussions address the most critical accounting policies applicable to our
Company, which are those that are most important to the portrayal of the
financial condition and results of operations of our Company, and require
managements most difficult, subjective and complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. Acquisition Price During 2002, we acquired Taiwans two leading music store chains, Rose
Records and Tachung Records for approximately NT$638.9 million (NT$418.3
million in cash and NT$220.6 million in the form of shares in G-Music). In the
absence of a quoted market price for the shares of G-Music issued as a portion
of the consideration for the acquisitions of Rose Records and Tachung Records,
the acquisition price of these music store chains is determined based on
managements estimates for fair value of acquired net assets, including
goodwill and amortizable intangibles. The actual value of such acquired net
assets may differ significantly from managements estimates. 25




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Revenue Recognition For 2003, our revenue was primarily generated from retail sales of offline
music merchandise comprised of pre-recorded music (including compact discs and
audio cassettes), video (including DVD and pre-recorded videocassettes), video
games and other complementary products (including electronics, accessories,
blank tapes and CD-Rs). Revenue from these retail sales is recognized at the
point of sale to the consumer, at which time payment is tendered. There are no
provisions for uncollectible amounts since payment is received at the time of
sale. In addition, we also record revenues from Internet access services, as
well as fee-based services, which mainly include subscription services for
videostreaming and paid email services. Such revenues are recognized in the
period in which the service is performed, if no significant company obligations
remain and collection of the receivables is reasonably assured. We contract
with third party content providers for certain services related to
subscriptions transmitted to our users and record the fees charged by the third
parties as cost of revenues. Merchandise Inventory and Return Costs Inventory is stated at the lower of cost or market value with cost being
determined by the weighted average cost method and market value being
determined by net realizable value. As with any retailer, economic conditions,
cyclical customer demand and changes in purchasing or distribution can affect
the carrying value of inventory. As circumstances warrant, we record the lower
of cost or market value, or LCM, as inventory adjustments. We also recorded
loss on obsolete and slow-moving items as inventory adjustments. In some
instances, these adjustments can have a material effect on the financial
results in an annual or interim period. In order to determine such adjustments,
we evaluate the age, inventory turns and estimated fair value of merchandise
inventory by product category and record any adjustment if estimated market
value is below cost and if inventory is obsolete. Actual inventory loss may
differ significantly from managements estimates. Through merchandising and
other initiatives, we attempt to take the steps necessary to increase the
sell-off of slower moving merchandise to eliminate or lessen the effect of any
LCM adjustments. We record actual and estimated merchandise return charges in
cost of sales. Impairment of Long-Lived Assets Fixed assets and other long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
undiscounted future net cash flows expected to be generated by the asset over
its remaining useful life. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. The estimate of fair
value is generally based on quoted market prices or on the best available
information, including prices for similar assets and the results of using other
valuation techniques. During 2003, we recorded an asset impairment charge of
NT$58.5 million (US$1.7 million) to write-off the carrying value of our
investment in an Internet company. We reviewed the underlying operating
performance, and financial conditions of this Internet company in assessing
impairment, and concluded an other-than-temporary impairment charge is
necessary for this investment impairment. During 2003, we also recorded an impairment charge related to our
broadband and communication equipment due to our decision to phase out one-way
Internet access services. The amount of impairment charge was determined by
the excess of carrying value over the estimated fair value of these equipment
based on quoted market prices. Actual impairment may differ significantly from
managements estimates. We have significant amortizable intangible assets arising from the
acquisitions of Rose Records and Tachung Records. The amortizable intangible
assets, including distribution channel and brand names, are amortized on a
straight-line basis over estimated useful lives ranging from five to fifteen
years. As of December 31, 2003, the balances of distribution channel and brand
names were NT$74.8 million and NT$135.8 million, respectively. In determining
the useful lives and recoverability of the intangibles, assumptions must be
made regarding estimated future cash flows and other factors to determine the
fair value of the assets, which may not represent the true fair value. If these
estimates or their related assumptions change in the future, there may be a
significant impact on our results of operations in the period of the change
incurred. 26




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Goodwill

Goodwill represents the adjusted amount of the cost of acquisitions in
excess of fair value of net assets acquired in purchase transactions. Effective
January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS
142, goodwill is no longer subject to amortization and potential impairment of
goodwill and purchased intangible assets with indefinite useful lives will be
evaluated at least annually. We periodically evaluate the carrying amount of
goodwill to determine whether adjustments to these amounts are required based
on current events and circumstances. We perform an analysis of the
recoverability of goodwill using a cash flow approach consistent with the
analysis of the impairment of long-lived assets. We performed an impairment
test of our goodwill and intangible assets as of December 31, 2003. Due to the
general market downturn and the operating performance of the acquired
businesses falling below our expectations, we recorded a goodwill impairment
loss of NT$25.4 million in 2003. The amount of the loss was determined based on
an independent appraisers report as of December 31, 2002. As the value of
goodwill and its impairment are determined based on a number of assumptions and
managements estimates, the change of assumptions and circumstances in the
future may have significant impact on our results of operations in the period
when a change occurred.

Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are subject to valuation allowances based upon the
managements estimate of realizability. Due to uncertainty of realization, we
have provided 100% valuation allowance against deferred tax assets as of
December 31, 2003. Actual results may differ significantly from managements
estimate.

Discussions of Results of Operations

For the Years Ended December 31, 2002 and 2003

Consolidated Results Of Operations

REVENUES. Total revenues for 2003 grew 28.3% to NT$3.3 billion (US$96.7
million) from NT$2.6 billion in 2002, primarily due to the contributions of the
Rose Records and Tachung Records music store chains that we acquired in 2002.
For 2003, the retail music business contributed approximately NT$2.6 billion
(US$76.9 million) or 79.5% of our revenues. The online business contributed
approximately NT$671.3 million (US$19.8 million) or 20.5% of our revenues in
2003, and it comprises (1) the Internet access services business, which
contributed approximately NT$647.7 million (US$19.1 million) of our revenues
and (2) advertising and promotional business, which contributed approximately
NT$0.9 million (US$27.1 thousand) of our revenues.

COSTS AND EXPENSES. Costs and expenses increased by 11.4% to NT$3.8
billion (US$111.1 million) in 2003 from NT$3.4 billion in 2002. Our costs and
expenses in 2003 primarily consist of cost of sales/ rental/ installation of
NT$2.2 billion (US$66.2 million), operating costs of NT$623.3 million (US$18.4
million), product development and engineering expenses of NT$41.7 million
(US$1.2 million), selling and marketing expenses of NT$499.8 million (US$14.7
million), general and administrative expenses of NT$274.3 million (US$8.1
million) and an impairment loss on property, plant and equipment of NT$53.6
million (US$1.6 million).

OPERATING LOSS. Operating loss for 2003 decreased 40.9% to NT$487.5
million (US$14.4 million) from NT$824.7 million for 2002.

NON-OPERATING EXPENSES. In 2003, we incurred non-operating expenses of
NT$100.1 million (US$2.9 million), compared to a non-operating income of
NT$108.7 million for 2002, principally due to an NT$58.5 million (US$1.7
million) write-off of our investment in Rock Internet Corporation and the
recognition of a foreign exchange loss of NT$24.9 million (US$0.7 million) and
loss on disposal of property, plant and equipment of NT$29.1 million (US$0.9
million) in 2003, compared to a foreign exchange gain of NT$93.9 million and
gain on disposal of investment of NT$114.6 million, offset by an NT$67.5
million loss from the

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change of our percentage of ownership in G-Music from 100% to 58.58% as a
result of the acquisitions of Rose Records and Tachung Records and an NT$40
million impairment loss on a long-term investment in Rock Internet Corporation
in 2002.

NET LOSS. Net loss for 2003 declined by 24% to NT$484.9 million (US$14.3
million) from NT$638.0 million for 2002.

Business Segment Results

Retail Music Business

We began to consolidate the results of operations of Rose Records in
February 2002 and the results of operations of Tachung Records in October 2002.
Consequently, a comparison of the consolidated results of operations of our
retail music business in 2003 and 2002 principally reflects the impact of
consolidating these businesses for portions of 2002 and all of 2003. This and
the impact of SARS on our 2003 results of operations makes it difficult to
compare our results of operations in the two periods. We briefly describe
below the principal trends affecting the revenues and cost of sales of our
underlying retail music business in 2003:

Revenues. Our revenues in the first and second quarters of 2003 were
adversely affected by the SARS outbreak, which particularly impacted our sales
from April through July. We believe that our competitors were similarly
affected. Decisions by major record companies to defer the release of popular
titles until it became clear that the SARS outbreak had been contained,
contributed to a smaller than usual seasonal increase in revenues during the
summer school vacation season and mitigated the effect of seasonality on sales
in the fourth quarter.

Cost of sales. Gross margins generally improved through 2003. We believe
this principally reflects a combination of fewer popular records being released
in 2003 and improved purchasing terms resulting from management changes in the
third quarter of 2003.

We present below information on the results of operations of our retail
music business in 2002 and 2003.

TOTAL REVENUES. Total revenues from our retail music business increased by
38% to NT$2.6 billion (US$76.9 million) in 2003 from NT$1.9 billion in 2002.
This increase was due in part to the fact that we consolidated the results of
operations of Rose Records and Tachung Records for the full year of 2003,
whereas in 2002, we had consolidated their results of operations from their
respective closing dates of the acquisitions, namely, February 2002, September
2002 and December 2002.

COSTS AND EXPENSES. Cost of sales increased by 28% to NT$2.9 billion
(US$84.1 million) in 2003 from NT$2.2 billion in 2002. This increase was due in
part to our consolidation of the results of operations of Rose Records and
Tachung Records for full year 2003.

OPERATING LOSS. Operating loss increased by 29% to NT$243.5 million
(US$7.2 million) in 2003 from NT$340.8 million in 2002.

NET LOSS. Net loss decreased by 31.9% to NT$254.8 million (US$7.5 million)
in 2003 from NT$340.7 million in 2002.

Online Services

ACCESS REVENUES. Total access revenues increased slightly from NT$638.9
million in 2002 to NT$647.7 million (US$19.1 million) in 2003, due to migration
of subscribers to higher specification products. The number of our broadband
subscribers decreased from 108,016 as of December 31, 2002 to 102,940 as of
December 31, 2003. As of December 31, 2003, we had 6,653 1-way subscribers,
18,450 2-way subscribers, and 77,837 ADSL subscribers. In the fourth quarter of
2003, the average blended access fee per broadband subscriber per month (ARPU)
for access services was approximately NT$428 (US$12.6), as compared to NT$388
for the fourth quarter of 2002. ARPU for 1-way cable services, 2-way cable
services and ADSL services were NT$236 (US$7.0), NT$587 (US$17.3) and NT$406
(US$12.0), respectively, during the fourth quarter of 2003, as compared to
NT$231, NT$618 and NT$363, respectively, for the same services during the
fourth quarter of 2002.

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Of the total access revenues recorded for 2003, consumer access revenues
through Hoshin GigaMedia were approximately NT$523.1 million (US$15.4 million),
while corporate access revenues through KBT were approximately NT$124.6 million
(US$3.7 million).

MODEM SALE/ RENTAL/ INSTALLATION REVENUES. Modem sale/rental/installation
revenues decreased 6% from NT$4.4 million for 2002 to NT$4.1 million (US$121
thousand) for 2003, resulting mostly from a decrease in sales of modems.

WEB DEVELOPMENT REVENUES. We did not record any Web development revenues
in 2002 or 2003 as we have de-emphasized this aspect of our business.

ADVERTISING REVENUES. Advertising revenues decreased 61.8% from NT$2.4
million in 2002 to NT$919.7 thousand (US$27 thousand) in 2003 as we
de-emphasized our business relating to the provision of Internet content.

OPERATING COSTS. Operating costs decreased by 17.4% from NT$634.9 million
in 2002 to NT$524.3 million (US$15.5 million) in 2003 due to a decrease in the
price of leasing bandwidth and circuits.

COST OF MODEM SALES/RENTAL/INSTALLATION. Cost of modem
sales/rental/installation decreased 44.9% from NT$54.6 million in 2002 to
NT$30.0 million (US$885.8 thousand) in 2003, due to a fall in the price of
cable modems, decreased sales as well as the use of refurbished cable modems
during 2003.

WEB DEVELOPMENT EXPENSES. We did not incur any Web development expenses in
2002 or 2003, in line with our de-emphasis of this aspect of our business.

PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES. Product development and
engineering expenses decreased 35.3% from NT$64.4 million in 2002 to NT$41.7
million (US$1.2 million) in 2003, primarily due to reduced costs relating to
workforce streamlining in 2003 and a de-emphasis on this aspect of our
operations.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
40.9% from NT$141.5 million in 2002 to NT$83.7 million (US$2.5 million) in
2003, primarily due to significantly reduced advertising in Taiwans media for
GigaMedias broadband services.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 14.7% from NT$143.5 million in 2002 to NT$122.5 million (US$3.6
million) in 2003.

NET NON-OPERATING EXPENSE. For 2003, we incurred a non-operating expense
of NT$10.7 million (US$315.3 thousand), primarily due to a foreign exchange
loss of NT$15.2 million (US$448.8 thousand) and a loss from disposal of
property of NT$16.0 million (US$472.4 thousand), which were offset by an
interest income of NT$7.8 million (US$229.9 thousand) and an investment gain of
NT$16.8 million (US$494.9 thousand).

For the Years Ended December 31, 2001 and 2002

Business Segment Results

Retail Music Business

We acquired Rose Records and Tachung Records during 2002. We began to
consolidate the results of operations of Rose Records and Tachung Records from
the respective closing dates of the acquisitions. Since these businesses were
acquired during 2002, year over year comparisons of this business segment are
not provided. The operating results of GigaMedias offline music business, post
acquisition, were as follows:

TOTAL REVENUES. Total revenues in 2002 were NT$1.9 billion, including
retail sales of NT$1.9 billion and advertising and promotional revenues of
NT$30.4 million.

COSTS AND EXPENSES. Cost of sales were NT$2.2 billion in 2002.

OPERATING LOSS. Operating loss was NT$340.8 million in 2002.

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NET LOSS. Net loss in 2002 was NT$340.7 million.

Online Services

ACCESS REVENUES. Total access revenues grew 64% from NT$389.8 million for
2001 to NT$638.9 million for 2002, primarily due to the increase of access fees
relating to the continuous rollout of ADSL services and the growth of these
subscribers, offset by a reduction in the number of 1-way subscribers in 2002.
The number of our broadband subscribers decreased from 119,130 as of December
31, 2001 to 108,016 as of December 31, 2002. As of December 31, 2002, we had
17,135 1-way subscribers, 17,308 2-way subscribers, and 73,573 ADSL
subscribers. In the fourth quarter of 2002, the average access fee per
broadband subscriber per month (ARPU) for access services was around NT$388, as
compared to NT$341 for 2001. ARPU for 1-way cable services, 2-way cable
services and ADSL services were NT$231, NT$618 and NT$363, respectively, during
the fourth quarter of 2002, as compared to NT$287, NT$589 and NT$312,
respectively, for the same services during the fourth quarter of 2001.

Of the total access revenues recorded for 2002, consumer access revenues
through Hoshin GigaMedia were approximately NT$562.4 million, while corporate
access revenues through KBT were approximately NT$76.5 million.

MODEM SALE/RENTAL/INSTALLATION REVENUES. Modem sale/rental/installation
revenues decreased 42% from NT$7.5 million for 2001 to NT$4.4 million for 2002,
resulting mostly from a decrease in sales of modems, which was partially offset
by an increase in modem rentals revenue resulting from an increase in the
number of rentals in 2002, but declining rental fees. We terminated free rental
promotions on one-way cable service and modem sales in 2001 to control costs
and grow margins.

WEB DEVELOPMENT REVENUES. Web development revenues decreased from NT$7.2
million for 2001 to nil for 2002, as we de-emphasized this aspect of our
business.

ADVERTISING REVENUES. Advertising revenues decreased 52% from NT$5.0
million for 2001 to NT$2.4 million for 2002 as we continued to de-emphasize
this aspect of our business in 2002.

OPERATING COST. Operating costs decreased 61% in 2002 to NT$634.9 million
compared to NT$1.6 billion in 2001. There was a decrease in share compensation
expense from 2001 of NT$14.1 million to NT$740 thousand in 2002. During 2001,
we incurred amortization of Microsofts warrant of NT$943.1 million, including
an accelerated expense of approximately NT$428.7 million recognized during the
fourth quarter in 2001 related to the remaining amount of the warrant.

COST OF MODEM SALES/RENTAL/INSTALLATION. Cost of modem
sales/rental/installation decreased 62% from NT$143.4 million for 2001 to
NT$54.6 million for 2002, due to decreased sales and the use of refurbished
cable modems during 2002.

WEB DEVELOPMENT EXPENSES. Web development expenses decreased from NT$12.2
million for 2001 to nil for 2002, in line with our de-emphasis of this aspect
of our business.

PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES. Product development and
engineering expenses decreased 39% from NT$106.5 million for 2001 to NT$64.4
million for 2002, primarily due to reduced costs relating to workforce
streamlining in 2002 and a de-emphasis on this aspect of our operations.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
50% from NT$285.6 million in 2001 to NT$141.5 million in 2002, primarily due to
tightened expenditure controls during 2002 and a decrease in share compensation
expense from 2001 of NT$11.9 million to NT$52.4 thousand in 2002.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 33% from NT$215.7 million for 2001 to NT$143.5 million in 2002,
driven by reductions in our workforce and tight expense controls in 2002 and a
decrease in share compensation expense from 2001 of NT$91.4 million to NT$4.0
million in 2002.

NET NON-OPERATING INCOME. For 2002, non-operating income declined 51% from
NT$219.2

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million for 2001 to NT$108.5 million, primarily due to a decrease in cash
and investments in 2002, resulting in a lower asset base. We recognized
non-operating income as a result of the gain from disposal of short-term
investments of NT$62.8 million, derived primarily from our sale of mutual fund
beneficiary certificates and the gain from disposal of long-term investments in
Gamania and a UBS AG Jersey Bond amounting to NT$51.8 million. We also recorded
an impairment loss in 2002 in the amount of NT$40.0 million related our
long-term investment in Rock Internet Corporation.

B. Liquidity and Capital Resources

Our principal sources of liquidity consist of cash generated from our
operations, interest generated or derived from the investment instruments we
purchased with the proceeds of our initial public offering in 2000 and proceeds
generated from the disposal of our investments. Our retail music business also
relied on bank borrowings to finance its operations, which borrowings were
repaid in full as of March 31, 2003. Because we historically have not generated
positive cash flows from our operations, we have substantially relied on our
cash management ability to support our operations. In addition, we have in
recent periods reduced our workforce and engaged in corporate restructuring to
reduce the capital requirement of our operations. Our policy with respect to
liquidity management is to maintain sufficient cash and cash equivalents to
fund operations, while placing remaining funds in higher yield investment
instruments.

Our future cash requirements will depend on a number of factors including:



| |  | the expansion and utilization of our music and artist catalog;
|- |  | --------------------------------------------------------------



| |  | the development of new technologies, such as Internet-based music
downloading and changing consumer buying habits;
|- |  | ------------------------------------------------------------------------------------------------------------------



| |  | inventory management;
|- |  | ---------------------



| |  | improvements in our operating margins;
|- |  | --------------------------------------



| |  | the effective and efficient marketing and distribution of our products;
|- |  | -----------------------------------------------------------------------



| |  | the rate at which subscribers purchase our Internet access services
and the pricing of such services;
|- |  | -----------------------------------------------------------------------------------------------------



| |  | the rate at which we expand our operations and employee base;
|- |  | -------------------------------------------------------------



| |  | the level of marketing required to acquire new subscribers and cable partners;
|- |  | ------------------------------------------------------------------------------



| |  | the rate at which we invest in upgrading and maintaining our
network and future technologies;
|- |  | ---------------------------------------------------------------------------------------------



| |  | the timing of entry into new markets and new services offered;
|- |  | --------------------------------------------------------------



| |  | price competition in the Internet and cable industries; and
|- |  | -----------------------------------------------------------



| |  | changes in revenue splits with our cable partners.
|- |  | --------------------------------------------------

Although operating conditions in 2003 were challenging, our financial
condition remained stable. As a result of our operating, investing and
financing activities during 2003, the amount of cash and cash equivalents we
held as of December 31, 2003 remained relatively unchanged at NT$1.2 billion
(US$35.3 million) as compared to December 31, 2002. Cash and cash equivalents,
short-term investments and long-term investments as at December 31, 2003 also
remained relatively unchanged at NT$2.7 billion (US$79.6 million), compared to
December 31, 2002. In April 2004, we acquired all of the issued and outstanding
shares of Grand Virtual, a developer of software for online entertainment and
social networking services and an application service provider of turnkey
solutions for games of skill and chance, in a private transaction for an
all-cash consideration of US$32.5 million, which we paid for entirely out of
our existing cash and cash equivalents. We continue to seek and review
potential merger and acquisition opportunities on an ongoing basis, which may
be funded through cash or equity. We do not believe that any potential merger
or acquisition that we may be engaged in would alter our goal of preserving
sufficient cash and cash equivalents to fund future operations. We believe that
our existing cash, cash equivalents, short-term investments and expected cash
flow from operations, will be

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sufficient to meet our capital expenditure, working capital, cash
obligations under our existing lease arrangements, and other requirements
through 2004.

OPERATING ACTIVITIES. In 2003, our net cash provided by operating
activities amounted to NT$217.9 million (US$6.4 million). This was primarily
attributable to a net loss of NT$484.9 million (US$14.3 million), which was
offset by the add-back of significant non-cash items, including NT$180.3
million (US$5.3 million) in depreciation, NT$76.7 million (US$2.3 million) in
amortization, impairment loss on long-term investments of NT$58.5 million
(US$1.7 million) and impairment loss on property, plant and equipment of
NT$53.6 million (US$1.6 million), the NT$88.0 million (US$2.6 million) decrease
in inventories and the NT$57.4 million (US$1.7 million) decrease in accrued
expenses.

INVESTING ACTIVITIES. Our net cash used in investing activities in 2003
was NT$170.9 million (US$5.0 million). This was primarily attributable to the
purchase of short-term investments of NT$3.7 billion (US$108.7 million), which
we largely funded from the liquidation of our short-term investments, and the
purchase of property plant and equipment of NT$65.8 million (US$1.9 million).
In 2002, our net cash provided by investing activities amounted to NT$4.0
billion.

FINANCING ACTIVITIES. Our net cash used in financing activities in 2003
was NT$89.3 million (US$2.6 million), primarily representing cash used in the
repayment of bank borrowings.

OTHER. Set forth below are the aggregate amounts, as of December 31, 2003,
of our future cash payment obligations under our existing contractual
obligations.

Payments Due by Period (in NT$ thousands)LessContractual Obligations
    
    Total
    
    than 1 year
    
    1-3 years
    
    After 3 yearsOperating Lease
    
    
    430,173
    
    
    
    197,254
    
    
    
    224,842
    
    
    
    8,077Total Contractual Cash Obligations
    
    
    430,173
    
    
    
    197,254
    
    
    
    224,842
    
    
    
    8,077


Amount of Commitment Expiration Per Period(in NT$ thousands)Other Commercial
    
    
    
    
    
    LessCommitments
    
    Total
    
    than 1 year
    
    1-3 years
    
    After 3 yearsStandby Letters of Credit
    
    
    34,800
    
    
    
    34,800
    
    
    
    
    
    
    
    Total Other Commercial Commitment
    
    
    24,800
    
    
    
    34,800
    
    
    
    0
    
    
    
    0


Off-Balance Sheet Arrangements

Historically, all of our revenues and receivables and a majority of our
operating expenses and payables are denominated in NT dollars, which is our
functional currency. As our expenses denominated in foreign currencies
historically have not been material, we have not used hedging transactions to
reduce our exposure to exchange rate fluctuations. We do not engage in any
derivative financial instruments for speculative purposes.

Capital Expenditures

We typically finance our capital expenditures through cash holdings. Our
gross capital expenditures for equipment and software, furniture and fixtures
declined 78.4%, from NT$304.7 million in 2002 to NT$65.8 million (US$1.9
million) in 2003. The decline was primarily related to the continued execution
of stringent cost controls and a managed growth plan during 2003. Capital
expenditures during 2003 were primarily for the replacement and upgrades of
network-related hardware in our consumer and corporate broadband businesses.
Our capital expenditure plans for 2004 will continue to focus primarily on the
replacement and upgrades of network-related hardware in our consumer and
corporate broadband businesses. We may adjust the amount of our capital
expenditures upward or downward based on cash flow from operations, the
progress of our expansion plans, and market conditions.

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Dividends From Our Subsidiaries In Taiwan

Under existing laws of Taiwan, dividends, whether in cash or shares of
common stock, declared by our subsidiaries incorporated under Taiwan law,
including Hoshin GigaMedia, out of retained earnings and distributed to us are
subject to Taiwan withholding tax, currently at the rate of 20% for non-Taiwan
investors holding a Foreign Investment Approval granted by Taiwans Ministry of
Economic Affairs, such as us, on the amount of any cash dividends or on the par
value of any share dividends.

Foreign Currency Exchange

All of our revenues and receivables and a majority of our operating
expenses and payables are denominated in NT dollars, which is our functional
currency. A small proportion of our operating expenses and payables, such as
the cost of international bandwidth, technology license fees, insurance
premiums and fees to our professional advisers, are primarily denominated in
U.S. dollars. As a result, our margins may be impacted by fluctuations of
exchange rate between the NT dollar and the U.S. dollar, exposing us to foreign
currency exchange risks. Because expenses denominated in foreign currencies
historically have not been material, we have not sought to reduce our exposure
to exchange rate fluctuations by using hedging transactions. However, we may
choose so in the future. We recognized a foreign exchange loss of NT$24.9
million (US$733 thousand) for 2003, and a foreign exchange gain of NT$93.9
million (US$2.7 million) for 2002.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (FIN 46). FIN 46 clarifies when a company
should consolidate in its financial statements the assets, liabilities and
activities of a variable interest entity. FIN 46 provides general guidance as
to the definition of a variable interest entity and requires a variable
interest entity to be consolidated if a company absorbs the majority of the
variable interest entitys expected losses, or is entitled to receive a
majority of the variable interest entitys residual returns, or both. In
December 2003, the FASB issued a revised interpretation of FIN 46 (FIN 46-R),
which supercedes FIN 46 and clarifies and expands current accounting guidance
for variable interest entities. FIN 46 and FIN 46-R are effective immediately
for all variable interest entities created after January 31, 2003, and for
variable interest entities created prior to February 1, 2003, no later than the
end of the first reporting period after March 15, 2004. We have performed a
review of entities created prior to and subsequent to January 31, 2003, and
determined the adoption of FIN 46 and FIN 46-R did not have a material impact
on the Companys financial reporting and disclosures.

On April 30, 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS No. 149). SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group (DIG) process that effectively required
amendments to SFAS No. 133, and decisions made in connection with other FASB
projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition
of a derivative and characteristics of a derivative that contains financing
components. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS No. 149 did not have a material impact on the Companys consolidated
financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective for
all financial instruments created or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on the
Companys consolidated financial statements.

In December 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition,
which supercedes SAB 101, Revenue Recognition in Financial Statements. SAB
104s primary purpose is to rescind accounting guidance contained in SAB 101
related to multiple element revenue arrangements and revises the SECs Revenue
Recognition in Financial

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Statements Frequently Asked Questions and Answers that have been codified
in Topic 13. SAB 104 was effective immediately and did not have a material
impact on the Companys financial reporting and disclosures.

In December 2003, the FASB issued SFAS No. 132, Employers Disclosures
about Pensions and Other Post-retirement Benefits. This statement revises
employers disclosures about pension plans and other post-retirement benefit
plans. It requires additional disclosures to those in the original SFAS No. 132
about the assets, obligations, cash flows and net periodic benefit cost of
defined benefit pension plans and other defined benefit post-retirement plans.
The required information should be provided separately for pension plans and
for other post-retirement benefit plans. This statement, which also requires
new disclosures for interim periods beginning after December 15, 2003, is
effective for fiscal years ended after December 15, 2003. We adopted this
statement for the year ended December 31, 2003 and the adoption of this
statement has no impact on our consolidated financial statements.

Inflation

We do not believe that inflation in Taiwan, where all of our current
business is conducted, has had a material impact on our results of operations.

Taxation

At December 31, 2003, we had net operating loss carry forwards for tax
purposes of approximately NT$2.5 billion (US$74.5 million), which will expire
at various times from December 2004 through December 2008. At December 31,
2003, we had a deferred tax asset of NT$724.1 million (US$21.3 million),
relating principally to our net operating loss. Our ability to realize the
value of our deferred tax asset depends on our future earnings, if any, the
timing and amount of which are uncertain. We have recorded a valuation
allowance substantially for the entire net deferred tax asset as a result of
those uncertainties. We recorded an income tax benefit of approximately NT$4.4
million (US$129.2 thousand) for 2002, which was related to KBT, a subsidiary of
our Company.

C. Research and Development, Patents and Licenses, Etc.

While we regard our intellectual property and proprietary rights as
important, we believe that our future success is dependent primarily on the
innovative skills, technological expertise and management abilities of our
employees rather than on patent, copyright and trademark protection, and,
accordingly, we do not consider any particular intellectual property or
proprietary right to be material to our business.

D. Trend Information

Please see - A. Operating Results  Overview for a discussion of the
most recent trends in our operation costs and revenues since the end of 2003.
In addition, please refer to discussions included in this Item for a discussion
of known trends, uncertainties, demands, commitments or events that we believe
are reasonable likely to have a material effect on our net operating revenues,
income from continuing operations, profitability or capital resources, or that
would cause reported financial information not necessarily to be indicative of
future operating results or financial condition.




ITEM 6. SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

The following table sets forth information with respect to all directors
and executive officers as of May 31, 2004.

Board Of Directors

Year Appointed toName
    
    Age
    
    Position
    
    Current PositionWU, Daniel
    
    
    56
    
    
    Chairman
    
    
    2003KOO, Jeffrey, Jr
    
    
    40
    
    
    Vice Chairman
    
    
    1999


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Year Appointed toName
    
    Age
    
    Position
    
    Current PositionBAO, Gilbert
    
    
    40
    
    
    Director
    
    
    2003CHANG, Nelson
    
    
    39
    
    
    Director
    
    
    2004DING, Michael Y.J.
    
    
    47
    
    
    Director
    
    
    2003HSU, Emmet Yu-Jui
    
    
    41
    
    
    Director
    
    
    2003HU ZEE, Nancy Jing-Ying
    
    
    45
    
    
    Director
    
    
    2003KOO, Andre
    
    
    37
    
    
    Director
    
    
    1999LEE, Howe Yong
    
    
    48
    
    
    Director
    
    
    2004LEE, Yichin
    
    
    43
    
    
    Director
    
    
    2003WANG, Arthur
    
    
    43
    
    
    Director
    
    
    2003


Executive Officers

Year Appointed toName
    
    Age
    
    Position
    
    Current PositionWu, Daniel
    
    
    56
    
    
    Chairman
    
    
    2003WANG, Arthur
    
    
    43
    
    
    Chief Executive Officer
    
    
    2003SHEA, Joseph
    
    
    38
    
    
    Vice President
    
    
    2002Chief Financial Officer
    
    
    2004TSENG, Jennifer
    
    
    35
    
    
    Vice President and General Counsel
    
    
    2003CHU, Michel
    
    
    35
    
    
    Vice President and Chief Technology Officer
    
    
    2000MAI, Falco
    
    
    42
    
    
    Vice President and Chief Administrative Officer
    
    
    2001


Mr. Arthur Wang was appointed as director and chief executive officer of
our Company with effect from December 1, 2003, following the resignation of Mr.
Raymond Chang. New board members appointed are as follows: (i) Mr. Yichin Lee,
who was appointed on September 30, 2003, (ii) Mr. Emmet Yu-Jui Hsu and Mr.
Gilbert Bao, who were appointed on December 1, 2003 and (iii) Mr. Nelson Chang
and Mr. Howe Yong Lee, who were appointed on February 25, 2004. Our former
directors, Leslie Koo and Gwo-yeu Tsai, resigned on December 11, 2003 and
December 10, 2003, respectively, for personal reasons.

Directors

DANIEL WU is the chairman of GigaMedia Limited. He brings to our Company
significant operational experience and extensive business relationships in
Taiwan. Dr. Wu is currently the chairman of CDIB & Partners Investment Holding
Corp. in Taiwan and a director and senior executive vice president of China
Development Financial Holding Corporation. Previously, he served as the
chairman of various companies including Videoland Inc. (2002-2004), Grand
Pacific Petrochemical Corp. (1994-2004), Biocare Corp. (1997-2003) and
Precision Semiconductor Mask Corp. (1998-2000). He was the chief executive
officer of Wyse Technology Inc. (1990-1994) and the president of Grand Pacific
Petrochemical Corp. (1992-1994). Dr. Wu was vice chairman of Crimson Asia
Capital Holdings, Ltd. (1997-2000). Prior to that, Dr. Wu was also the chairman
of Monte Jade Science & Technology Association from 1993 to 1994. Dr. Wu
received his doctorate in chemical engineering from the University of Delaware
in 1976 and an undergraduate degree in the same discipline from National Taiwan
University in 1970.

JEFFREY KOO, JR. is vice-chairman and a director of our Company. He is
also currently the chairman of Chinatrust Commercial Bank, the managing
director of Crimson Capital Management, Ltd. and the honorary vice chairman of
J-Ho Real Estate Development Co. From February 1993 to January 1995, Mr. Koo
also served as the executive vice president of Taiwan Fuji-Xerox Corp. Mr. Koo
received a bachelor of arts degree from SooChow University in Taiwan and a
master of business administration degree from the University of Pennsylvania.
He is the brother of Andre Koo.

GILBERT
BAO(1) is a director of our Company. He is also currently vice
president of Chung Shing Textile Co., Ltd., executive director of Taiwan Cotton
Spinners Association, and executive director of Taiwan Manmade Fiber Industry
Association. He graduated from the University of Southern California in 1986.

NELSON CHANG(1) is a director of our Company. He is also currently the
managing director of Shin-Long Construction Co., managing director of Enrich
Venture Capital Management Co., Ltd., vice president of X-Legend Entertainment
Corp., and vice president of EasyFun Entertainment Corp. Mr. Chang received a
master of business administration degree from National Taiwan University.

MICHAEL Y.J. DING(1) brings to our Company significant securities and
business experience. Mr. Ding is

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currently president and chief executive officer of Fubon Asset Management
Co., Ltd. Prior to that, Mr. Ding was president and fund manager of the R.O.C.
Fund (listed on the New York Stock Exchange), as well as president of the
International Investment Trust Co. in Taiwan, where he also served as chief
investment officer and a senior vice president. Mr. Ding was previously chief
economist and head of research at Citicorp International Securities Ltd. in
Taipei and head of research and information for the Greater China region at
McKinsey & Co., Inc. Mr. Ding holds a bachelor of laws degree from Chinese
Cultural University and a masters degree and a doctorate in economics from
Indiana University.

EMMET YU-JUI HSU(1) is a director of our Company. He is also currently
chairman and president of Shihlin Electric and Engineering Corp., Hsinchu
Transportation Co. Ltd., and The Ambassador Hotel in Taipei, Taiwan. He majored
in business administration at the University Southern California and received a
master of business administration degree from Chengchi University in Taiwan.

NANCY JING-YING HU ZEE is a certified accountant in the U.S. and Hong
Kong and is currently a director of Fee Tang Holdings Limited, Max China
Limited, Golden Pacific Enterprises Limited, KND & Co. CPA Limited, Taiwan
Business Association (H.K.) Limited, etKING Media Technology Limited and the
Taipei Yi Kuang Orphanage. Ms. Hu is currently the director and president of
Videoland Inc. She is also chairman of Medialand Inc. and Ho Wei Communication,
which are subsidiaries of Videoland Inc. Ms Hu holds a bachelors degree from
National Taiwan University, a masters degrees in sciences from Barry
University and a master of business administration degree from Florida
International University.

ANDRE KOO is a director of our Company. He is also currently the Chairman
of Chailease Group and chief executive officer of Chinatrust Hotels Ltd., both
of which are members of the Koos Group. He is also the president of My-Funding
Corp. Mr. Koo received a bachelors degree and a masters of business
administration degree from New York University. He is a brother of Jeffrey Koo,
Jr.

HOWE YONG LEE(1) is a director of GigaMedia and currently the managing
director of Lee Kim Yew (Pte) Ltd., an investment company based in Singapore.
He also served as a director of China Development Corporation in Hong Kong from
1997 to 2000 and as a director of Transmarco Limited in Singapore from 1995 to
1997. Mr. Lee received a bachelor of arts degree in business administration
from the University of Washington in 1984.

YICHIN LEE(1) is a director of our Company. He is also currently vice
president and general manager of PCCW Ltd. Mr. Lee holds a doctorate degree in
resource planning and management from Stanford University.

ARTHUR WANG is the chief executive officer and director of GigaMedia
Limited. He is also a partner of 698 Capital Limited, an Asian investment firm
based in Hong Kong, and a member of the board of Linmark Group, a Hong Kong
Stock Exchange listed global sourcing firm, where he serves as chair of the
audit committee. Previously, Mr. Wang was an executive director of KGI Asia
Limited, the investment banking arm of the Koos Group of Taiwan. At KGI, Mr.
Wang served as head of corporate finance. He also served as an investment
advisor and board member of UFJ Asia Finance Technology Fund of the UFJ Group
(formerly the Sanwa Bank Group of Japan), and as a board member and director of
Softbank Investment International (Strategic) Limited, the Hong Kong Stock
Exchange listed arm of Softbank Corporation. Mr. Wang received his bachelor of
arts degree from the University of California and his juris doctorate degree
from Yale Law School. He practiced corporate and securities law in the Hong
Kong offices of Skadden, Arps, Slate, Meagher & Flom LLP.



---

|(1) |  | An independent director.
|--- |  | ------------------------

Officers

JOSEPH SHEA is chief financial officer and a vice president of our
Company. Prior to joining GigaMedia, Mr. Shea was an equity research analyst at
Lehman Brothers Asia Limited covering the Internet industry. Before he was at
Lehman Brothers, Mr. Shea was a manager at A.T. Kearney (Hong Kong) Limited
where he was responsible for project planning and engagement execution for
clients based in Asia and Europe. While working at A.T. Kearney, Mr. Shea led
several Internet-related projects. Mr. Shea also held design engineer positions
in several major microprocessor design projects at Intel Corporation. Mr. Shea
received his master of business administration degree from the University of
California at Berkeley. He also holds a masters of science in electrical
engineering from Columbia University as well as a bachelors of science in
electrical engineering from Carnegie-Mellon University.

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JENNIFER TSENG is vice president and general counsel of GigaMedia. Prior
to joining our Company, Ms. Tseng practiced law and presided over a local law
firm in Taipei where she conducted general litigation practice across a range
of major business disputes and civil litigation, from counseling through trial
and appeal. Ms. Tseng received her master of laws degree from School of Law at
University of Warwick in the United Kingdom and her bachelor of law degree from
Department of Law at National Taiwan University in Taiwan.

MICHEL CHU is chief technology officer and a vice president of our
Company. He has extensive experience in Internet-related software development,
system engineering and project management. Mr. Chu is responsible for the
design, development and implementation of our Companys broadband service
infrastructure. Mr. Chu received a masters of science degree in electrical
engineering from National Taiwan University.

FALCO MAI is chief administrative officer and a vice president of our
Company. He is also currently a consultant at KGI Securities Co. Ltd in Taipei.
Prior to joining our Company, Mr. Mai worked at KGI Securities Co. Ltd in
Taipei as a manager of the research department, the equity and sales -
proprietary trading department and the derivatives product department. Mr. Mai
was also senior vice president to the general management office, as well as the
spokesman from 1993-2001. Mr. Mai received a bachelor of science degree in
electrical engineering from National Taiwan University.

B. Compensation

For the year ended December 31, 2003, the aggregate compensation paid by
us to all of our executive officers was approximately NT$20,186,750 (US$595,128
thousand) and the aggregate compensation paid by us to all of our directors was
approximately NT$2,058,000 (US$60,672 thousand).

C. Board Practices

Neither we nor any of our subsidiaries has signed any service contract
with any of our directors in respect of provision of benefit upon termination
of employment.

Each of our directors will remain in his office as a director until:



| |  | he is prohibited from acting as a director by reason of any order
made pursuant to the Singapore Companies Act (Chapter 50);                     
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | he resigns from his office;                                                                                                                      
| 
| |  | he receives a bankruptcy order made against him;                                                                                                 
| 
| |  | he is found to be lunatic or of unsound mind; or                                                                                                 
| 
| |  | he is removed by an ordinary resolution passed by our shareholders
in accordance with the provisions of the Singapore Companies Act
(Chapter 50).

Our board of directors has appointed an audit committee. The audit
committee currently consists of Gilbert Bao, Michael Y. J. Ding, and Yichin
Lee. Our audit committee will select and evaluate, on our behalf, the
independent public accountants who audit our annual financial statements, and
will review and approve the planned scope of our annual audit. In accordance
with our Articles of Association, all of the members of our audit committee
must be persons who qualify as independent directors for purposes of the
rules and regulations of the Nasdaq National Market.

D. Employees

As of June 10, 2004, the online business unit of GigaMedia employed 195
people, excluding part-time and temporary personal and consultants. Of the 195
employees, 128 were employed in our broadband business group, including sales,
marketing, engineering, customer service and related services; 26 were employed
in our technology group; six were employed in our new media group; five were
employed in the chief executive officer office; 18 were employed in our finance
and control group; and 11 were employed in our administration group. In
addition, our subsidiary KBT employed a total of 68 people. Our retail music
business unit employed a total
of 388 people, including 345 store employees and 43 office employees.

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None of our employees is subject to any collective bargaining
arrangements, and we consider our relations with employees to be good.

E. Share Ownership

Share Ownership of Directors and Executive Officers

The tables below set forth information as to our directors, and executive
officers share ownership in our Company as of May 31, 2004.

Number of SharesNumber of
    
    Issuable upon
    
    Exercise Price
    
    ExpirationDirector
    
    Common Shares
    
    exercise of options
    
    (US$)
    
    DateJeffrey Koo, Jr.
    
    
    (1
    )
    
    
    100,000
    
    
    
    24.3
    
    
    
    2005Andre Koo
    
    
    (1
    )
    
    
    100,000
    
    
    
    24.3
    
    
    
    2005




---

|(1) |  | See discussions of beneficial ownership of this person in our Company in
Beneficial Ownership below.
|--- |  | -------------------------------------------------------------------------------------------------------

Number of SharesNumber of
    
    Issuable upon
    
    Exercise Price
    
    ExpirationOfficer
    
    Common Shares
    
    exercise of options
    
    (US$)
    
    DateMichel Chu
    
    
    408,000
    
    
    
    0
    
    
    
    N/A
    
    
    
    N/AJoseph Shea
    
    
    0
    
    
    
    0
    
    
    
    N/A
    
    
    
    N/AFalco Mai
    
    
    0
    
    
    
    0
    
    
    
    N/A
    
    
    
    N/AJennifer Tseng
    
    
    0
    
    
    
    0
    
    
    
    N/A
    
    
    
    N/A


Beneficial Ownership

As of May 31, 2004, Jeffrey Koo Jr. and Andre Koo jointly owned 14,397,499
common shares or approximately 28.7% of common shares of our Company through
legal entities, Best Method Inc. and Kudos Fund.

Other than the above Koo family directors, no other director or executive
officer beneficially owns of record more than 1% of the outstanding shares of
our Company. See Item 7 below.

Employee Share Option Plans

During 1999, we adopted the 1999 Employee Share Option Plan, or the 1999
Plan. Pursuant to the 1999 Plan, up to two million common shares may be granted
to employees of our Company. The 1999 Plan is administered by a committee
designated by our board of directors. The committee as plan administrator has
complete discretion to determine the exercise price for the option grants,
which eligible individuals are to receive option grants, the time or times when
options grants are to be made, the number of shares subject to grant and the
maximum term for which any granted option is exercisable. During 2000, options
to purchase 1,111,440 shares of our Companys common stock were granted at an
exercise price of US$24.3, a 10% discount to the initial public offering price
of US$27, and options to purchase 836,470 shares of our Companys common stock
were granted at an exercise price of US$15, representing fair value at the date
of grant. The options expire on the date of termination of employment or five
years from the date of grant if not exercised. Also, the options are not
transferable other than on death, and are exercisable in three annual
installments of 30%, 30%, and 40% commencing one year from the date of grant
when the specific employees complete one, two, or three years, respectively, of
service with us. We grant fixed awards with pro rata vesting, and computes
compensation expenses along with the vesting periods.

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Unearned compensation for outstanding options granted under the 1999 Plan
as of December 31, 2001 and 2002 amounted to NT$5.3 million and nil. In June
2001, we cancelled all outstanding stock options granted in 2000 under the 1999
Plan, resulting in the recognition of compensation expense in the amount of
NT$53.3 million for 2001. Total compensation expense recorded in 2001 for all
options amounted to NT$130.8 million, which consists of amortization of options
outstanding during 2001, net of forfeitures. We recognized the amortization of
compensation expenses in 2002 in the amount of NT$5.3 million.

During 2001, we adopted the 2001 Employee Share Option Plan, or the 2001
Plan, under which up to three million common shares may be granted to employees
of our Company. There were no options granted under the 2001 Plan and the 2001
Plan was cancelled in June 2002.

During 2002, we adopted the 2002 Employee Share Option Plan, or the 2002
Plan, under which we may grant to our employees, directors, officers and
certain other qualified persons options to purchase up to a total of 3,000,000
of our common shares. As of May 31, 2004, no grants have been made under the
2002 Plan, but the committee in reviewing the compensation and executives and
other employees in 2004, may determine to grant options under the 2002 Plan.

On May 7, 2004, the Board of Directors approved the 2004 Employee Share
Option Plan, or the 2004 ESOP. Shareholders approval is sought for the 2004
ESOP at the annual general meeting of shareholders which will be held on June
30, 2004. All employees, officers, directors, supervisors, advisors and
consultants are eligible to participate in the 2004 ESOP under which 7,000,000
shares have been reserved for issuance. The 2004 ESOP will be administered by a
committee appointed by the board of directors.

Employee Share Purchase Plan

On May 7, 2004, the board of directors approved the 2004 Employee Share
Purchase Plan, or the 2004 ESPP, under which we may grant our employees rights
to purchase up to a total of 2,000,000 of our common shares at the price of the
lesser of 85% of the fair market value of a share on the first day of the
offering period or 85% of the fair market value of a share on the exercise
date. Each employee is entitled to purchase an amount not to exceed two months
of his/her salary. Shareholders approval is sought for the 2004 ESPP at the
annual general meeting of shareholders, which will be held on June 30, 2004.

Share Incentive Program

In order to provide appropriate equity incentives to our employees, in
October 1998 and the first half of 1999, Hoshin GigaMedia issued an aggregate
of 4.679 million shares of Hoshin GigaMedia to some of our employees at no
cost, generally subject to a three-year vesting schedule. Following our
acquisition of 100% of Hoshin GigaMedia, these shares of Hoshin GigaMedia were
exchangeable for 4.679 million shares of our Company, subject to the original
vesting schedule. We do not plan to issue shares to our employees in the future
for compensation purposes, other than shares issued upon the exercise of our
employee share options.




ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

The following table sets forth information known to us with respect to the
ownership of our shares as of May 31, 2004 by (1) each shareholder known by us
to own more than 5% of our shares and (2) all directors and executive officers
as a group.

Percentage ofName of Owner(1)
    
    Shares owned
    
    Shares ownedBest Method Limited (2)
    
    
    10,799,999
    
    
    
    21.53
    %Kudos Fund (2)
    
    
    3,597,500
    
    
    
    7.2
    %Directors and executive
officers as a group (1 person)
    
    
    408,000
    
    
    
    0.8
    %




---

|(1) |  | As at May 31, 2004, Microsoft Corporation was not the record holder of any
of our outstanding common shares. However, as at that date, Microsoft held a
warrant entitling it to purchase shares of our common stock. Pursuant to the
terms of the warrant, the holder thereof may, after giving effect to the
potential adjustment described in Note 5 of Notes to our Consolidated Financial
Statements, be entitled to acquire up to 33,529,412 shares of our common stock
pursuant to the warrant, subject to compliance with applicable Singapore and
other laws. If the warrant were exercised in full by the holder for this number
of shares, such holder would there by
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|    |  | acquire approximately 40.0% of our outstanding shares (on a pro forma basis)
and the percentage ownership of each of the other holders named above
would be proportionately reduced.                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | A member of the Koos Group. The Koos Group is controlled by members of
the Koo family, which includes two of our directors: Jeffrey Koo, Jr. and
Andre Koo, who are the beneficial owners of these shares.
|   
|(3) |  | Jeffrey Koo, Jr. and Andre Koo jointly own 14,397,499 common shares of
our Company, consisting of 10,799,999 shares owned through Best Method
Limited and 3,597,500 shares through Kudos Fund.            

As of May 31, 2004, we had 50,154,000 ordinary shares outstanding, out of
which, 35,348,501 shares were listed on the Nasdaq National Market and not held
by our major shareholders and directors or executive officers as disclosed
above and in Item 6 Senior Management and Employees  E. Share Ownership,
representing 70.48% of our total outstanding shares. As of May 31, 2004, the
35,348,501 shares listed on the Nasdaq National Market were held by 38 record
holders, including nominee holders, with the registered address in the United
States. Leslie Koo, who owned 8,521,019 shares, or 16.99% of our shares as of
August 7, 2003 through the following legal entities, namely, Robustus Capital
Investments Ltd., JKK Inc., TCC International Limited and KGEX.com Co., Ltd.,
sold all of his shares during 2003 and ceased to be a shareholder of our
Company. None of our major shareholders have different voting rights from those
of other shareholders of us.

Except for the warrant discussed in (1) above, there are no arrangements
known to us, the operation of which may at a subsequent date result in change
of control of our Company. If the warrant were exercised in full, after giving
effect to the potential adjustment referred to above, the Koos Group would no
longer possess control of our Company.

Related Party Transactions

From time to time, we have engaged in a variety of transactions with our
affiliates in the normal course of business. Our policy is that such
transactions have been conducted on terms as favourable to us as obtainable at
the time in a comparable arms length transaction with a non-affiliate.

Koos Group

We are a member of the Koos Group, a major conglomerate in Taiwan. In the
normal course of business, we conducted certain transactions with various
companies and individuals affiliated with the Koos Group. These transactions
are described in greater detail in Note 18 of our consolidated financial
statements.

Koos Group Cable Operators

For 2003 and as of April 30, 2004, nine of our cable partners were members
of the Koos Group cable television network. As part of our revenue sharing
arrangements with these partners, we generally paid them (1) 35% to 45% of each
subscribers monthly access fee in excess of NT$300 and (2) NT$500 per cable
modem installation. These payments totaled approximately NT$45.6 million,
NT$48.0 million and NT$43.0 million (US$1.3 million) for 2001, 2002 and 2003,
respectively. The term of our agreements with these cable partners was
generally nine years, and we were generally granted exclusive rights to use
their cable systems to provide Internet access services. However, in May 2004,
we reached an agreement in principle with our cable partners for all of our new
cable modem-based subscribers to be provided with two-way cable Internet
services. This agreement in principle involves an equal sharing of revenues
between us and our partners. We expect to execute definitive documents relating
to this revised arrangement shortly.

China Trust Commercial Bank

Pursuant to an arrangement between our wholly-owned subsidiary KBT and
China Trust Commercial Bank since September 2001, KBT charges China Trust
Commercial Bank a monthly leased line fee. This fee totaled approximately
NT$10.2 million (US$300.6 thousand) in each of 2002 and 2003.

Our total bank deposits with China Trust Commercial Bank as of December
31, 2002 and 2003 amounted to NT$683,746 and NT$469,772, respectively.

Raymond Chang

During 2001, we provided our former CEO, Raymond Chang, a two-year loan in
the amount of

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approximately NT$18 million at an annual interest rate of 4.45%.
As at December 31, 2003, NT$12.7 million remained due and owing from Mr. Chang
under the loan. The loan was fully repaid to us on June 15, 2004.

Tachung Records

As of December 31, 2002, the Companys indirectly-owned subsidiary,
Tachung Records, had receivables of NT$88,000 from its former shareholders and
the receivables were recorded as other current assets in the balance sheet.
An executive officer of the Companys subsidiary, Shu-Yun Huang, was one of the
debtors and, in accordance with the acquisition agreements with these former
shareholders, Shu-Yun Huang was required to be responsible for collecting the
receivables as of December 31, 2002. These receivables were fully collected
subsequent to December 31, 2002.

China Life Insurance Co., Ltd

The Company leases its main office premises from China Life Insurance Co.,
Ltd. under an operating lease that expires in 2005. The Company incurred rental
expense of NT$47,567, NT$12,910 and NT$12,800 with China Life Insurance Co.,
Ltd. for the years ended December 31, 2001 and 2002 and 2003, respectively.




ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

Financial Statements

Please refer to Item 18. Financial Statements.

Information on Legal or Arbitration Proceedings

We are currently a party to a legal proceeding related to our initial
public offering, as described below. As we believe the proceeding relates to
misconduct by the underwriters and not GigaMedia, we do not expect that the
ultimate outcome of this legal proceeding will have a materially adverse effect
on our financial position or overall trends in results of our operations.
However, if an unfavorable ruling were to occur, there exists the possibility
of a material adverse impact on the results of operations.

In December 2001, a class action lawsuit was filed against us and our
directors and some officers on behalf of purchasers of our common stock between
February 17, 2000 and December 6, 2000 inclusive. There are over 300 issuers
who are defendants in this class action.

The complaint alleges that we violated Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder in connection with the initial public
offering of our stock or our IPO. The complaint further alleges that the
prospectus used for our IPO was materially false and misleading because it
failed to disclose, among other things (i) the underwriters had solicited and
received excessive and undisclosed commissions from certain investor in
exchange for which the underwriters allocated to those investors substantial
portion of the restricted number of our shares issued in connection with our
IPO; and (ii) the underwriters had entered into agreements with customers
whereby the underwriters agreed to allocate our shares to those customers in
our IPO in exchange for which the customer agreed to purchase additional
GigaMedia shares in the aftermarket at pre-determined prices.

The plaintiffs claim damages in an unspecified amount, including class
damages and statutory compensation in an amount to be determined at trial,
including interest, costs and attorneys fees. On or around April 19, 2002, the
plaintiffs filed amended complaints against us. On July 1, 2002, the
underwriter defendants filed their motion to dismiss the amended complaints.
Subsequently, on July 15, 2002, the issuer defendants filed their motion to
dismiss the amended complaints. The parties completed the briefing on the
motions to dismiss, and the court held oral argument on the motions to dismiss
on November 1, 2002. On February 19, 2003, the court issued an Opinion and
Order on defendants motions to dismiss, which granted the motions in part and
denied the motions in part. As to our Company, the Rule 10b-5 claims were
dismissed without prejudice while the Section 11 claims survived the motion.

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On June 26, 2003, the plaintiffs executive committee announced a proposed
settlement between plaintiffs, on the one hand, and the issuer defendants and
their respective officer and director defendants, including GigaMedia and its
named officers and directors, on the other. A memorandum of understanding to
settle plaintiffs claims against the issuers and their directors and officers
has been approved as to form by the issuer defendants, including GigaMedia. The
proposed settlement does not resolve plaintiffs claims against the underwriter
defendants. The proposed settlement is also subject to approval by the district
court.

The principal components of the proposed settlement include (i) a release
of all of plaintiffs claims against the issuer defendants and their officers
and directors which have, or could have, been asserted in this litigation
arising out of the conduct alleged in the amended complaints to be wrongful,
(ii) the assignment by the issuers to the plaintiffs of certain potential
claims against the underwriter defendants and the agreement by the issuers not
to assert certain claims against the underwriter defendants, and (iii) an
undertaking by the insurers of the issuer defendants to pay to plaintiffs the
difference (the Recovery Deficit) between $1 billion and any lesser amount
recovered from the underwriter defendants in this litigation. If recoveries in
excess of $1 billion are obtained by plaintiffs from the underwriters, the
insurers of the settling issuer defendants will owe no money to the plaintiffs.
On June 14, 2004, the plaintiffs and issuer defendants presented the executed
settlement agreement to Judge Scheindlin during a court conference. Judge
Scheindlin has set the following schedule with respect to her consideration of
the settlement agreement: (i) plaintiffs will move for preliminary approval of
the settlement agreement, with a short brief, on or before June 25, 2004; (ii)
objections to the settlement agreement may be filed by any party on or before
July 14, 2004; and (iii) reply briefs, if any, in support of the settlement
agreement shall be filed on or before July 21, 2003. The settlement agreement
is subject to the approval of the district court.

Because the litigation is at a very early stage of discovery, and because
the proposed settlement agreement between the issuer defendants and the
plaintiffs has not been finalized and must still be approved by the district
court, we are unable to assess the likelihood of an unfavorable outcome and can
make no definitive determination as to the amount or range of potential loss,
if any. However, we intend to vigorously defend ourself against allegations. We
have entered into an insurance policy with American Insurance Group with US$10
million of liability coverage. In addition, we have requested the underwriters
of our IPO for reimbursement for all cost, expenses, losses and/or damages
incurred by us in connection with such lawsuit. Accordingly, as of December 31,
2003, management believes that the potential liability, if any, will be covered
by the insurance policy, and hence we have not recorded any provision related
to these claims.

In March 2003, we commenced arbitration proceedings in Singapore by
submitting a Notice of Arbitration to the Singapore International Arbitration
Center (the SIAC) to resolve certain contractual dispute in connection with a
strategic agreement entered into between our Company, EMI Music Asia (EMI)
and GigaMusic.com Limited (GigaMusic.com). On December 31, 2003, a Final
Settlement Agreement and Release (the Settlement Agreement) was entered into
by our Company, EMI and GigaMusic.com to resolve and settle all disputes
relating to this matter. Under the Settlement Agreement, we agreed to pay EMI
US$400,000 while EMI agreed to return to us 5% ownership in GigaMusic.com and a
letter of credit for the amount of US$1,000,000 issued to EMI in accordance
with said strategic agreement. The Settlement Agreement became effective on
February 25, 2004, following a resolution approved by a meeting of our board of
directors.

In April 2004, the landlord of the premises of one of our retail music
stores filed a lawsuit in the District Court of Panchiao, Taipei County against
our Company. The complaint alleges that we defaulted on monthly rental payments
under the lease agreement and also breached the covenant against sub-letting
the premises. The complaint claims that the landlord has suffered damages
amounting potentially to NT$5 million plus back rent at NT$200,000 per month
since February 1, 2004. On April 26, 2004, we served an answer asserting
various affirmative defenses. The first hearing was held on May 13, 2004, and
the second hearing was held on June 14, 2004. While we intend to vigorously
defend the claim for back rent, the claim for sub-letting has been
substantiated by the landlord. We have commenced settlement negotiations with
the landlord. We believe we have a reasonable chance of settling this matter
with the landlord for (1) making rent payment at NT$550,000 per month from the
settlement date in lieu of paying NT$5 million as claimed and (2) signing a new
lease for a term of two to three years at our proposed NT$550,000 monthly
payment.

In November 1999, we issued a warrant to Microsoft in connection with the
purchase by Microsoft of 4 million of our shares for US$35 million. The warrant
is exercisable for five years and initially entitles Microsoft to purchase up
to 10 million of our shares at US$6.60 per share. As a result of a special
distribution of US$2.00 per share by GigaMedia in March 2002, the warrant
provided that Microsoft had the right to elect either (i) an adjustment to the
terms of the warrant such that the warrant thereafter would represent the right
to acquire

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33,529,412 shares at US$1.97 per share, or (ii) a cash payment (the
Anti-Dilution Fee) equal to US$20 million (the per share special distribution
amount multiplied by the number of shares originally covered by the warrant).
In March 2004, Microsoft notified GigaMedia of its purported election to
receive the Anti-Dilution Fee. GigaMedia informed Microsoft that such
purported election was untimely and therefore ineffective. In June 2004, we
agreed with Microsoft on the terms of a settlement of this dispute. Pursuant
to the settlement, Microsoft will receive a cash payment and will return the
warrant to our Company for cancellation, releasing all rights and claims
related to the warrant. We expect to consummate this settlement early in the
third quarter of 2004. Certain of our principal shareholders have agreed to
fully indemnify us in connection with the settlement and, as a result, we
believe that our settlement with Microsoft will not have a material adverse
effect on us or our financial condition.

Except for the above-referenced litigation, we are not aware that any of
our directors, any member of our senior management or any of our affiliates is
a party to any current or pending legal proceedings the outcome of which is
expected to have a material adverse effect on us.

Dividend Policy

We have never declared nor paid any dividends on our shares. We anticipate
that we will continue to retain any earnings for use in the operation of our
business and we do not intend to pay dividends in the foreseeable future.

B. Significant Changes

Mr. Arthur Wang was appointed as director and chief executive officer of
our Company with effect from December 1, 2003, as a result of the resignation
of Mr. Raymond Chang. New board members appointed are as follows: (i) Mr.
Yichin Lee, who was appointed on September 30, 2003, (ii) Mr. Emmet Yu-Jui Hsu
and Mr. Gilbert Bao, who were appointed on December 1, 2003 and (iii) Mr.
Nelson Chang and Mr. Howe Yong Lee, who were appointed on February 25, 2004.
Our former directors, Leslie Koo and Gwo-yeu Tsai, resigned on December 11,
2003 and December 10, 2003, respectively, for personal reasons.

In April 2004, we acquired all of the issued and outstanding shares of
Grand Virtual in a private transaction for an all-cash consideration of US$32.5
million. Grand Virtual was a privately-held developer of software for online
entertainment and social networking services and an application service
provider of turnkey solutions for games of skill and chance based in the Boston
area of the U.S.. We believe that our acquisition of Grand Virtual will be
accretive to our cash flows and earnings, and will enhance our diversified
entertainment products portfolio.




ITEM 9. THE OFFER AND LISTING

Market Price Information for Our Shares

Our shares have been listed and traded on the Nasdaq National Market since
February 24, 2000. The following table shows, for the periods indicated, the
high and low closing prices for the shares as quoted on the Nasdaq National
Market, as well as the total trading volume and the average daily trading
volume for such shares.

Common SharesAverage DailyHigh
    
    Low
    
    Total Trading Volume
    
    Trading VolumeYear Ended December 31, 2000
    
    (in US$)
    
    (in thousands shares)First quarter
    
    $
    90.75
    
    
    $
    18.00
    
    
    
    23,294
    
    
    
    803Second quarter
    
    $
    50.00
    
    
    $
    12.00
    
    
    
    15,920
    
    
    
    261Third quarter
    
    $
    12.88
    
    
    $
    7.12
    
    
    
    12,442
    
    
    
    207Fourth quarter
    
    $
    8.50
    
    
    $
    2.75
    
    
    
    9,610
    
    
    
    153


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Common SharesAverage DailyHigh
    
    Low
    
    Total Trading Volume
    
    Trading VolumeYear Ended December 31, 2001
    
    (in US$)
    
    (in thousands shares)First quarter
    
    $
    4.00
    
    
    $
    1.97
    
    
    
    3,271
    
    
    
    53Second quarter
    
    $
    2.83
    
    
    $
    1.12
    
    
    
    4,398
    
    
    
    70Third quarter
    
    $
    1.41
    
    
    $
    0.60
    
    
    
    7,942
    
    
    
    137Fourth quarter
    
    $
    2.76
    
    
    $
    0.89
    
    
    
    4,687
    
    
    
    73


Common SharesAverage DailyHigh
    
    Low
    
    Total Trading Volume
    
    Trading VolumeYear Ended December 31, 2002
    
    (in US$)
    
    (in thousands shares)First quarter
    
    $
    2.88
    
    
    $
    2.30
    
    
    
    9,492
    
    
    
    161Second quarter
    
    $
    1.25
    
    
    $
    0.67
    
    
    
    6,215
    
    
    
    99Third quarter
    
    $
    1.30
    
    
    $
    0.63
    
    
    
    4,967
    
    
    
    78Fourth quarter
    
    $
    0.84
    
    
    $
    0.42
    
    
    
    9,801
    
    
    
    153


Common SharesAverage DailyHigh
    
    Low
    
    Total Trading Volume
    
    Trading VolumeYear Ended December 31, 2003
    
    (in US$)
    
    (in thousands shares)First quarter
    
    $
    1.52
    
    
    $
    0.66
    
    
    
    27,796
    
    
    
    456Second quarter
    
    $
    1.21
    
    
    $
    0.86
    
    
    
    22,647
    
    
    
    359Third quarter
    
    $
    2.98
    
    
    $
    1.17
    
    
    
    176,987
    
    
    
    2,765Fourth quarter
    
    $
    3.35
    
    
    $
    1.44
    
    
    
    88,187
    
    
    
    1,378


Common SharesAverage DailyHigh
    
    Low
    
    Total Trading Volume
    
    Trading VolumeYear Ended December 31, 2004
    
    (in US$)
    
    (in thousands shares)January
    
    $
    2.07
    
    
    $
    1.68
    
    
    
    39,768
    
    
    
    1,988February
    
    $
    1.90
    
    
    $
    1.62
    
    
    
    15,076
    
    
    
    794March
    
    $
    1.00
    
    
    $
    1.33
    
    
    
    10,340
    
    
    
    450April
    
    $
    1.87
    
    
    $
    1.22
    
    
    
    21,722
    
    
    
    1,034May
    
    $
    1.32
    
    
    $
    1.06
    
    
    
    5,822
    
    
    
    291June (only through
June 28)
    
    $
    1.43
    
    
    $
    1.10
    
    
    
    4,024
    
    
    
    224





ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

Our current Memorandum and Articles of Association were adopted on June
30, 2000.

The principal purpose of our Company is that of investment holding. Our
Companys objects and purposes are set out in full in Clause 3 of our
Memorandum of Association. Subject to the provisions of the Singapore Companies
Act (Chapter 50) and any other written law in Singapore and our Memorandum and
Articles of Association, we have full capacity to carry on or undertake any
business or activity, do any act or enter into any transaction and for such
purposes, full rights, powers and privileges.

The following is a summary of certain provisions of our Articles of
Association.

DIRECTORS

Each of our directors will remain in his office as a director until:



| |  | He is prohibited from acting as a director by reason of any order
made pursuant to the Singapore Companies Act (Chapter 50);
|- |  | ----------------------------------------------------------------------------------------------------------------------------

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| |  | He resigns from his office;                                                                                                                      
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                  
| |  | He receives a bankruptcy order made against him;                                                                                                 
|  |  |                                                                                                                                                  
| |  | He is found to be lunatic or of unsound mind; or                                                                                                 
|  |  |                                                                                                                                                  
| |  | He is removed by an ordinary resolution passed by our shareholders
in accordance with the provisions of the Singapore Companies Act
(Chapter 50).

A director of our Company who is directly or indirectly interested in a
transaction, contract or arrangement with our Company shall, as soon as
practicable after the relevant facts have come to his knowledge, disclose the
nature of his interest at a meeting of the board of directors. Subject to such
disclosure, a director shall be entitled to vote in respect of any contract or
arrangement in which he is interested and he shall be taken into account in
ascertaining whether a quorum is present.

Our directors may borrow or raise money from time to time for the purpose
of our Company or secure the payment of such sums as they think fit and may
secure the repayment or payment of such sums by mortgage or charge upon all or
any of our property or assets or by the issue of debentures (whether at par or
at discount or premium) or otherwise as they may think fit.

Subject to the Singapore Companies Act (Chapter 50), the remuneration of
the directors shall be determined from time to time by our Company in general
meeting. Any director who is appointed to any executive office or serves on any
committee or who otherwise performs or renders services, which in the opinion
of the directors are outside his ordinary duties as a director, may, subject to
the Singapore Companies Act (Chapter 50), be paid such extra remuneration as
the directors may determine.

Our Directors are not required to hold any of our shares by way of
qualification. A Director who is not a shareholder of us is nevertheless
entitled to attend and speak at shareholders meetings.

AUDIT COMMITTEE

Our audit committee and board of directors have the ultimate authority and
responsibility to select and evaluate, on our behalf, the independent public
accountants who audit our annual financial statements. Our audit committee will
review and approve the planned scope of our annual audit. In accordance with
our Articles of Association, all of the members of our audit committee must be
persons who qualify as independent directors for purposes of the rules and
regulations of the Nasdaq National Market.

The audit committee is currently consists of Messrs. Gilbert Bao, Michael
Y. J. Ding and Yichin Lee. We intend to fully comply with the requirements of
the U.S. Sarbanes-Oxley Act of 2002 and the rules of the U.S. Securities and
Exchange Commission thereunder and the Nasdaq National Markets requirements
relating to audit committees.

DIVIDENDS

Our Company may by an ordinary resolution declare dividends but no
dividend shall be payable except out of the profits of our Company or in excess
of the amount recommended by the directors. Our profits available for dividend
and determined to be distributed shall be applied to pay dividends to
shareholders according to their respective rights and priorities. Except for
shares with special rights as to dividends, all dividends shall be declared and
paid according to the amounts paid up on shares.

All dividends unclaimed after having been declared may be invested or
otherwise made use of by our board of directors for our benefit. If any
dividend has not been claimed for six years from the date of declaration, such
dividend may be forfeited and shall revert to us. However, our directors may at
any time thereafter at their absolute discretion annul any such forfeiture and
pay the dividend so forfeited to the person entitled thereto prior to the
forfeiture. No dividend shall bear interest against us.

LIQUIDATION DISTRIBUTION

In the case of winding up of our Company and in accordance with applicable
laws, our shareholders may pass a special resolution to authorize a liquidator
to divide and distribute our assets to our shareholders or,

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authorize the
liquidator to vest the whole or part of our assets in trustees upon such trusts
for the benefit of our shareholders but so that no shareholder will be
compelled to accept shares or other securities on which there is any liability.

SHAREHOLDERS MEETINGS

We are required to hold an annual general meeting once in every calendar
year and not more than 15 months after the preceding annual general meeting.
The directors may convene an extraordinary general meeting whenever they think
fit, and they must do so upon the request in writing of shareholders
representing not less than 10% of our paid-up share capital. In addition, two
or more shareholders holding not less than 10% of our issued share capital may
call a meeting of our shareholders. Unless otherwise required by law or by our
Articles of Association, voting at general meetings is by ordinary resolution,
requiring an affirmative vote of a simple majority of those present and voting.
An ordinary resolution suffices, for example, in respect of appointments of
directors. A special resolution, requiring an affirmative vote of at least 75%
of those present and voting, is necessary for certain matters under the
Singapore Companies Act (Chapter 50), such as an alteration of our Articles of
Association. Subject to the Singapore Companies Act (Chapter 50), at least 21
days advance written notice specifying the intention to propose a special
resolution must be given of every general meeting convened for the purpose of
passing a special resolution. Subject to the Singapore Companies Act (Chapter
50), at least 14 days advance written notice must be given of every general
meeting convened for the purpose of passing an ordinary resolution.

VOTING RIGHTS

Voting at any meeting of our shareholders is by a poll. On a poll every
shareholder who is present in person or by proxy has one vote for every share
held by him.

SHARE CAPITAL

We generally have the right by obtaining a general mandate at the annual
general meeting to repurchase not more than 10% of our own shares in issue.

Our board of directors may make a capital call on our shareholders with
respect to the amounts unpaid on their shares and the shareholders are required
to pay the amount called at the time(s) and place as appointed by the board of
directors. The board of directors may revoke a call or postpone the time
previously fixed for the call payment.

We have the right, by ordinary resolution, to increase our capital by a
sum and the number of shares as the resolution prescribes.

We may by ordinary resolution:



|(i)   |  | consolidate and divide some or all of our share capital into shares of a
larger nominal value than our existing shares;                                                                                                                                                                                                                                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  |  | subject to the Singapore Companies Act (Chapter 50), sub-divide some or
all of our shares into shares of a smaller nominal value than is fixed by
our Memorandum of Association, provided always that in such sub-division,
the proportion between the amount paid and the amount (if any) unpaid on
each reduced share shall be the same as it was in the case of the share
from which the reduced share is derived;
|     
|(iii) |  | cancel any shares which have not been taken or agreed to be taken by any
person or which have been forfeited at the date of the passing of the
resolution and reduce the amount of our share capital by the amount
of the shares so cancelled; or                                                                                                                                                                    
|     
|(iv)  |  | subject to the Singapore Companies Act (Chapter 50) and our Articles of
Association, convert any class of our shares into any other class of shares.                                                                                                                                                                                                                                                                 

We may also by special resolution reduce our share capital and any capital
redemption reserve fund and any share premium account in any manner as
authorized by law.

We are not required to provide any sinking fund pursuant to our Articles
of Association. There was no

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provision discriminating against any existing or prospective holder of
shares as a result of such shareholder owning a substantial number of our
shares.

There was no limitation on the rights of non-resident or foreign
shareholders to hold or exercise voting rights on the shares.

MODIFICATION OF RIGHTS

We may vary or abrogate any special rights attached to any class of our
shares by a special resolution passed at a separate meeting of holders of the
shares of that class or, where the necessary majority for such special
resolution is not obtained at the meeting, with the consent in writing of the
holders of three-fourths in nominal value of the issued shares of that class
within two months of such meeting.

TRANSFER OF SHARES

Subject to our Articles of Association, our shares are freely transferable
but our directors may, in their absolute discretion, decline to register any
transfer of our shares on which we have a lien. All of our outstanding shares
have been fully paid. In addition, our directors may refuse, at their
discretion, to register or transfer shares to a transferee of whom they do not
approve. Shares may be transferred by a duly signed instrument of transfer in
the usual common form or in a form approved by our directors. Our directors may
decline to register any transfer of shares evidenced in certificated form
unless, among other things, it has been duly stamped and is presented for
registration together with the share certificate and other evidence of title as
they may require. We will replace worn-out or defaced certificates for shares
upon production thereof to the directors and upon payment of such fee as
specified in our Articles of Association. We will replace lost, destroyed or
stolen certificates for shares upon, among other things, the applicant
furnishing evidence and such indemnity as the directors may require.

TAKEOVERS

The acquisition of shares of public companies is regulated by the
Singapore Securities and Futures Act (Chapter 289) and the Singapore Code on
Take-overs and Mergers. Any person, either on his own or together with parties
acting in concert with him, acquiring an interest in 30% or more of our voting
shares is obliged to extend a takeover offer for the remaining shares which
carry voting rights, in accordance with the provisions of the Singapore Code on
Take-overs and Mergers. Parties acting in concert include a company and its
related and associated companies, a company and its directors, including their
close relatives and related trusts, a company and its pension funds and
employee share schemes, a person and any investment company, unit trust or
other fund whose investment such person manages on a discretionary basis and a
financial advisor and its client in respect of shares held by the financial
advisor and all the funds managed by the financial advisor on a discretionary
basis where the shareholdings of the financial advisor and any of those funds
in the client total 10% or more of the clients equity share capital. The offer
must be in cash or be accompanied by a cash alternative at not less than the
highest price, excluding stamp duty and dealing costs, paid by the offeror or
parties acting in concert with him for shares of that class within the
preceding 6 months. A mandatory takeover offer is also required to be made if a
person holding between 30% and 50%, both inclusive, of the voting shares,
either on his own or together with parties acting in concert with him, acquires
additional shares representing more than 1% of the voting shares in any 6-month
period.

C. Material Contracts

The following are summaries of our material contracts entered into over
the past two years. However, these summaries may not contain all the
information important to you. For more complete information, you should read
the entire agreements, which have been included as exhibits to this annual
report or incorporated into this annual report by reference to our annual
reports on Form 20-F and Form 20-F/A (File No. 000-30540) filed with the
Commission on June 28, 2002 and August 15, 2003.

Acquisition Agreements to acquire Rose Records and Tachung Records,
Taiwans two leading music store chains, entered into as of February 2002 with
respect to Rose Records and September 2002 with respect to Tachung Records.

We finalized agreements in February 2002 in the case of Rose Records and
in September 2002 in the case of Tachung Records to acquire through our
directly-owned subsidiary, G-Music Limited, all of the ownership

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interests of Rose Records Co., Ltd. and Tachung Records Co., Ltd.

The total purchase price was NT$638.9 million, consisting of NT$418.3
million in cash, NT$88.0 million of which was not paid and recorded as other
current liabilities as of December 31, 2002, and NT$220.6 million in the form
of shares in G-Music. The value of G-Music common stock was determined based on
managements estimate of the fair value of G-Music common stock in connection
with the acquisitions.

The value of the net tangible assets and the amortizable intangible assets
of the companies acquired was NT$370.6 million at the acquisition dates. We
currently own approximately 58.58% of G-Music after the shares issued to the
selling shareholders of Rose Records and Tachung Records.

Settlement Agreement, dated December 31, 2003, entered into among EMI,
GigaMusic.com and GigaMedia

On December 31, 2003, we entered into a Settlement Agreement with EMI and
GigaMusic.com to resolve and settle all disputes in connection with the
strategic agreement entered into between our Company, EMI and GigaMusic.com as
of May 14, 2001. Under the Settlement Agreement, we agreed to pay EMI
US$400,000 while EMI agreed to return to us 5% ownership of GigaMusic.com and a
letter of credit for the amount of US$1,000,000 issued to EMI in accordance
with the strategic agreement. The Settlement Agreement became effective on
February 25, 2004, following a resolution approved by a meeting of our board of
directors.

Stock Purchase Agreement, dated as of March 17, 2004, by and among GigaMedia
International Limited, GV Holding Company, and Alexander Saidakovsky, Alexander
Ganelis and Daniil Utin

On March 17, 2004, we entered into a Stock Purchase Agreement through our
wholly-owned subsidiary, GigaMedia International Limited, with GV Holding
Company, and Alexander Saidakovsky, Alexander Ganelis and Daniil Uti to
acquire all of the issued and outstanding shares of Grand Virtual in a private
transaction for an all-cash consideration of US$32.5 million. Grand Virtual is
a developer of software for online entertainment and social networking services
and an application service provider of turnkey solutions for games of skill and
chance based in the Boston area of the U.S.

D. Exchange Controls

There are currently no foreign exchange regulations which restrict the
export or import of our capital and the ability of Hoshin GigaMedia and G-Music
to distribute dividends to us. There are no limitations on the right of a
non-resident or foreign owner to hold or vote the shares imposed by Singapore
law or by our Articles of Association.

E. Taxation

Singapore Tax Considerations

Taxation of Dividends received by Singapore Resident Shareholders

Dividends paid by us would be taxable in Singapore if they are received in
Singapore or if they are considered, in the hands of a particular shareholder,
to be derived in Singapore (for example if they constitute the income of a
trade or business carried out in Singapore).

Under the Singapore-Taiwan Tax Treaty, if a dividend is paid by a company
which is tax resident in Taiwan to a person who is tax resident in Singapore,
the tax on the dividend shall not exceed an amount which, together with the
corporate income tax on the profits of the company paying the dividends,
constitutes 40% of that part of the taxable income out of which the dividends
are paid. The term corporate income tax payable shall be deemed to include
the corporate income tax that would have been paid but for the reduction or
exemption under the laws designed to promote economic development.

If our shareholder, whether a company or an individual, receiving or
deriving such dividends is tax resident in Singapore, he would be entitled to
foreign tax credits under the Singapore-Taiwan Tax Treaty and, if the recipient
is a company which owns not less than 25% of our shares, the tax credit will
include underlying tax paid by us. Singapore foreign tax credit is limited to
the lower of the foreign tax suffered and the Singapore tax payable on the net
foreign income (after attributable and allowable expenses).

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Certain foreign dividends received by a Singapore resident person on or
after 1 June 2003 will be exempt from tax. The main conditions to be satisfied
for such exemption (as contained in a circular published by the Inland Revenue
Authority of Singapore on 21 May 2003) are that:

(a) the dividends are received from a jurisdiction with a headline tax
rate of at least 15%; and

(b) the dividends themselves, or the income from which they are paid,
have been subject to tax in the foreign jurisdiction.

The normal tax rate for corporate profits is 22% for the year of
assessment 2004 (i.e. for the income earned in the financial year or other
basis period ended 2003). Based on the tax changes proposed by the Singapore
Minister of Finance during the 2004 Budget on 27 February 2004, the corporate
tax rate will be reduced to 20% for the year of assessment 2005. The marginal
tax rate for individuals ranges from 0% to 22%, depending on the amount of
chargeable income. If our shareholders are corporations, our shareholders will
be regarded as being tax resident in Singapore if the control and management of
our shareholders business is exercised in Singapore. For example, if our
shareholders board of directors meets and conducts the business of our
shareholders company in Singapore, our shareholders will be regarded as tax
residents of Singapore. If our shareholders are individuals, our shareholders
will be regarded as being tax resident in Singapore in a year of assessment if,
in the preceding year, our shareholders were physically present in Singapore or
exercised an employment in Singapore (other than as directors of a company) for
183 days or more or if our shareholders had resided in Singapore.

The Singapore Minister of Finance has proposed in the fiscal year 2004
Budget on 27 February 2004 that, with effect from year of assessment 2005, all
foreign-sourced income received (except for income received through a
partnership in Singapore) in Singapore by tax resident individuals will be
exempt from tax.

Gains on Disposal of Shares

Singapore does not impose a tax on capital gains. However, there are no
specific laws or regulations which deal with the characterization of capital
gains and hence, gains may be construed to be of an income nature and subject
to tax if they arise from activities which the Inland Revenue Authority of
Singapore regards as the carrying on of a trade or business in Singapore.

Stamp Duty

There is no stamp duty payable in respect of the issuance and holding of
shares. Where existing shares are acquired in Singapore, stamp duty is payable
on the instrument of transfer of the shares at the rate of S$2.00 for every
S$1,000 of the consideration for, or market value of, the shares, whichever is
higher. The stamp duty is borne by the purchaser unless there is an agreement
to the contrary. Where an instrument is executed outside Singapore, or no
instrument of transfer is executed, no stamp duty is payable on the acquisition
of existing shares. However, stamp duty would be payable if an instrument of
transfer which is executed outside Singapore is received in Singapore.

Under Singapore law, our directors may not register a transfer of shares
unless the instrument of transfer has been duly stamped.

Singapore Estate Duty

If our shareholders are individuals who are not domiciled in Singapore,
Singapore estate duty will be imposed on the value of immovable properties
situated in Singapore owned by such individual, subject to specific exemption
limits. Previously, movable assets of non-domiciles were also included. With
respect to deaths occurring on or after 1 January 2002, the movable property of
persons who are not domiciled in Singapore at the time of death are exempt from
estate duty. Therefore, an individual holder of shares who is not domiciled in
Singapore at the time of his or her death will not be subject to Singapore
estate duty on the value of our shares.

If our shareholders are individuals who are domiciled in Singapore,
Singapore estate duty is imposed on the value of most immoveable property
situated in Singapore and on most movable property, wherever it may be
situated, subject to specific exemption limits. Accordingly, our shares held by
an individual domiciled in Singapore are subject to Singapore estate duty upon
such an individuals death. Singapore estate duty is payable

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to the extent that the value of our shares aggregated with any other
assets subject to Singapore estate duty exceeds S$600,000. Unless other
exemptions apply to the other assets, for example, the separate exemption limit
for residential properties, any excess beyond S$600,000 will be taxed at 5% on
the first S$12,000,000 of the individuals Singapore chargeable assets and
thereafter at 10%.

Individuals should consult their own tax advisors regarding the Singapore
estate duty consequences of their ownership of our shares.

United States Federal Income Tax Considerations for U.S. Holders

The following is a discussion of certain U.S. federal income tax
considerations for investors in our shares that are U.S. persons (as defined
below) that hold the shares as a capital asset. This discussion is based on
U.S. federal income tax law as in effect on the date hereof which is subject to
change, possibly on a retroactive basis. This discussion is for general
information only and does not address all of the tax considerations that may be
relevant to you in light of your particular circumstances or if you are subject
to special treatment under the U.S. federal income tax laws including if you
are:



| |  | a bank;                                                                                                              
|- |  | ---------------------------------------------------------------------------------------------------------------------
| 
| |  | a broker-dealer;                                                                                                     
| 
| |  | a financial institution or an insurance company;                                                                     
| 
| |  | a tax-exempt entity;                                                                                                 
| 
| |  | a person holding shares as part of a straddle, hedge, conversion or other integrated investment;                     
| 
| |  | a person owning, actually or constructively, 10% or more of the
combined voting power of all classes of our stock; or
| 
| |  | a person whose functional currency is not the United States dollar.                                                

This discussion does not address any U.S. state, local or foreign or any
U.S. federal estate, gift or alternative minimum tax consideration of a holder
of our shares.

As used in this discussion, the term U.S. person means:



| |  | an individual who is a citizen or resident of the United States;                                                                                                                                                                                                                                                                                  
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | a corporation, or other entity treated as a corporation, created or
organized under the laws of the United States or any political
subdivision thereof;                                                                                                                                                                                           
| 
| |  | an estate the income of which is subject to United States federal
income taxation regardless of its source;                                                                                                                                                                                                                                       
| 
| |  | a trust if (1) it is subject to the primary supervision of a court
within the United States and one or more United States persons have the
authority to control all substantial decisions of the trust, or (2) it
was in existence on August 20, 1996, was treated as a U.S. person on
the previous day, and elected to continue to be so treated.

If a partnership (including any entity treated as a partnership for U.S.
federal income tax purposes) holds our shares, the tax treatment of a partner
in such partnership will generally depend upon the status of the partner and
the activities of the partnership. If you are a partner of a partnership
holding our shares, you are urged to consult your tax advisors as to the
particular U.S. federal income tax consequences as applicable to you.

You are urged to consult your tax advisor concerning the particular U.S.
federal, state, local and foreign income and other tax considerations regarding
the ownership and disposition of the shares including the application of the
passive foreign investment company rules discussed below. Investors should
review the discussion below under Passive Foreign Investment Company Rules
carefully.

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Taxation of Dividends Except as discussed below with respect to the passive foreign investment
company tax rules, the amount of distributions you receive on your shares
(other than certain pro rata distributions of shares or rights to subscribe for
shares) will generally be treated as dividend income to you if the
distributions are made from our current and accumulated earnings and profits as
calculated according to United States federal income tax principles. You will
include such dividends in your gross income as ordinary income on the day you
actually or constructively receive them. The amount of any distribution of
property other than cash will be the fair market value of such property on the
date it is distributed. A non-corporate recipient of dividend income will
generally be subject to tax on dividend income from a qualified foreign
corporation at a maximum U.S. federal tax rate of 15% rather than the marginal
tax rates generally applicable to ordinary income so long as certain holding
period requirements are met. A non-U.S. corporation (other than a foreign
personal holding company, foreign investment company, or passive foreign
investment company) generally will be considered to be a qualified foreign
corporation (i) if it is eligible for the benefits of a comprehensive tax
treaty with the United States which the Secretary of Treasury of the United
States determines is satisfactory for purposes of this provision and which
includes an exchange of information program or (ii) with respect to any
dividend it pays on stock which is readily tradable on an established
securities market in the United States. There is currently no tax treaty in
effect between the United States and Singapore. Our shares are expected to be
readily tradable on the NASDAQ National Market, an established securities
market in the United States. Distributions, if any, in excess of current and
accumulated earnings and profits will constitute a return of capital and will
be applied against and reduce the holders tax basis in such or shares. To the
extent that distributions are in excess of such basis, the distributions will
constitute capital gain as discussed below. U.S. corporate holders will
generally not be eligible for the dividends received deduction for
distributions to domestic corporations in respect of distributions on shares. The amount of any distribution paid in a currency other than the United
States dollar will equal the United States dollar value of the foreign currency
you receive, calculated by reference to the exchange rate in effect on the date
you actually or constructively receive the distribution regardless of whether
the foreign currency is actually converted into United States dollars. If you
do not convert the foreign currency you receive as a dividend on the date of
receipt, you will have a basis in such foreign currency equal to its United
States dollar value on the date of receipt. Any gain or loss you realize when
you subsequently sell or otherwise dispose of such foreign currency generally
will be ordinary income or loss from sources within the United States for
foreign tax credit limitation purposes. Holders may generally elect to claim a credit against their United States
federal income tax liability for Singapore tax withheld from dividends received
in respect of the ADSs or shares. The rules relating to the determination of
the foreign tax credit are complex and prospective purchasers are urged to
consult their personal tax advisors to determine whether and to what extent
they would be entitled to such credit. Holders that do not elect or are not
permitted to claim foreign tax credits may instead claim a deduction for
Singapore tax withheld. You will not be eligible for a foreign tax credit for
the underlying Singapore taxes on profits paid by us with respect to such
dividends. Sale or other disposition of shares.Except as discussed below with
respect to the passive foreign investment company tax rules, a holder generally
will recognize capital gain or loss for U.S. federal income tax purposes upon a
sale or other disposition of our shares in an amount equal to the difference
between the amount realized from the sale or disposition and the holders
adjusted tax basis in the shares. Such gain or loss generally will be long-term
(taxable at a reduced rate for individuals) if, on the date of sale or
disposition, the shares or were held by the holder for more than one year and
will generally be treated as gain or loss from United States sources for
foreign tax credit purposes. The claim of a deduction in respect of a capital
loss may be subject to limitations. Passive Foreign Investment Company Rules In general, we will be classified as a passive foreign investment
company (a PFIC) for any taxable year if either (i) at least 75% of our
gross income is passive income or (ii) at least 50% of the value (determined on
the basis of a quarterly average) of our assets produce or are held for the
production of passive income. Based on the current and projected composition of
our income and valuation of our assets, including goodwill, we believe we were
a PFIC for the 2003 taxable year, and absent significant capital expenditures
or a significant increase in our stock price this year, or both, it is likely that we will
remain a PFIC for the 2004 taxable year. 51




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We have limited control over the
market value of our shares and do not currently have plans to make significant
active investments. Whether we are or become classified as a PFIC in the
current or any future taxable year will be determined on the basis of, among
other things, our annual asset values (including, among other items, the level
of our cash, cash equivalents and short-term investments), and gross income
(including whether such income is active versus passive income as specially
determined under the PFIC rules) for such taxable year, which assets, capital
expenditures, and gross income are subject to change from year to year. Because
the determination of whether we are a PFIC is a factual determination made
annually and because there are uncertainties in the application of the relevant
rules, there can be no assurance we will not be considered a PFIC in the
current or any future taxable year. Provided we are a PFIC for any taxable year
during your holding period of our shares, the PFIC tax rules discussed below
generally will apply in future years even if we cease to be a PFIC in
subsequent years. U.S. holders who are individuals will not be eligible for
reduced rates of taxation on any dividends, if we are a PFIC in the taxable
year in which such dividends are paid or in the preceding taxable year. If we were classified as a PFIC for any taxable year during which you held
shares, and unless you make a mark-to-market election (as described below), you
will generally be subject to special tax rules, regardless of whether we remain
a PFIC, on (i) any excess distribution that we make to you (which generally
means any distribution received by you in a taxable year that is greater than
125% of the average annual distributions received by you in the three preceding
taxable years) or your holding period for the shares, if shorter, and (ii) any
gain realized on the sale or other disposition, including a pledge, of shares.
Under the PFIC rules:  
    
    the excess distribution or gain would be allocated ratably to your
holding period for the shares;
    
    the amount allocated to the current taxable year and any taxable
year prior to the first taxable year in which we are treated as a PFIC
would be treated as income;
    
    the amount allocated to each taxable year beginning with the first
taxable year in which we are classified as a PFIC, other than the
current taxable year, would be subject to tax at the highest tax rate
in effect applicable to you for that year; and
    
    the interest charge generally applicable to underpayments of tax
would be imposed on the tax attributable to each taxable year beginning
with the first taxable year in which we are classified as a PFIC, other
than the current taxable year. We will not provide you with information to enable you to make a
qualified electing fund election under which, generally in lieu of the
treatment described above, our earnings would be currently included in your
gross income. As an alternative to the rules described above, a holder of marketable
stock in a PFIC may make a mark-to-market election, provided that the shares
are actively traded on a qualified exchange. Under applicable Treasury
regulations, a qualified exchange includes a foreign exchange that is
regulated by a governmental authority in which the exchange is located and in
respect of which certain other requirements are met. If you make this election,
you will generally (i) include as income for each taxable year the excess, if
any, of the fair market value of your shares at the end of the taxable year
over the adjusted tax basis of the shares and (ii) deduct as a loss the excess,
if any, of the adjusted tax basis of the shares over the fair market value of
the shares at the end of the taxable year, but only to the extent of the amount
previously included in income as a result of the mark-to-market election. Your
adjusted tax basis in the shares would be adjusted to reflect any income or
loss resulting from the mark-to-market election. If you make a mark-to-market
election in respect of a corporation classified as a PFIC and such corporation
ceases to be classified as a PFIC, you will generally not be required to take
into account the gain or loss described above during any period that such
corporation is not classified as a PFIC. If you own shares during any year that we are a PFIC, you must file an
annual IRS Form 8621. You are urged to consult your tax advisor concerning the
United States federal income tax consequences of purchasing, holding, and
disposing our shares if we are or become a PFIC, including the possibility of
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Information Reporting and Backup Withholding In general, unless you are an exempt recipient such as a corporation and
demonstrate this when required, information reporting will apply to dividend
payments that we make to you paid within the United States (and in some cases,
outside of the United States). Additionally, if you fail to provide your
taxpayer identification number, or fail either to report in full dividend and
interest income or to make the necessary certifications, you will be subject to
backup withholding. In general, payment of the proceeds from the sale of shares to or through
a United States office of a broker is subject to both United States backup
withholding and information reporting unless you certify as to your non-United
States status under penalties of perjury or otherwise establish an exemption.
United States information reporting and backup withholding generally will not
apply to a payment made outside the United States of the proceeds of a sale of
shares through an office outside the United States of a non-United States
broker. However, United States information reporting requirements (but not
backup withholding) will apply to a payment made outside the United States of
the proceeds of a sale of shares through an office outside the United States if
the broker is:  
    
    a United States person;
    
    a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period;
    
    a controlled foreign corporation for United States tax purposes; or
    
    a foreign partnership, if at any time during its tax year:
    
    one or more of its partners are U.S. holders (as defined in U.S.
Treasury regulations) who in the aggregate hold more than 50% of the
income or capital interest in the partnership; or
    
    such foreign partnership is engaged in a United States trade or
business; unless the broker has documentary evidence in its files that you are a
non-United States person or you otherwise establish an exemption. Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your United States federal income tax liability,
provided you furnish the required information to the Internal Revenue Service. Inheritance and Gift Tax As
discussed in  Singapore Tax Considerations, Singapore estate duty
may be imposed on holders of shares. You should consult your own tax advisor
regarding the effect of such taxes on your particular situation. F. Dividends and Paying Agents Not applicable. G. Statements by Experts Not applicable. H. Documents on Display The U.S. Securities and Exchange Commission, or the SEC, allows us to
incorporate by reference the information we file with the SEC. This means
that we can disclose important information to you by referring you to another
document filed separately with the SEC. The information incorporated by
reference in this annual report is considered to be part of this annual report.
We therefore incorporate by reference in Item 19 of this annual report certain
exhibits, which we filed with the SEC before. You may read and copy this annual
report, including the exhibit(s) incorporated by 53




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reference in this annual
report, at the SECs Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SECs regional offices in New York, New York
and Chicago, Illinois. You can also request copies of this annual report,
including the exhibit(s) incorporated by reference in this annual report, upon
payment of a duplicating fee, by writing information on the operation of the
SECs Public Reference Room. I. Subsidiary Information Not applicable. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss related to adverse changes in market
prices, including interest rates and foreign exchange rates, of financial
instruments. We are exposed to various types of market risks, including changes
in interest rates and foreign currency exchange rates, in the normal course of
business. Foreign Currency Exchange All of our revenues and receivables and a majority of our operating
expenses and payables are denominated in NT dollars, which is our functional
currency. A small proportion of our operating expenses and payables, such as
the cost of international bandwidth and technology license fees, are primarily
denominated in U.S. dollars. As a result, our margins may be impacted by
fluctuations of exchange rate between NT dollar and U.S. dollar, exposing us to
foreign currency exchange risks. Because expenses denominated in foreign
currencies historically have not been material, we have not tried to reduce our
exposure to exchange rate fluctuations by using hedging transactions. However,
we may choose to do so in the future. As of December 31, 2003, we had bank deposits, restricted cash, short-term
investments and long-term investments denominated in U.S. dollars of US$43.9
million. As of December 31, 2003, we also had accounts payable denominated in
U.S. dollars of US$578.3 thousand. We realized a foreign exchange gain of
NT$5.2 million in 2001, a foreign exchange gain of NT$131.9 million in 2002 and
a foreign exchange gain of NT$1.8 million (US$51.7 thousand) in 2003 related to
currency fluctuations. Unrealized foreign exchange gain was NT$8.7 million in
2001, with unrealized exchange losses of NT$38.0 million in 2002 and NT$26.6
million (US$784.8 thousand) in 2003. Interest Rate Sensitivity Our exposure to interest rates relates primarily to our short-term
investments and short-term loans. As of December 31, 2003, we had short-term
investments of NT$983.6 million (US$29.0 million). These short-term investments
consist predominantly of beneficiary certificates of open and fixed income
mutual funds. These investments are subject to interest rate risk in that the
value of their holdings in debt instruments will fall if market interest rates
increase. Declines in interest rates over time will, however, reduce our
interest income from our bank deposits. We have not entered into any interest
rate swaps, caps or any hedge contracts to modify our exposure to interest rate
fluctuations. However, we do not expect significant risk associated with the
fluctuations of interest rate of short-term loans due to their short-term
maturity period. Other Market Risk We are also exposed to other market risk, which is mainly derived from our
current investments in Gamania and other investee companies. Changes in the
stock price or the performance of these companies might have significant impact
on our financial positions or operating results. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 54




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PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS Not applicable. 
 ITEM 15. CONTROLS AND PROCEDURES (a)     Our management, including our chief executive officer and chief financial
officer, have reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in the Exchange Act Rules 13a-15(3) and
15d-15(3)) as of December 31, 2003, being the end of the period covered by this
annual report. We are in the process of identifying, developing and implementing measures
to improve the effectiveness of our disclosure controls and procedures, and, in
particular, internal controls, including plans to enhance our resources,
systems and training with respect to our financial reporting and disclosure
responsibilities, and to review our actions with the audit committee and
independent auditors. We intend to commit considerable resources to these
efforts. In this respect, we are in the process of implementing our POS system,
which will centralize inventory management for all of our retail music stores
and help improve our internal controls. We also plan to upgrade and expand the
application of our SAP program to all of our businesses. In this respect, we
are currently evaluating the integration of our SAP program with our music as
well as online gaming and social networking businesses. We are also planning to
hire independent advisors during the second half of 2004 to assist us in
reviewing and re-designing our internal control and audit processes, procedures
and policies and to develop a plan to implement the reporting requirements of
Section 404 of the U.S. Sarbanes-Oxley Act of 2002. In designing and evaluating our disclosure controls and procedures, our
management recognized that disclosure controls and procedures, no matter how
well designed and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are
met. As such, disclosure controls and procedures or internal control systems
may not prevent all error and all fraud. In addition, the design of a control
system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. The design of
any disclosure controls and procedures is also based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Because of the inherent limitations in all control
systems, no evaluation of controls can provide assurance that all control
issues and instances of fraud, if any, within GigaMedia have been detected. Based on their evaluation as of December 31, 2003, our chief executive
officer and chief financial officer have concluded that steps can be taken to
improve our disclosure controls and procedures. Nevertheless, our chief
executive officer and chief financial officer believe that, subject to the
limitations noted above, our disclosure controls and procedures are effective
to ensure that material information required to be included in this annual
report is made known to them by others on a timely basis. On June 2, 2004, we announced a correction to our first quarter 2004
consolidated operating and financial results. This correction resulted from our
identification of a miscalculation in prepaid music store rental expenses which
impacted prepaid expenses as reported in our first quarter 2004 consolidated
operating and financial results originally issued on May 25, 2004. This
correction, however, did not amount to a restatement of our first quarter 2004
consolidated operating and financial results. (b)     Not applicable. (c)     Not applicable. (d)     There have been no significant changes in our internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses. 55




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ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Mr. Michael Y. J. Ding, a
member of our audit committee, qualifies as an audit committee financial expert
in accordance with the requirements of Item 16A of Form 20-F. Mr. Ding has
served as a director of our board and a member of our audit committee since
July 30, 2003. Mr. Ding is currently president and chief executive officer of
Fubon Asset Management Co., Ltd. Prior to that, Mr. Ding was president and fund
manager of the R.O.C. Fund (listed on the New York Stock Exchange), as well as
president of the International Investment Trust Co. in Taiwan, where he also
served as chief investment officer and a senior vice president. Prior to that,
Mr. Ding was a chief economist and head of research at Citicorp International
Securities Ltd. in Taipei and head of research and information for the Greater
China region at McKinsey & Co., Inc. 
 ITEM 16B. CODE OF ETHICS We have adopted a code of ethics, as defined in Item 16B of Form 20-F. Our
code of ethics applies to our chief executive officer, chief financial officer
and persons performing similar functions as well as to our directors, other
officers, employees and consultants. Our code of ethics is available on our Web
site at http://ir.giga.net.tw/code%20of%20business%20conduct.htm. If we amend
the provisions of our code of ethics that apply to our chief executive officer,
chief financial officer or persons performing similar functions, or if we grant
any waiver of such provisions, we will disclose such amendment or waiver on our
Web site at the same address. We will also provide any person without charge a
copy of our code of ethics, upon written request to our Investor Relations
Department at 14th Floor, No. 122, Tun Hua N. Rd., Sungshan Chiu, Taipei,
Taiwan 105, or e-mail to: Brad.miller@GigaMedia.net.tw. 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table summarizes the aggregate fees billed to us by
PricewaterhouseCoopers in Taiwan during the fiscal years ended December 31,
2002 and December 31, 2003: Year Ended December 31,2002
    
    2003(in NT$)Audit Fees
    
    
    3,207,000
    
    
    
    4,740,000Audit-Related Fees
    
    
    981,300
    
    
    
    0Tax Fees
    
    
    525,000
    
    
    
    550,000Other Fees
    
    
    100,000
    
    
    
    210,000
 A. Audit Fees Audit fees consist of fees billed for the companys consolidated financial
statements and the statutory financial statements of the companys
subsidiaries. They also include fees billed for other audit services, which are
those services that only the external auditor reasonably can provide. B. Audit-Related Fees Audit-related fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of the companys financial statements and employee benefit plan audits. C. Tax Fees Tax fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns. D. All Other Fees All other fees are fees billed for products and services provided by the
principal accountant, other than the 56




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services reported as audit fees, audit-related fees and tax fees,
consisting of fees billed for business registration service performed before
May 6, 2003. E. Audit Committee Pre-Approval Policies and Procedures We intend to comply with the requirements of the U.S. Sarbanes-Oxley Act
of 2002 and the rules of the SEC thereunder and Nasdaqs requirements relating
to audit committees. 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. 
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS Not applicable. 
 PART III 
 ITEM 17. FINANCIAL STATEMENTS We have elected to provide financial statements for fiscal year 2003 and
the related information pursuant to Item 18. 
 ITEM 18. FINANCIAL STATEMENTS Our consolidated financial statements and the report thereon by our
independent accountants listed below are attached hereto as follows: Page(a)
    
    Report of Independent Accountants
    
    F-1(b)
    
    Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    F-2(c)
    
    Consolidated Statements of Operations for the years ended December 31,
2001, 2002 and
2003
    
    F-4(d)
    
    Consolidated Statements of Shareholders Equity for the years ended
December 31, 2001, 2002 and
2003
    
    F-5(e)
    
    Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2002 and
2003
    
    F-6(f)
    
    Notes to the Consolidated Financial Statements
    
    F-8
 
 ITEM 19. EXHIBITS EXHIBIT INDEX 1.1
    
    Memorandum of Association of our Company*1.2
    
    Articles of Association of our Company*4.1
    
    Microsoft Commercial Internet System License Agreement between Hoshin
GigaMedia Center Inc., dated April 1, 1998*4.2
    
    License Agreement between Portal Information Network, Inc. and Hoshin
GigaMedia Center Inc., dated May 23, 1998*4.3
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Prosperity CATV Inc., dated May 12, 1999
(including English summary)*4.4
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and
 57




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Everlasting Cable TV Co., dated June 16,
1999 (including English summary)*4.5
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Lee Kwan Cable TV Co., dated June 16, 1999
(including English summary)*4.6
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Wonderful Cable TV Co. Ltd., dated June
16, 1999 (including English summary)*4.7
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Powerful CATV Co. Ltd., dated May 14, 1999
(including English summary)*4.8
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Netwave Cable TV Inc., dated April 16, 1999
(including English summary)*4.9
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and New Visual Wave CATV Inc., dated August 18,
1999 (including English summary)*4.10
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Da Fung CATV Co. Ltd., dated July 6, 1999
(including English summary)*4.11
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Gaho Cable Co. Ltd., dated May 12, 1999
(including English summary)*4.12
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and TeleFirst Cable Communication Co. Ltd.,
dated May 19, 1999 (including English summary)*4.13
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Chun-Chien Cable Television Co. Ltd., dated
January 1, 2000 (including English summary)*4.14
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Twinstar CATV Co. Ltd., dated April 16,
1999 (including English summary)*4.15
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Sun Crown CATV Co. Ltd., dated April 16,
1999 (including English summary)*4.16
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Shinyeongan CATV Co. Ltd., dated May 21,
1999 (including English summary)*4.17
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Chung Lian Inc., dated April 16, 1999
(including English summary)*4.18
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Gang Du Cable TV Co. Ltd., dated April 16,
1999 (including English summary)*4.19
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Union Cable TV Co. Ltd., dated May 14, 1999
(including English summary)*4.20
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and North Taoyuan CATV Company, dated August 9,
1999 (including English summary)*4.21
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Top Cable TV System Co., dated November 1,
1999 (including English summary)*4.22
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Shin Ho Cable TV Co. Ltd., dated May 13,
1999 (including English summary)*4.23
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Shuang Shing Cable TV Co., dated June 16,
1999 (including English summary)*4.24
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Hai Sun Cable Broadcasting System Co. Ltd.,
dated August 9, 1999 (including English summary)*4.25
    
    Broadband Internet over Cable Service Agreement between Hoshin
GigaMedia Center Inc. and Tien Wai Tien CATV Co., Ltd., dated October
25, 1999 (including English summary)*4.26
    
    Share and Warrant Purchase Agreement among GigaMedia Limited, Hoshin
GigaMedia Center Inc., Microsoft Corporation, Koos Develop Corp.,
Chester Koo and Leslie Koo, dated October 27, 1999*4.27
    
    Registration Rights Agreement among GigaMedia Limited and Microsoft
Corporation, dated November 23, 1999*4.28
    
    Shareholders Agreement among GigaMedia Limited, Microsoft
Corporation, Koos Develop Corp., Kudos Fund, Best Method Inc., TCC
International, Mr. Chester Koo, Mr. Leslie Koo, Mr. Kent Yen, Mr.
Raymond Chang, Mr. Yichun Chang, Mr. Chris Tung and Mr. Michel Chu,
dated November 23, 1999*4.29
    
    Business Co-Operation Agreement among Hoshin GigaMedia Center Inc.
and Microsoft Corporation, dated November 1, 1999*4.30
    
    Warrant, dated November 23, 1999, issued to Microsoft Corporation*4.31
    
    Strategic Alliance Agreement among GigaMedia Limited, Hoshin
GigaMedia Center Inc., and Gamania Digital Entertainment Co., LTD.,
dated March 1, 2001**4.32
    
    Commercial Agreement among GigaMedia Limited, Hoshin GigaMedia Center
Inc., and Rock Internet Corporation, dated April 20, 2001**4.33
    
    Strategic Alliance Agreement among GigaMedia Limited, GigaMusic.com
Limited, and EMI Music Asia (a division of EMI Group Hong Kong
Limited), dated May 14, 2001+**
 58




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4.34
    
    Stock Purchase Agreement among Tachung Records and certain
shareholders of Rose Records, dated as of January 29, 2002***4.35
    
    Stock Purchase Agreement among G-Music Limited and all shareholders
of Tachung Records, dated as of February 4, 2002***4.36
    
    Amendment to Stock Purchase Agreement, dated as of April 4, 2002, to
the Stock Purchase Agreement among Point Records Co., Ltd. and
certain shareholders of Point Records Co., Ltd, dated as of January
29, 2002****4.37
    
    Amendment to Stock Purchase Agreement, dated as of September 20,
2002, to the Stock Purchase Agreement among Music King Co., Ltd. and
selling shareholders of Music King Co., Ltd., dated as of February 4,
2002****4.38
    
    Final Settlement Agreement and Release, dated as of December 31,
2003, entered into among EMI Music Asia, GigaMusic.com Limited and
GigaMedia Limited4.39
    
    Stock Purchase Agreement, dated as of March 17, 2004, by and among
GigaMedia International Limited, GV Holding Company, and Alexander
Saidakovsky, Alexander Ganelis and Daniil Utin8.1
    
    List of Subsidiaries11
    
    Code of ethics adopted by the registrant on April 21, 200412.1
    
    Certification by our Chief
Executive Officer pursuant to Rule 13a-14(b) of the Securities
Exchange Act12.2
    
    Certification by our Chief
Financial Officer pursuant to Rule 13a-14(b) of the Securities
Exchange Act13
    
    Certifications by our Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 * Incorporated by reference from the Registration Statement on Form F-1, file
number 333-11416 filed with the SEC on February 2, 2000. ** Incorporated by reference from the annual report on Form 20-F, file number
000-30540 filed with the SEC on June 28, 2001. *** Incorporated by reference from the annual report on Form 20-F, file number
000-30540 filed with the SEC on June 28, 2002. **** Incorporated by reference from the annual report on Form 20-F, file number
000-30540 filed with the SEC on July 15, 2003. + Does not contain portions for which confidential treatment has been
requested. 59




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SIGNATURES The registrant 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. GIGAMEDIA LIMITEDBy:
    /s/ Joseph Shea/S/ JOSEPH SHEAJoseph Shea
Chief Financial Officer Date: June 30, 2004 60




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GIGAMEDIA LIMITED
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 2002 AND 2003 AND FOR THE
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the board of directors and shareholders
of GigaMedia Limited: We have audited the accompanying consolidated balance sheets of GigaMedia
Limited and its subsidiaries as of December 31, 2002 and 2003, and the related
consolidated statements of operations, of shareholders equity and of cash
flows for the years then ended. 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. The financial
statements of the Company for the year ended December 31, 2001 were audited by
other independent accountants whose report dated March 25, 2002 expressed an
unqualified opinion on those statements. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the 2002 and 2003 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
GigaMedia Limited and its subsidiaries as of December 31, 2002 and 2003, and
the results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
States of America. PricewaterhouseCoopers
Taipei, Taiwan
March 31, 2004 F-1




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##### Table of Contents



GIGAMEDIA LIMITED
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2003
(in thousands except for par value amount) December 312002
    
    2003ASSETS
    
    NT$
    
    NT$
    
    US$(Unaudited)(Note1)CURRENT ASSETSCash and cash equivalents (Notes 7 and 18)
    
    $
    1,241,157
    
    
    $
    1,198,934
    
    
    $
    35,346Short-term investments (Note 8)
    
    
    855,273
    
    
    
    983,645
    
    
    
    28,999Notes and accounts receivable (net of allowance
for doubtful accounts of NT$54,056 and NT$58,805
as of December 31, 2002 and 2003, respectively)
(Note 9)
    
    
    127,603
    
    
    
    139,050
    
    
    
    4,099Receivable from related parties (Note 18)
    
    
    5,705
    
    
    
    7,841
    
    
    
    231Inventories-net (Note 10)
    
    
    360,216
    
    
    
    163,185
    
    
    
    4,811Prepaid expenses
    
    
    19,869
    
    
    
    46,459
    
    
    
    1,370Restricted cash (Note 13)
    
    
    100,414
    
    
    
    65,409
    
    
    
    1,928Note receivable from officer (Note 18)
    
    
    18,534
    
    
    
    12,650
    
    
    
    373Other current assets (Note 18)
    
    
    148,944
    
    
    
    22,605
    
    
    
    666Total Current Assets
    
    
    2,877,715
    
    
    
    2,639,778
    
    
    
    77,824LONG-TERM INVESTMENTS (Note 11)
    
    
    641,088
    
    
    
    518,382
    
    
    
    15,282PROPERTY, PLANT AND EQUIPMENT-NETLand
    
    
    22,224
    
    
    
    22,224
    
    
    
    655Building
    
    
    37,869
    
    
    
    37,869
    
    
    
    1,116Information, communication equipment and software
    
    
    720,691
    
    
    
    561,612
    
    
    
    16,557Modems rented
    
    
    80,553
    
    
    
    82,565
    
    
    
    2,434Office furniture and fixture
    
    
    106,191
    
    
    
    77,728
    
    
    
    2,292Transportation equipment
    
    
    7,793
    
    
    
    9,320
    
    
    
    275Leasehold improvements
    
    
    106,867
    
    
    
    112,148
    
    
    
    3,306Sub-total
    
    
    1,082,188
    
    
    
    903,466
    
    
    
    26,635Less: Accumulated depreciation
    
    
    (344,930
    )
    
    
    (373,758
    )
    
    
    (11,019
    )Prepayment for equipment
    
    
    1,680
    
    
    
    1,447
    
    
    
    43Net
    
    
    738,938
    
    
    
    531,155
    
    
    
    15,659GOODWILL (Note 4)
    
    
    25,389
    
    
    
    
    
    
    
    INTANGIBLE ASSETS-NET (Note 5)
    
    
    242,012
    
    
    
    210,583
    
    
    
    6,208OTHER ASSETSDeferred assets (Note 12)
    
    
    79,593
    
    
    
    40,836
    
    
    
    1,204Refundable deposits-out
    
    
    82,960
    
    
    
    108,734
    
    
    
    3,206Others
    
    
    8,343
    
    
    
    19,874
    
    
    
    586Total Other Assets
    
    
    170,896
    
    
    
    169,444
    
    
    
    4,995TOTAL ASSETS
    
    $
    4,696,038
    
    
    $
    4,069,342
    
    
    $
    119,968
 The accompanying notes are an integral part of these consolidated financial statements. F-2




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GIGAMEDIA LIMITED
CONSOLIDATED BALANCE SHEETS-(Continued)
December 31, 2002 and 2003
(in thousands except for par value amount) December 312002
    
    2003LIABILITIES & SHAREHOLDERS' EQUITY
    
    NT$
    
    NT$
    
    US$(Unaudited)(Note 1)CURRENT LIABILITIESShort-term loans (Note 14)
    
    $
    93,000
    
    
    $
    
    
    
    $
    Notes and accounts payable
    
    
    470,646
    
    
    
    570,283
    
    
    
    16,813Payable to related parties (Note 18)
    
    
    20,511
    
    
    
    13,833
    
    
    
    408Accrued compensation
    
    
    44,610
    
    
    
    48,177
    
    
    
    1,420Accrued expenses
    
    
    53,150
    
    
    
    110,585
    
    
    
    3,261Other current liabilities
    
    
    118,395
    
    
    
    76,160
    
    
    
    2,245Total Current Liabilities
    
    
    800,312
    
    
    
    819,038
    
    
    
    24,147OTHER LIABILITIESRefundable deposits
    
    
    23,622
    
    
    
    27,368
    
    
    
    807Accrued pension liabilities (Note 15)
    
    
    25,047
    
    
    
    33,696
    
    
    
    993Total Other Liabilities
    
    
    48,669
    
    
    
    61,064
    
    
    
    1,800Total Liabilities
    
    
    848,981
    
    
    
    880,102
    
    
    
    25,946MINORITY INTERESTS
    
    
    227,180
    
    
    
    119,621
    
    
    
    3,526COMMITMENTS AND CONTINGENCIES (Note 20)SHAREHOLDERS EQUITYCommon shares, NT$10 dollars par
value; authorized 80,000 thousand
shares; issued 50,154 thousand shares
on December 31, 2002 and 2003 (Note
16)
    
    
    501,540
    
    
    
    501,540
    
    
    
    14,786Warrant outstanding
    
    
    1,543,270
    
    
    
    1,543,270
    
    
    
    45,497Additional paid-in capital
    
    
    6,532,703
    
    
    
    6,532,703
    
    
    
    192,591Accumulated deficit
    
    
    (5,054,760
    )
    
    
    (5,539,617
    )
    
    
    (163,314
    )Accumulated other comprehensive income
    
    
    97,124
    
    
    
    31,723
    
    
    
    935Total Shareholders Equity
    
    
    3,619,877
    
    
    
    3,069,619
    
    
    
    90,495TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    4,696,038
    
    
    $
    4,069,342
    
    
    $
    119,968
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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GIGAMEDIA LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2002 and 2003
(in thousands except for loss per share amounts) 2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$(Unaudited)(Note1)OPERATING REVENUES (Note 18)Sales/rental
    
    $
    7,490
    
    
    $
    1,864,128
    
    
    $
    2,559,008
    
    
    $
    75,442Access revenues
    
    
    389,801
    
    
    
    638,916
    
    
    
    647,716
    
    
    
    19,095Web development revenues
    
    
    7,190
    
    
    
    
    
    
    
    
    
    
    
    Advertising and promotional revenues
    
    
    5,039
    
    
    
    32,801
    
    
    
    54,894
    
    
    
    1,618Other revenues
    
    
    1,432
    
    
    
    19,964
    
    
    
    18,505
    
    
    
    545Total
    
    
    410,952
    
    
    
    2,555,809
    
    
    
    3,280,123
    
    
    
    96,700COSTS AND EXPENSES (Note 18)Costs of sales/rental/installation
    
    
    (143,420
    )
    
    
    (1,686,256
    )
    
    
    (2,244,196
    )
    
    
    (66,162
    )Operating costs
    
    
    (1,636,820
    )
    
    
    (634,872
    )
    
    
    (623,318
    )
    
    
    (18,376
    )Web development expenses
    
    
    (12,233
    )
    
    
    
    
    
    
    
    
    
    
    Product development and engineering expenses
    
    
    (106,458
    )
    
    
    (64,444
    )
    
    
    (41,673
    )
    
    
    (1,229
    )Selling and marketing expenses
    
    
    (285,590
    )
    
    
    (427,310
    )
    
    
    (499,820
    )
    
    
    (14,734
    )General and administrative expenses
    
    
    (215,663
    )
    
    
    (211,944
    )
    
    
    (274,278
    )
    
    
    (8,086
    )Bad debt expenses
    
    
    (40,250
    )
    
    
    (32,167
    )
    
    
    (5,362
    )
    
    
    (158
    )Impairment loss on goodwill (Note 4)
    
    
    
    
    
    
    (242,938
    )
    
    
    (25,389
    )
    
    
    (748
    )Impairment loss on intangible assets (Note 5)
    
    
    
    
    
    
    (80,627
    )
    
    
    
    
    
    
    Impairment loss on property, plant and equipment (Note 6)
    
    
    
    
    
    
    
    
    
    
    (53,567
    )
    
    
    (1,579
    )Other costs
    
    
    (1,203
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (2,441,637
    )
    
    
    (3,380,558
    )
    
    
    (3,767,603
    )
    
    
    (111,072
    )Loss from operations
    
    
    (2,030,685
    )
    
    
    (824,749
    )
    
    
    (487,480
    )
    
    
    (14,372
    )NON-OPERATING INCOME (EXPENSES)Interest income
    
    
    32,486
    
    
    
    34,905
    
    
    
    14,414
    
    
    
    425Gain on disposal of short-term investments
    
    
    201,826
    
    
    
    62,787
    
    
    
    16,787
    
    
    
    495Gain on disposal of long-term investments
    
    
    11,639
    
    
    
    51,791
    
    
    
    
    
    
    
    Impairment loss on long-term investments (Note 11)
    
    
    
    
    
    
    (40,000
    )
    
    
    (58,520
    )
    
    
    (1,725
    )Loss resulting from change of ownership percentage in a
majority-owned subsidiary
    
    
    
    
    
    
    (67,468
    )
    
    
    
    
    
    
    Interest expense
    
    
    (1,085
    )
    
    
    (1,392
    )
    
    
    (1,248
    )
    
    
    (37
    )Foreign exchange gains (loss)-net
    
    
    13,868
    
    
    
    93,941
    
    
    
    (24,869
    )
    
    
    (733
    )Share of loss of equity investees
    
    
    (27,837
    )
    
    
    
    
    
    
    
    
    
    
    Loss on disposal of property, plant and equipment
    
    
    (10,778
    )
    
    
    (30,593
    )
    
    
    (29,107
    )
    
    
    (858
    )Others
    
    
    (957
    )
    
    
    4,687
    
    
    
    (17,514
    )
    
    
    (517
    )Subtotal
    
    
    219,162
    
    
    
    108,658
    
    
    
    (100,057
    )
    
    
    (2,950
    )LOSS BEFORE INCOME TAXES AND MINORITY INTERESTS
    
    
    (1,811,523
    )
    
    
    (716,091
    )
    
    
    (587,537
    )
    
    
    (17,322
    )INCOME TAX BENEFIT (EXPENSES) (Note 17)
    
    
    393
    
    
    
    4,383
    
    
    
    (4,879
    )
    
    
    (144
    )NET LOSS BEFORE MINORITY INTEREST
    
    
    (1,811,130
    )
    
    
    (711,708
    )
    
    
    (592,416
    )
    
    
    (17,466
    )MINORITY INTEREST (INCOME) LOSS
    
    
    (194
    )
    
    
    73,718
    
    
    
    107,559
    
    
    
    3,171NET LOSS
    
    $
    (1,811,324
    )
    
    $
    (637,990
    )
    
    $
    (484,857
    )
    
    $
    (14,295
    )LOSS PER SHARE-BASIC AND DILUTED (IN DOLLARS)Net loss (Note 2)
    
    $
    (36.12
    )
    
    $
    (12.72
    )
    
    $
    (9.67
    )
    
    $
    (0.29
    )WEIGHTED AVERAGE SHARES USED TO COMPUTE
NET LOSS PER SHARE (Note 2)Basic and diluted
    
    
    50,154
    
    
    
    50,154
    
    
    
    50,154
    
    
    
    50,154
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



GIGAMEDIA LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 2001, 2002 and 2003
(in thousands) Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    otherWarrant
    
    paid-in
    
    Accumulated
    
    comprehensiveShares
    
    Amount
    
    outstanding
    
    capital
    
    deficit
    
    income (loss)
    
    TotalNT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$
    
    NT$Balance as of January 1, 2001
    
    
    50,154
    
    
    $
    501,540
    
    
    $
    1,543,270
    
    
    $
    9,917,354
    
    
    $
    (2,605,446
    )
    
    $
    717
    
    
    $
    9,357,435Components of comprehensive loss:Net loss in 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,811,324
    )
    
    
    
    
    
    
    (1,811,324
    )Reclassification adjustments for
gains realized in operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (717
    )
    
    
    (717
    )Unrealized gain on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168,905
    
    
    
    168,905Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,643,136
    )Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,827
    
    
    
    
    
    
    
    
    
    
    
    130,827Balance as of December 31, 2001
    
    
    50,154
    
    
    
    501,540
    
    
    
    1,543,270
    
    
    
    10,048,181
    
    
    
    (4,416,770
    )
    
    
    168,905
    
    
    
    7,845,126Components of comprehensive loss:Net loss in 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (637,990
    )
    
    
    
    
    
    
    (637,990
    )Reclassification adjustments for
gains realized in operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (148,773
    )
    
    
    (148,773
    )Unrealized gain on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,992
    
    
    
    76,992Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (709,771
    )Capital returns
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,521,814
    )
    
    
    
    
    
    
    
    
    
    
    (3,521,814
    )Refund of expenses from NASDAQ in
relation to the initial public
offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,055
    
    
    
    
    
    
    
    
    
    
    
    1,055Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,281
    
    
    
    
    
    
    
    
    
    
    
    5,281Balance as of December 31, 2002
    
    
    50,154
    
    
    
    501,540
    
    
    
    1,543,270
    
    
    
    6,532,703
    
    
    
    (5,054,760
    )
    
    
    97,124
    
    
    
    3,619,877Components of comprehensive loss:Net loss in 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (484,857
    )
    
    
    
    
    
    
    (484,857
    )Unrealized loss on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,401
    )
    
    
    (65,401
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (550,258
    )Balance as of December 31, 2003
    
    
    50,154
    
    
    
    501,540
    
    
    
    1,543,270
    
    
    
    6,532,703
    
    
    
    (5,539,617
    )
    
    
    31,723
    
    
    
    3,069,619
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



GIGAMEDIA LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2002 and 2003
(in thousands) 2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$(Unaudited)(Note 1)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,811,324
    )
    
    $
    (637,990
    )
    
    $
    (484,857
    )
    
    $
    (14,295
    )Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:Depreciation
    
    
    127,978
    
    
    
    196,346
    
    
    
    180,269
    
    
    
    5,315Amortization
    
    
    1,090,932
    
    
    
    97,459
    
    
    
    76,679
    
    
    
    2,261Provision for bad debt expenses
    
    
    40,250
    
    
    
    32,167
    
    
    
    5,362
    
    
    
    158Provision for inventory loss
    
    
    19,324
    
    
    
    22,175
    
    
    
    109,030
    
    
    
    3,215Share of net loss of equity investees
    
    
    27,837
    
    
    
    
    
    
    
    
    
    
    
    Loss on disposal of property, plant and equipment
    
    
    10,778
    
    
    
    30,593
    
    
    
    29,107
    
    
    
    858Gain on disposal of short-term investments
    
    
    (201,826
    )
    
    
    (62,787
    )
    
    
    (16,787
    )
    
    
    (495
    )Gain on disposal of long-term investments
    
    
    (11,639
    )
    
    
    (51,791
    )
    
    
    
    
    
    
    Share compensation expenses
    
    
    130,827
    
    
    
    5,281
    
    
    
    
    
    
    
    Minority interests income (loss)
    
    
    194
    
    
    
    (73,718
    )
    
    
    (107,559
    )
    
    
    (3,171
    )Impairment loss on goodwill
    
    
    
    
    
    
    242,938
    
    
    
    25,389
    
    
    
    748Impairment loss on intangible assets
    
    
    
    
    
    
    80,627
    
    
    
    
    
    
    
    Impairment loss on long-term investments
    
    
    
    
    
    
    40,000
    
    
    
    58,520
    
    
    
    1,725Impairment loss on property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    53,567
    
    
    
    1,579Loss resulting from change of ownership percentage in a
majority-owned subsidiary
    
    
    
    
    
    
    67,468
    
    
    
    
    
    
    
    Net changes in operating assets and liabilities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Notes and accounts receivable
    
    
    (76,842
    )
    
    
    (35,142
    )
    
    
    (16,809
    )
    
    
    (496
    )Receivable from related parties
    
    
    16,595
    
    
    
    (2,793
    )
    
    
    (2,136
    )
    
    
    (63
    )Inventories
    
    
    37,228
    
    
    
    35,226
    
    
    
    88,001
    
    
    
    2,594Prepaid expenses
    
    
    3,697
    
    
    
    3,286
    
    
    
    (26,590
    )
    
    
    (784
    )Other current assets
    
    
    (31,275
    )
    
    
    117,881
    
    
    
    126,339
    
    
    
    3,726Refundable modem deposits
    
    
    1,342
    
    
    
    
    
    
    
    
    
    
    
    Notes and accounts payable
    
    
    (17,265
    )
    
    
    (115,577
    )
    
    
    99,637
    
    
    
    2,938Payable to related parties
    
    
    (15,974
    )
    
    
    16,731
    
    
    
    (6,678
    )
    
    
    (197
    )Accrued expenses
    
    
    (55,736
    )
    
    
    (41,137
    )
    
    
    57,435
    
    
    
    1,693Accrued compensation
    
    
    3,410
    
    
    
    (374
    )
    
    
    3,567
    
    
    
    105Other current liabilities
    
    
    (253
    )
    
    
    12,215
    
    
    
    (42,235
    )
    
    
    (1,245
    )Accrued pension liabilities
    
    
    5,844
    
    
    
    15,637
    
    
    
    8,649
    
    
    
    255Licenses payable
    
    
    (6,408
    )
    
    
    
    
    
    
    
    
    
    
    Net cash (used in) provided by operating activities
    
    
    (712,306
    )
    
    
    (5,279
    )
    
    
    217,900
    
    
    
    6,424CASH FLOWS FROM INVESTING ACTIVITIES:(Increase) decrease in restricted cash
    
    
    (75,900
    )
    
    
    (24,514
    )
    
    
    35,005
    
    
    
    1,032Increase in investments-purchase of investments
    
    
    (962,194
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from disposal of long-term investments
    
    
    22,500
    
    
    
    428,806
    
    
    
    
    
    
    
    Purchase of property, plant and equipment
    
    
    (348,193
    )
    
    
    (304,741
    )
    
    
    (65,815
    )
    
    
    (1,940
    )Proceeds from disposal of property, plant and equipment
    
    
    481
    
    
    
    149,592
    
    
    
    10,655
    
    
    
    314Proceeds from disposal of short-term investments
    
    
    14,181,171
    
    
    
    4,101,247
    
    
    
    3,575,790
    
    
    
    105,418Purchase of short-term investments
    
    
    (11,763,672
    )
    
    
    
    
    
    
    (3,688,590
    )
    
    
    (108,744
    )Purchase of intangible assets
    
    
    
    
    
    
    (35,110
    )
    
    
    
    
    
    
    Acquisitions, net of cash acquired
    
    
    
    
    
    
    (311,987
    )
    
    
    
    
    
    
    Decrease (increase) in refundable deposits-out
    
    
    4,965
    
    
    
    (60,955
    )
    
    
    (25,774
    )
    
    
    (760
    )Increase (decrease) in other assets
    
    
    (33,295
    )
    
    
    84,016
    
    
    
    (11,531
    )
    
    
    (340
    )(Increase) decrease in note receivable from officer
    
    
    (18,534
    )
    
    
    
    
    
    
    5,884
    
    
    
    173Increase in deferred assets
    
    
    (155,636
    )
    
    
    (61,290
    )
    
    
    (6,493
    )
    
    
    (191
    )Payable to equipment suppliers
    
    
    (50,134
    )
    
    
    
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    801,559
    
    
    
    3,965,064
    
    
    
    (170,869
    )
    
    
    (5,038
    )CASH FLOWS FROM FINANCING ACTIVITIES:Increase (decrease) in bank borrowing
    
    
    
    
    
    
    4,220
    
    
    
    
    
    
    
    Repayment of bank borrowing
    
    
    
    
    
    
    
    
    
    
    (93,000
    )
    
    
    (2,742
    )Increase in refundable deposits
    
    
    
    
    
    
    3,565
    
    
    
    3,746
    
    
    
    111Decrease in lease obligations
    
    
    (13,187
    )
    
    
    
    
    
    
    
    
    
    
    Capital returns
    
    
    
    
    
    
    (3,521,814
    )
    
    
    
    
    
    
    Refund of IPO expenses from NASDAQ
    
    
    
    
    
    
    1,055
    
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (13,187
    )
    
    
    (3,512,974
    )
    
    
    (89,254
    )
    
    
    (2,631
    )NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    76,066
    
    
    
    446,811
    
    
    
    (42,223
    )
    
    
    (1,245
    )
 F-6




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##### Table of Contents



2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$
    
    US$(Unaudited)(Note 1)CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR
    
    
    718,280
    
    
    
    794,346
    
    
    
    1,241,157
    
    
    
    36,591CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    794,346
    
    
    $
    1,241,157
    
    
    $
    1,198,934
    
    
    $
    35,346SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:Interest paid during the year
    
    $
    1,085
    
    
    $
    1,392
    
    
    $
    1,248
    
    
    $
    37Income tax paid during the year
    
    $
    16,979
    
    
    $
    882
    
    
    $
    
    
    
    $
    NON-CASH FINANCING AND INVESTING
ACTIVITIES:Issuance of shares of a consolidated subsidiary for business
combinations
    
    $
    
    
    
    $
    220,606
    
    
    $
    
    
    
    $
    Acquisition costs in the form of payable as of year-end
    
    $
    
    
    
    $
    88,000
    
    
    $
    
    
    
    $
    Unrealized holding gain (loss) on available-for-sale
securities
    
    $
    168,188
    
    
    $
    76,992
    
    
    $
    (65,401
    )
    
    $
    (1,928
    )Intangible assets from investment activities
    
    $
    12,631
    
    
    $
    
    
    
    $
    
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



NOTE 1.     THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company GigaMedia Limited (GigaMedia or the Company) was incorporated in
Singapore in September 1999. The Company was listed on Nasdaq Stock Markets
National Market (NASDAQ) in New York on February 17, 2000. The Companys
principal shareholders are members of the Koos Group, a major conglomerate in
Taiwan. GigaMedia is a diversified provider of online and offline entertainment
services and products in Taiwan. The Companys online services primarily
consist of broadband Internet access services provided through multiple
delivery technologies. The Companys access products consist of premium cable
modem and Asymmetric Digital Subscriber Line (ADSL) offerings. The Company
also provides Internet content services through its Web site,
http://www.gigigaga.com, which is a Chinese-language broadband Web destination.
The Companys offline services primarily consist of the sale of compact discs,
video compact discs, digital versatile discs, audio and videocassettes, and
related accessories through its 52 directly-owned stores in Taiwan. Acquisitions of Rose Records and Tachung Records In February 2002, September 2002 and December 2002, the Company, through
its directly-owned subsidiary, G-Music Limited (G-Music), acquired all of the
outstanding stock of 17 companies, which owned 50 music chain stores under the
distribution system of Rose Records and Tachung Records. Accordingly, the
Company has included the results of the acquired companies from their
respective acquisition dates in its consolidated statements of operations. See
Note 3 for further discussion of the Companys acquisition activities. Principles of Consolidation The consolidated financial statements include the accounts of GigaMedia
and its wholly-owned and controlled majority-owned subsidiaries, Hoshin
Gigamedia Center Inc., GigaMusic.com Limited, G-Music Limited, Music King Co.,
Ltd., Koos Broadband Telecom Co., Ltd., Point Records Co., Ltd., as well as 17
other companies, including Tachung Records Co., Ltd. All significant
intercompany transactions and account balances have been eliminated. Convenient translation into US dollars The Company and its subsidiaries maintain their accounting records and
prepare their financial statements in New Taiwan (NT) dollars. The United
States (US) dollar amounts disclosed in the 2003 financial statements are
presented solely for the convenience of the reader and were translated at the
rate of NT$33.92 to US$1.00, the U.S. Federal Reserve Bank of New York noon
buying exchange rate on December 31, 2003. Such translation amounts are
unaudited and should not be construed as if the NT dollar amounts represent, or
have been, or could be, converted into US dollars at that or any other rate. Use of Estimates The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in GigaMedias financial statements and accompanying notes. Actual results
could differ from those assumptions. Revenue Recognition General The Company recognizes revenues in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 101 (SAB No. 101), Revenue
Recognition in Financial Statements and Staff Accounting Bulletin No. 104
(SAB No. 104), Revenue Recognition. Revenue is recognized when persuasive
evidence of an arrangement exists, delivery occurs or services are rendered,
the sales price is fixed or determinable and collectibility is reasonably
assured. The following policies apply to the Companys major categories of
revenue transactions. F-8




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##### Table of Contents



Sales/rental Sales/rental consist of retail sales generated from the Companys offline
business and sales, rental of cable modem and other related products generated
from the Companys online business. Retail sales are derived from the sales of entertainment merchandise to
the customers from the music chain stores. Revenue is recognized at the point
of sale to the consumer, at which time payment is tendered. There are no
provisions for uncollectible amounts since payment is received at the time of
sale. In addition, no provision for sales returns is made, as the Company does
not grant the customers any right of return. Revenues from the sale of cable modems and other related products are
recognized upon delivery. Cable modems can be rented for a flat rate on a
monthly basis until the customers petition to discontinue such service.
Revenues from the monthly rental of cable modems are recognized over the same
period as the access service is rendered. Internet access cable modems and ADSL Internet access revenues are recognized in the period the services are
rendered. Revenues are recorded, net of discounts, either for a monthly flat
rate (which includes unlimited access) or on a charge-per-minute basis. Free
months are offered in connection with promotional discounts. Because these free
months are usually given at the beginning of a subscription period, no revenue
is recognized during the months the free access has been provided, as the
continuance of the customer is not assured. As part of the revenue sharing
arrangements with cable partners, access revenue is recorded net of fees paid
to cable partners. In addition, the Company also offers promotional packages,
in which the Company receives subscription fees in advance on a quarterly or
semi-annual basis. The Company records these advanced receipts as other current
liabilities on the balance sheet and amortizes such revenues over the
subscription period. The Company introduced premium ADSL service in the second quarter of 2001.
Chunghwa Telecom Co., Ltd. (CHTC) provides the telecommunications network and
ADSL modems to subscribers, connects customers to CHTCs transfer mode network
and aggregates the telecom lines into the Companys servers. Revenue is
recognized when the Company bills the customer as services have been provided. Web development Web development revenues are derived from the design and development of
Internet Web sites and are recognized when work is performed. Advertising, promotional and other revenues Advertising revenues are derived from the sales of advertising services
and sponsorships in which the Company delivers advertisements for a fixed fee
on the Companys Web Sites and those of the advertising affiliates. Advertising
revenue is derived principally from short-term advertising contracts in which
the Company may guarantee a minimum number of impressions to advertisers over a
specific period of time for a fixed fee. Advertising revenues are recognized
pro rata over the contracted period, calculated based on the percentage of
impressions delivered over the total guaranteed impressions. In addition, the
Company also generates promotional revenues from its vendors of music products,
including in-store signage and in-store music-playing for the artists
designated by the vendors for a short period for each music album. Revenue is
recognized when services are provided. Other revenues consist of subscription revenues, which are recognized when
services are provided. Cash Equivalents Cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash, and so near to their maturity
that they present insignificant risk from changes in interest rates. Commercial
paper, negotiable certificates of deposit, time deposit and bank acceptances
with original maturities of three months or less are considered to be cash
equivalents. F-9




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##### Table of Contents



Foreign Currency Transactions The Company and its subsidiaries maintain their accounting records in New
Taiwan (NT) Dollars, the national currency of the Republic of China (the
ROC). Transactions denominated in foreign currencies are recorded in NT
dollars using the exchange rates in effect at the date of transactions. Assets
and liabilities denominated in foreign currencies are translated into NT
dollars using the exchange rate in effect at the balance sheet date. Foreign
exchange gains or losses are included in non-operating income or expense. Fair value of financial instruments The Companys financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximates their fair value due to the short-term maturity of
these instruments. Investments Investments principally consist of debt securities and equity securities
of public and privately held securities. Investments in debt securities and equity securities are classified as
available-for-sale investments. Accordingly, the investments are carried at
fair value and the unrealized gains and losses are recorded as accumulated
other comprehensive income in the stockholders equity. Unrealized gains or
losses that are considered other than temporary are included in the current
years operations. Realized gains and losses, measured against cost, are
included in the current years operations. Equity investments in privately held companies are generally carried at
cost. Equity investments in companies over which the Company has the ability to
exercise significant influence, but does not hold a controlling interest, are
accounted for under the equity method and the Companys proportionate share of
income or losses is recorded in non-operating income or expenses. When an equity investee company issues additional shares at an amount over
or under the carrying value of the shares held by the Company and the Companys
ownership interest decreases as a result of not fully subscribing to the
issuance, the resulting difference between the Companys investment balance and
its proportionate share of the investee companys net equity is recorded in the
current years operations. Allowance for Doubtful Accounts An allowance for doubtful accounts is provided based on an evaluation of
collectibility and an aging analysis of notes receivable, accounts receivables
and other receivables. Inventories Inventories are carried at the lower of cost or market value using the
weighted average cost method, while net realizable value is used to determine
the market value. An allowance for loss on obsolescence and decline in market
value is provided, when necessary. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided on the straight-line basis over the
following useful lives: Building
    
    50 yearsInformation, communication equipment and software
    
    3 to 5 yearsModems rented
    
    3 to 5 yearsOffice furniture and equipment
    
    3 to 5 yearsTransportation equipment
    
    5 yearsLeasehold improvements
    
    5 years
 F-10




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Leasehold improvements are depreciated over the life of the lease or the
assets, whichever is shorter. Improvements and replacements are capitalized and
depreciated over their estimated useful lives while ordinary repairs and
maintenance are expensed as incurred. Impairment of Long-Lived Assets Long-lived assets, such as property, plant and equipment assets, are
evaluated for impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. An impairment loss is
recognized when estimated undiscounted future cash flows expected to result
from the use of the asset plus net proceeds expected from disposition of the
asset, if any, are less than the carrying value of the asset. When an
impairment is identified, the carrying amount of the asset is reduced to its
estimated fair value. Effective January 1, 2002, in conjunction with the implementation of
Statement of Financial Accounting Standards (SFAS) No. 142, all goodwill,
including goodwill related to acquisitions prior to July 1, 2001, will no
longer be amortized and potential impairment of goodwill and purchased
intangible assets with indefinite useful lives will be evaluated using the
specific guidance provided by SFAS No. 142. This impairment analysis will be
performed at least annually. Also effective January 1, 2002, potential
impairment of long-lived assets other than goodwill and purchased intangible
assets with indefinite useful lives will be evaluated using the guidance
provided by SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to undiscounted future net
cash flows expected to be generated by the asset over its remaining useful
life. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. The estimate of fair value is generally
based on quoted market prices or on the best available information, including
prices for similar assets and the results of using other valuation techniques. Advertising Advertising costs are expensed as incurred. Advertising costs incurred in
2001, 2002 and 2003 totaled NT$135,831, NT$48,701 and NT$24,993, respectively. Stock-Based Compensation The Company measures compensation expense for its stock-based employee
compensation plan using the intrinsic value method. If the fair value based
method had been applied in measuring stock compensation expense, the pro forma
effect on net loss and net loss per share would have been as follows: Years Ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$Net lossAs reported
    
    $
    (1,811,324
    )
    
    $
    (637,990
    )
    
    $
    (484,857
    )Stock compensation expense
    
    
    (751,857
    )
    
    
    
    
    
    
    Pro forma
    
    $
    (2,563,181
    )
    
    $
    (637,990
    )
    
    $
    (484,857
    )Net loss per share (in
dollars):As reported-basic and diluted
    
    $
    (36.12
    )
    
    $
    (12.72
    )
    
    $
    (9.67
    )Pro forma-basic and diluted
    
    $
    (51.11
    )
    
    $
    (12.72
    )
    
    $
    (9.67
    )
 See
Note 16Shareholders Equity and Share Options for the assumptions
and methodology used to determine the fair value of stock-based compensation. Retirement Plan The Companys defined benefit pension plans cover substantially all of the
regular employees. The net pension cost is computed based on an actuarial
valuation and includes service cost, interest cost, expected return on plan
assets and amortization of net asset/ obligation at transition, amortization of
prior service cost and amortization of pension gain or loss. The unrecognized
net assets or obligation at transition is amortized equally over 15 years. The
unrecognized prior service cost is amortized over the average remaining service
period of the participated employees expected to receive benefits under the
pension plan as of the date of amendment of the F-11




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plan. The amortization of unrecognized gain or loss is the excess of the
beginning balance of unrecognized gain or loss over 10% of the greater of the
projected benefit obligation or the market-related value of plan assets divided
by the service period of active employees expected to receive benefits under
the plans. Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity of a
Company from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to
owners. Comprehensive income (loss) is recorded as a component of shareholders
equity. The Companys comprehensive income (loss) consists of net earnings or
loss as well as unrealized gains and losses on available-for-sales securities. Accounting for Income Taxes The Company has adopted SFAS No. 109, Accounting for Income Taxes.
Under SFAS No. 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets
and liabilities, loss carryforwards and investment credits and are measured
using the enacted tax rate and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Loss Per Share The Company computes loss per share in accordance with SFAS No. 128,
Earnings per Share. Under the provisions of SFAS No. 128, basic net income
or loss per share is computed by dividing the net income or loss available to
common shareholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net income or loss per share is
computed by dividing the net income or loss for the period by the weighted
average number of common shares and common share equivalents outstanding during
the period. Common share equivalents, composed of incremental common shares
issuable upon the exercise of stock options, are included in the computation of
diluted net income or loss per share to the extent such shares are diluted. Minority Interest Minority interest represents the outside shareholders 5% ownership of the
common stock of GigaMusic.com Limited and 41.42% of the common stock of G-Music
Limited. Reclassification The presentation of certain prior year information has been reclassified
to conform with current year presentation. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (FIN 46). FIN 46 clarifies when a company
should consolidate in its financial statements the assets, liabilities and
activities of a variable interest entity. FIN 46 provides general guidance as
to the definition of a variable interest entity and requires a variable
interest entity to be consolidated if a company absorbs the majority of the
variable interest entitys expected losses, or is entitled to receive a
majority of the variable interest entitys residual returns, or both. In
December 2003, the FASB issued a revised interpretation of FIN 46 (FIN 46-R),
which supercedes FIN 46 and clarifies and expands current accounting guidance
for variable interest entities. FIN 46 and FIN 46-R are effective immediately
for all variable interest entities created after January 31, 2003, and for
variable interest entities created prior to February 1, 2003, no later than the
end of the first reporting period after March 15, 2004. We have performed a
review of entities created prior to and subsequent to January 31, 2003, and
determined the adoption of FIN 46 and FIN 46-R did not have a material impact
on the Companys financial reporting and disclosures. On April 30, 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS No. 149). SFAS No. F-12




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149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The new guidance amends SFAS No. 133 for
decisions made as part of the Derivatives Implementation Group (DIG) process
that effectively required amendments to SFAS No. 133, and decisions made in
connection with other FASB projects dealing with financial instruments and in
connection with implementation issues raised in relation to the application of
the definition of a derivative and characteristics of a derivative that
contains financing components. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on the
Companys consolidated financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective for
all financial instruments created or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on the
Companys consolidated financial statements. In December 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition,
which supercedes SAB 101, Revenue Recognition in Financial Statements. SAB
104s primary purpose is to rescind accounting guidance contained in SAB 101
related to multiple element revenue arrangements and revises the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
that have been codified in Topic 13. SAB 104 was effective immediately and did
not have a material impact on the Companys financial reporting and
disclosures. In December 2003, the FASB issued SFAS No. 132, Employers Disclosures
about Pensions and Other Postretirement Benefits. This statement revises
employers disclosures about pension plans and other postretirement benefit
plans. It requires additional disclosures to those in the original SFAS No. 132
about the assets, obligations, cash flows and net periodic benefit cost of
defined benefit pension plans and other defined benefit post-retirement plans.
The required information should be provided separately for pension plans and
for other post-retirement benefit plans. This statement, which also requires
new disclosures for interim periods beginning after December 15, 2003, is
effective for fiscal years ended after December 15, 2003. The Company adopted
this statement for the year ended December 31, 2003 and the adoption of this
statement has no impact on the Companys consolidated financial statements. Note 2.     LOSS PER SHARE For the years end December 31,2001
    
    2002
    
    2003(in thousand shares)Average outstanding shares, end of year
    
    
    50,154
    
    
    
    50,154
    
    
    
    50,154NT$
    
    NT$
    
    NT$Loss before income tax and minority
interests
    
    $
    (1,811,523
    )
    
    $
    (716,091
    )
    
    $
    (587,537
    )Minority interest (income) loss
    
    
    (194
    )
    
    
    73,718
    
    
    
    107,559Income tax benefit (expense)
    
    
    393
    
    
    
    4,383
    
    
    
    (4,879
    )Net loss
    
    $
    (1,811,324
    )
    
    $
    (637,990
    )
    
    $
    (484,857
    )Loss per share-basic and diluted (in NT$)
    
    $
    (36.12
    )
    
    $
    (12.72
    )
    
    $
    (9.67
    )
 For the years ended December 31, 2001, 2002 and 2003, diluted loss per
share included only weighted-average shares outstanding as the inclusion of
additional potential common stock equivalents would have been antidiluted since
the Company incurred a net loss for the respective years. F-13




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Note 3.     ACQUISITIONS In February 2002, September 2002 and December 2002, the Company acquired,
through its directly-owned subsidiary, G-Music, all of the outstanding stock of
17 companies, which owned 50 music chain stores under the distribution system
of Rose Records and Tachung Records. The acquisitions have gained the Company
meaningful presence in the offline entertainment market, and are consistent
with the Companys strategy of building a diversified entertainment business.
These factors contributed to purchase prices in excess of fair market value of
the acquirees net tangible assets and intangible assets acquired, and as a
result, the Company has recorded goodwill in connection with the transactions. The total purchase price of NT$638,904 consisted of NT$220,606 in G-Music
Common Stock, representing 6,550 thousand shares and NT$418,298 in cash
consideration. The value of G-Music Common Stock was determined based on the
managements estimate of the fair value of G-Music Common Stock in connection
with the acquisitions. Total purchase price has been allocated as follows: NT$Cash acquired
    
    $
    18,311Inventories, net
    
    
    365,118Property, plant and equipment, net
    
    
    105,158Other tangible assets acquired
    
    
    285,364Amortizable intangible assets:Brandnames
    
    
    150,875Distribution channel
    
    
    106,851Goodwill
    
    
    268,327Short-term bank loans
    
    
    (88,780
    )Notes and accounts payable
    
    
    (516,451
    )Other tangible liabilities assumed
    
    
    (55,869
    )Total
    
    $
    638,904
 Amortizable intangible assets acquired have estimated useful lives as
follows: brandnames  15 years; distribution channel  five years. Goodwill of
NT$268,327 represents the excess of the purchase price over the fair value of
the net tangible and intangible assets acquired and is not deductible for tax
purposes. The results of operations of the acquirees have been included in the
Companys consolidated statements of operations since the completion of the
acquisitions. The following unaudited pro forma information presents a summary
of the results of operations of the Company as of December 31, 2002 as if the
acquisitions occurred on January 1, 2001: For the years ended December 31,2001
    
    2002(Unaudited)NT$
    
    NT$Net revenues
    
    $
    3,606,979
    
    
    $
    3,834,289Loss from operations
    
    $
    (2,221,609
    )
    
    $
    (854,184
    )Net loss
    
    $
    (1,876,740
    )
    
    $
    (650,607
    )Net loss per share-basic and diluted (in dollars)
    
    $
    (37.42
    )
    
    $
    (12.97
    )
 The unaudited pro forma financial information is not intended to represent
or to be indicative of the consolidated results of operations or financial
condition of the Company that would have been reported had the acquisitions
been completed as of the dates presented, and should not be taken as
representative of the future consolidated results of operations or financial
condition of the Company. F-14




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Note 4.     GOODWILL The changes in the carrying amount of goodwill for the years ended
December 31, 2002 and 2003 are as follows: 2002
    
    2003NT$
    
    NT$Balance as of January 1,
    
    $
    
    
    
    $
    25,389Acquisitions
    
    
    268,327
    
    
    
    Impairment
    
    
    (242,938
    )
    
    
    (25,389
    )Balance as of December 31,
    
    $
    25,389
    
    
    $
    
 The Company performed impairment tests of its goodwill and intangible
assets as of December 31, 2002 and 2003. Due to the general market downturn and
operating performance of the acquired business below the Companys
expectations, the Company recorded goodwill impairment loss of NT$242,938 and
NT$25,389 in 2002 and 2003, respectively. The amounts of losses were determined
based on an independent appraisers report. The fair value of the reporting
unit giving rise to the impairment loss was estimated using the expected
present value of future cash and income method. Note 5.     INTANGIBLE ASSETS  NET The following table summarizes the Companys intangible assets, net: December 31, 2002Gross carrying
    
    Accumulatedamount
    
    amortization
    
    NetNT$
    
    NT$
    
    NT$EMI-content, licenses and others
    
    $
    80,627
    
    
    $
    (80,627
    )
    
    $
    Brandnames
    
    $
    150,875
    
    
    $
    (5,029
    )
    
    $
    145,846Distribution channel
    
    
    106,851
    
    
    
    (10,685
    )
    
    
    96,166$
    257,726
    
    
    $
    (15,714
    )
    
    $
    242,012
 December 31, 2003Gross carrying
    
    Accumulatedamount
    
    amortization
    
    NetNT$
    
    NT$
    
    NT$Brandnames
    
    $
    150,875
    
    
    $
    (15,087
    )
    
    $
    135,788Distribution channel
    
    
    106,851
    
    
    
    (32,056
    )
    
    
    74,795$
    257,726
    
    
    $
    (47,143
    )
    
    $
    210,583
 a.     In November 1999, GigaMedia issued a warrant to Microsoft Corporation
(Microsoft) in connection with a share purchase and business cooperation
agreement. The warrant is exercisable for five years and initially entitled
Microsoft to purchase up to 10 million of GigaMedias shares at US$6.60 per
share. GigaMedia recorded the warrant in the amount of approximately NT$1,543
million, which was equal to the fair value of the warrant determined at the
issuance date, and classified it as stockholders equity. As of December 31,
2002, GigaMedia had recorded cumulatively NT$1,543 million as expenses related
to the warrant. As a result of a special distribution of US$2.00 per share by
GigaMedia in March 2002, the warrant provided that Microsoft had the right to
elect either (i) an adjustment to the terms of the warrant such that the
warrant thereafter would represent the right to acquire 33,529,412 shares at
US$1.97 per share, or (ii) a cash payment (an Anti-Dilution Fee) equal to
US$20,000,000 (the per share special distribution amount multiplied by the
number of shares originally covered by the warrant). Microsoft made no election
at the time of the special distribution. The fair value of the warrant at the
time of the special distribution, including the above-described election right,
was approximately NT$783 million, which was less than the book value of the
warrant. Accordingly, no adjustment was made to the book value of the warrant.
The following assumptions were used to perform the Black-Scholes model
calculation to determine the fair value of the warrant: fair value per common
share of US$0.67, expected volatility of 134.5%, dividend yield of 0, risk free
interest rate of 1.5% and an expected life of 2.6 years. Subsequent to the
special distribution, certain of the Companys major shareholders entered into
an agreement with the Company pursuant to which they agreed, severally and not
jointly, to indemnify the Company against obligation to Microsoft, if any,
resulting from the above-described special distribution and the anti-dilution
provision of the warrant. In March 2004, Microsoft notified GigaMedia that it
was purportedly electing to receive the Anti-Dilution Fee described above.
GigaMedia has informed Microsoft that the purported election F-15




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##### Table of Contents



was untimely and, therefore, ineffective. GigaMedia intends to vigorously
dispute Microsofts claim to such Anti-Dilution Fee. b.     In 2001, GigaMedia entered into a three-year agreement with EMI Music
Asia (EMI), a division of EMI Group Hong Kong Limited, to establish
GigaMusic.com Limited (GigaMusic), which is registered in the Cayman Islands.
The Company invested NT$239,990 in GigaMusic during 2001. The Company holds 95%
of the total shares; EMI holds 5% of the total shares in exchange for:  *
    
    EMI providing access to EMI management expertise and industry
know-how;*
    
    EMI providing content;*
    
    EMI granting licenses and rights (non-exclusive and
non-transferable) to GigaMusic.com to use EMIs licensed products and
artists, including streaming EMIs licensed samples, displaying EMIs
licensed materials, previews of newly released licensed recordings, and
promotional downloads of licensed recordings. The total value of the 5% shares granted to EMI amounted to NT$12,631 and
was recorded as an intangible asset. In addition to the 5% ownership of
GigaMusic, the Company paid EMI non-recoupable fees of US$1,000 thousand in
June 2001 and March 2002, respectively, which were recorded as other assets.
The Company was required to pay an additional payment of US$1,000 thousand in
March 2003 in accordance with the terms of the agreement. However, in March
2002, the Company sent a notice to EMI to terminate the agreement. The notice
also required EMI to return its ownership interest in GigaMusic and the
US$2,000 thousand paid in June 2001 and March 2002 by the Company. As of December 31, 2002, the Company performed an impairment test of the
EMI intangible asset as well as the US$2,000 thousand payments. Due to the fact
that EMI had not provided the agreed-upon products to GigaMusic, the site had
not been launched and no subscriber revenue had been generated from the
project, the fair value of the intangible asset and the US$2,000 thousand
payments was considered negligible. The Company therefore wrote down the
balance of these assets and recorded an impairment loss of NT$80,627 in the
current years operational results. On March 28, 2003, the Company obtained a preliminary injunction order
from Taipei District Court on the additional US$1,000 thousand scheduled for
payment to EMI. The Company commenced arbitration proceedings by submitting a
Notice of Arbitration to the Singapore International Arbitration Center (the
SIAC) to resolve the disputes in connection with the strategic agreement
entered into by the Company, GigaMusic.com, and EMI. On December 31, 2003, the Company, GigaMusic and EMI signed a Final
Settlement Agreement and Release (the Settlement Agreement) to resolve and
settle all disputes relating to this litigation. Under the Settlement
Agreement, the Company agreed to pay EMI the sum of US$400 thousand, and EMI
agreed to return to the Company 5% ownership in GigaMusic and a letter of
credit issued to EMI in accordance with the previous agreement. The parties
agreed to finally and forever settle and release each other from any and all
claims arising out of or in connection with this matter. The Settlement
Agreement became effective on February 25, 2004 pursuant to a resolution
approved in the Companys board of directors meeting. The consideration of US$400 thousand paid to EMI consisted of two
components:  (i)
    
    The payment for obtaining 5% ownership in GigaMusic, which was
NT$8,000 based on the fair value of GigaMusics net assets as of
December 31, 2003; and(ii)
    
    The payment to EMI to return the letter of credit, which payment
was estimated to be NT$5,680 and was expensed in 2003. c.     As a result of the acquisition transactions mentioned in Note 3,
intangible assets, including brandnames and distribution channel, amounting to
NT$257,726 were recorded by the Company. As of December 31, 2002 and 2003, the
Company performed an impairment test based on an independent appraisal report
and considered that the carrying amount of the intangible assets approximate
their fair value. Accordingly, no impairment loss was recorded in 2002 and
2003. The intangible assets are both amortizable and have original estimated
useful lives as follows: brandnames-15 years; distribution channel-five years.
For the years ended December 31, 2002 and 2003, the total amortization expenses
were NT$15,714 and NT$31,428, respectively. As of December 31, F-16




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##### Table of Contents



2003, based on the current amount of intangibles subject to amortization,
the estimated amortization expense for each of the succeeding five years is as
follows: For the year ending December 31,
    
    Amount2004
    
    $
    31,4282005
    
    
    31,4282006
    
    
    31,4282007
    
    
    20,7432008
    
    
    10,058$
    125,085
 Note 6.     IMPAIRMENT LOSS ON PROPERTY, PLANT AND EQUIPMENT Due to rapid technological development in broadband Internet access
services and the Companys related decision to phase out one-way Internet
access services, the Company expects certain broadband and communication
equipment to be disposed of within one year from the balance sheet date.
Accordingly, the Company compared the carrying amount of one-way broadband
equipment with undiscounted future net cash flows expected to be generated by
these assets over their remaining life and deemed that this equipment was
unrecoverable and impaired. Therefore, for the year ended December 31, 2003,
the Company recorded a charge of NT$53,567 related to the impairment, measured
as the amount by which the carrying value exceeded the fair value of this
equipment based on quoted market prices in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Note 7.     CASH AND CASH EQUIVALENTS December 31,2002
    
    2003NT$
    
    NT$Petty cash
    
    $
    11,714
    
    
    $
    14,498Checking and savings accounts
    
    
    283,859
    
    
    
    194,563Time deposits
    
    
    945,584
    
    
    
    989,873Total
    
    $
    1,241,157
    
    
    $
    1,198,934
 Note 8.     SHORT-TERM INVESTMENTS December 31,2002
    
    2003NT$
    
    NT$Available-for-sale securities:Debt securities due within one year
    
    $
    69,500
    
    
    $
    Open-end funds
    
    
    785,773
    
    
    
    983,645Total
    
    $
    855,273
    
    
    $
    983,645
 Short-term investments are classified as available-for-sale securities. As
of December 31, 2002 and 2003, the balances of unrealized gains for
available-for-sale securities were NT$1,214 and NT$0, respectively. During
2001, 2002 and 2003, realized gains from disposal of short-term investments
amounted to NT$201,826, NT$62,787 and NT$16,787, respectively. F-17




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Note 9.     NOTES AND ACCOUNTS RECEIVABLE, NET December 31,2002
    
    2003NT$
    
    NT$Notes and accounts receivable
    
    $
    181,659
    
    
    $
    197,855Less: Allowance for doubtful accounts
    
    
    (54,056
    )
    
    
    (58,805
    )Net
    
    $
    127,603
    
    
    $
    139,050
 For the years ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$Allowance for doubtful accountsBalance at beginning of year
    
    $
    2,578
    
    
    $
    26,728
    
    
    $
    54,056Additions: Bad debt expenses
    
    
    40,250
    
    
    
    32,167
    
    
    
    5,362Less: Write-off
    
    
    (16,100
    )
    
    
    (4,839
    )
    
    
    (613
    )Balance at end of year
    
    $
    26,728
    
    
    $
    54,056
    
    
    $
    58,805
 Note 10.     INVENTORIES-NET December 31,2002
    
    2003NT$
    
    NT$Cable modems
    
    $
    69,795
    
    
    $
    53,745Merchandise
    
    
    335,402
    
    
    
    180,088Subtotal
    
    
    405,197
    
    
    
    233,833Less: Allowance for inventory
market value decline and
obsolescence
    
    
    (44,981
    )
    
    
    (70,648
    )Net
    
    $
    360,216
    
    
    $
    163,185
 For the years ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$Allowance for inventory market
value decline and obsolescence
Balance at beginning of year
    
    $
    3,482
    
    
    $
    22,806
    
    
    $
    44,981Additions: Charges for
inventory market value decline
and obsolete items
    
    
    19,324
    
    
    
    22,175
    
    
    
    109,030Reductions: Written off
allowance for inventory market
value decline and obsolescence
    
    
    
    
    
    
    
    
    
    
    (83,363
    )Balance at end of year
    
    $
    22,806
    
    
    $
    44,981
    
    
    $
    70,648
 Charges for inventory market value decline and obsolete items are a component
of operating costs. Note 11.     LONG-TERM INVESTMENTS December 31,2002
    
    2003Percentage
    
    
    
    
    
    PercentageNT$
    
    Of held(%)
    
    NT$
    
    Of held(%)Debt securities:Societe Generale Bond Fund
(SG Bond Fund)
    
    $
    370,365
    
    
    
    
    
    
    $
    381,042
    
    
    
    Equity Securities:Gamania Digital Entertainment Co.,
Ltd. (Gamania)
    
    
    212,203
    
    
    
    3.25
    %
    
    
    137,340
    
    
    
    3.09
    %Rock Internet Corporation (RIC)
    
    
    58,520
    
    
    
    4.35
    %
    
    
    
    
    
    
    4.35
    %Sub-total
    
    
    270,723
    
    
    
    
    
    
    
    137,340Total
    
    $
    641,088
    
    
    
    
    
    
    $
    518,382
 In 2001, the Company purchased SG Bond Fund for NT$333,700. These debt
securities are classified as long-term available-for-sale investments as
management does not intend to sell these securities for use in current
operations. Accordingly, the Company revalued these debt securities at fair
market value at the balance sheet date and recognized the unrealized gains as
accumulated other comprehensive income. As of December 31, F-18




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##### Table of Contents



2002 and 2003, the balances of unrealized gains on these investments were
NT$36,665 and NT$47,341, respectively. In 2001, the Company invested NT$369,280 in Gamania, which accounted for
9.92% ownership of Gamania. During 2002 and 2003, the Company received stock
dividends of 1,319 thousand shares and 1,397 thousand shares, respectively.
During 2002, the Company disposed of 3,457 thousand shares of Gamania at an
average selling price of approximately NT$77.43 per share and recognized a
disposal gain of NT$51,347 in 2002. The Company has no ability to exercise
significant influence over Gamanias operating and financial policies. These
equity securities are classified as long-term available-for-sale investments as
management does not intend to sell these securities for use in current
operations. Accordingly, the Company revalued these equity securities at fair
market value at the balance sheet date and recognized the unrealized gain as
accumulated other comprehensive income. Following the initial public offering
of Gamania in Taiwan in 2002, the Company adopted Gamanias quoted market price
as of December 31, 2002 and 2003 to determine the fair value of this investee.
As of December 31, 2002 and 2003, the balance of unrealized gain (loss) were
NT$59,245 and (NT$15,618), respectively; all unrealized losses were less than
12 months. On April 30, 2001, the board of directors of Dynamix Media Technologies
Inc. (Dynamix), an affiliated investment of the Company, held a meeting and
resolved to dissolve Dynamix as of June 30, 2001. Therefore, during 2001, the
Company wrote off the value of its investment in the amount of NT$20,344. In
addition, at April 30, 2001, the Company had uncollected receivables from
Dynamix in the amount of NT$16,100, which were also written off in 2001. The Companys equity in net losses of its partially-owned equity
affiliates in 2001, 2002 and 2003 was NT$27,837, NT$0 and NT$0, respectively. In 2001, the Company invested NT$98,520 in Rock Internet Corporation
(RIC), a private company engaged in providing online music services. The
Company has no ability to exercise significant influence over RICs operating
and financial policies. During the year ended December 31, 2002, due to a
downturn in the Internet industry and the fact that the investee had incurred
significant losses since incorporation, management concluded that the
impairment loss the Company had suffered was other-than-temporary. Accordingly,
as of December 31, 2002, the Company wrote down the investment to its fair
value, which was approximately its net worth since (1) the investee is a
private Company and hence there is no quoted market value to determine its fair
value; and (2) based on managements evaluation, as of December 31, 2002, the
carrying value of the assets and liabilities of the investee Company
approximate its fair value. During 2003, the investees operations continued to
deteriorate and hence management wrote off the remaining balance of the
investment to NT$0. As a result, the impairment loss of NT$40,000 and NT$58,520
were recognized in 2002 and 2003, respectively, in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. Note 12.     DEFERRED ASSETS December 31,2002
    
    2003NT$
    
    NT$Cable modems
    
    $
    5
    
    
    $
    Software, royalty and license fees
    
    
    51,652
    
    
    
    24,603Network development cost
    
    
    23,819
    
    
    
    13,402Other
    
    
    4,117
    
    
    
    2,831Total
    
    $
    79,593
    
    
    $
    40,836
 Deferred assets are stated at cost and amortized on a straight-line basis
over the following period: software, royalty and license fees-one to three
years; network development cost-five years. Network development cost is
comprised of costs to set up the leased network. F-19




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##### Table of Contents



Note 13.     RESTRICTED CASH Restricted cash recorded in current assets as of December 31, 2002 and 2003
consist of the following: December 31,2002
    
    2003NT$
    
    NT$Restricted cash-current assetsTime deposit pledged to ABN AMRO for standby
letter of credit maturing on January 30, 2004
    
    $
    
    
    
    $
    34,809Time deposit pledged to ABN AMRO for standby
letter of credit maturing on April 1, 2003
    
    
    34,891
    
    
    
    Time deposit pledged to Hua Nan Commercial,
China Trust Commercial and Ta Chong Bank as a
guarantor for inventory purchases
    
    
    28,000
    
    
    
    30,000Time deposit pledged to Fubon Commercial Bank for
short-term loans
    
    
    37,523
    
    
    
    Time deposit pledged to Hua Nan Commercial Bank
for refundable deposit maturing on January 28, 2004
    
    
    
    
    
    
    600Total
    
    $
    100,414
    
    
    $
    65,409
 According to the agreement mentioned in Note 5, the Company paid EMI two
one-time, non-recoupable initiation fees of US$1,000 thousand on June 30, 2001
and March 1, 2002, respectively. The Company was required to pay an additional
payment of US$1,000 thousand in March 2003 in accordance with the terms of the
agreement. Therefore, the Company provided one unconditional and irrevocable
standby letter of credit issued by ABN AMRO BANK in the amount of US$1,000
thousand in favor of EMI. The standby letter of credit was guaranteed by one
certificate of deposit maturing on January 30, 2004. Note 14.     SHORT-TERM LOANS December 31,Nature
    
    Pledged assets
    
    2002
    
    2003NT$
    
    NT$Secured loans
    
    Time deposits (see Note 12)
    
    $
    93,000
    
    
    $Interest rate
    
    
    
    
    6.25
    %
    
    
 Note 15.     PENSION BENEFITS As all of the Companys employees are located in Taiwan, the Company has
enacted provisions for employees retirement in accordance with the Labor
Standards Law of the Republic of China. The provisions state that employees are
entitled to two base points for every year of service for the first 15 years
and one base point for every additional year of service, up to a maximum of 45
base points. The pension obligation to employee is computed based on years of
service and average salary or wages for the six months prior to approved
retirement. The following table sets forth the actuarial assumptions of the Companys
defined benefit pension plan: 2001
    
    2002
    
    2003Discount rate (weighted averages)
    
    
    4.25
    %
    
    
    4.00
    %
    
    
    3.50
    %Expected return on plan assets
(weighted averages)
    
    
    4.00
    %
    
    
    3.25
    %
    
    NARate of compensation increase
(weighted averages)
    
    
    4.50
    %
    
    
    3.38
    %
    
    
    2.67
    %
 The following provides a reconciliation of projected benefit obligations
and funded status of the plan and the components of net periodic benefit cost
recognized. 2002
    
    2003NT$
    
    NT$Vested benefit obligation
    
    $
    
    
    
    $
    Accumulated benefit obligation
    
    $
    14,346
    
    
    $
    21,537
 F-20




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##### Table of Contents



2002
    
    2003NT$
    
    NT$Projected benefit obligation at January 1,
    
    $
    11,079
    
    
    $
    30,062Service cost
    
    
    6,834
    
    
    
    7,503Interest cost
    
    
    665
    
    
    
    1,202Benefit obligation arising from the acquisitions
    
    
    15,445
    
    
    
    Actuarial gain on projected benefit obligation
    
    
    (3,961
    )
    
    
    (1,229
    )Projected benefit obligation at December 31,
    
    $
    30,062
    
    
    $
    37,538
 December 31,2002
    
    2003NT$
    
    NT$Fair value of plan assets
    
    $
    
    
    
    $
    Projected benefit obligation
    
    
    (30,062
    )
    
    
    (37,538
    )Funded status
    
    
    (30,062
    )
    
    
    (37,538
    )Unrecognized transition obligations
    
    
    2,231
    
    
    
    4,985Unrecognized prior service cost
    
    
    12,900
    
    
    
    11,967Unrecognized loss (gain)
    
    
    (2,356
    )
    
    
    (6,136
    )Additional liability
    
    
    (7,760
    )
    
    
    (6,974
    )Accrued pension liabilities
    
    $
    (25,047
    )
    
    $
    (33,696
    )
 Net periodic pension cost includes the following components: For the years ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$Service cost
    
    $
    5,191
    
    
    $
    6,834
    
    
    $
    7,503Interest cost
    
    
    383
    
    
    
    665
    
    
    
    1,202Amortization of unrecognized net transition obligation
    
    
    270
    
    
    
    160
    
    
    
    159Amortization of unrecognized prior service cost
    
    
    
    
    
    
    156
    
    
    
    933Amortization of unrecognized pension loss (gain)
    
    
    
    
    
    
    77
    
    
    
    (362
    )Net periodic pension cost
    
    $
    5,844
    
    
    $
    7,892
    
    
    $
    9,435
 As of December 31, 2003, the Company has not set up a pension fund and,
therefore, no asset allocation disclosure was required. In addition, the
Company does not expect to make any contributions in 2004. The benefits
expected to be paid from 2004 through 2008 is NT$0, and in aggregate for 2009
and thereafter is NT$2,219. Note 16.     SHAREHOLDERS EQUITY AND SHARE OPTIONS As of December 31, 2003, the authorized capital of the Company was
NT$800,000, represented by 80,000 thousand common shares with par value of
NT$10 per share. As of December 31, 2003, there were 50,154 thousand common
shares issued and outstanding. On January 17, 2002, the Companys shareholders approved a return of
capital in the amount of US$2 for each ordinary share outstanding on March 15,
2002. On March 29, 2002, the Company returned capital to the shareholders in an
amount of US$100,308 thousand, or the equivalent of NT$3,521,814 based on the
exchange rate at the transaction date. During 1999, the Company adopted the 1999 Employee Share Option Plan (the
Plan). Pursuant to the Plan, up to 2 million common shares may be granted to
employees of the Company. The Plan is administered by a committee designated by
the board of directors. The committee as plan administrator has complete
discretion to determine the exercise price for the option grants, to determine
which eligible individuals are to receive option grants, the time or times when
options grants are to be made, the number of shares subject to grant and the
maximum term for which any granted option is exercisable. During 2000, options
to purchase 1,111 thousand shares of the Companys common stock were granted at
an exercise price of US$24.3, a 10% discount to the initial public offering
price (US$27), and options to purchase 837 thousand shares of the Companys F-21




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##### Table of Contents



common stock were granted at an exercise price of US$15 (fair value at the
date of grant). During 2001, there were 1,475 thousand shares of options, which
were granted in 2000, cancelled or forfeited by employees. Total compensation expense recorded in 2001, 2002 and 2003 for all options
amounted to NT$130,827, NT$5,281 and NT$0, respectively, which consists of
amortization of options outstanding during the respective years, net of
forfeitures. Unearned compensation for outstanding options as of December 31,
2002 and 2003 amounted to NT$0 and NT$0, respectively. There were no options
granted in 2002 or 2003. Pro forma information regarding net income and earnings per share is
required by FASB No. 123, Accounting for Stock-Based Compensation, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method required by that statement. The fair value for these options was estimated at the date of grant using
the Black-Scholes option-pricing model based on the risk-free interest rate of
5.06% to 6.2%, assuming no dividends and an option life of five years.
Volatility of the stock in a range of 41.34 to 58.77 has been reflected in the
option pricing calculation. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, this option valuation model requires
the input of highly subjective assumptions including the expected stock price
volatility. For the purposes of SFAS No.123s fair value method for pro forma
disclosures, the estimated fair value of the option is amortized to expense
over the option-vesting period. The Companys pro forma information is as
follows: For the years ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$Net lossAs reported
    
    $
    (1,811,324
    )
    
    $
    (637,990
    )
    
    $
    (484,857
    )Pro forma
    
    $
    (2,563,181
    )
    
    $
    (637,990
    )
    
    $
    (484,857
    )Loss per shareAs reported
    
    $
    (36.12
    )
    
    $
    (12.72
    )
    
    $
    (9.67
    )Pro forma
    
    $
    (51.11
    )
    
    $
    (12.72
    )
    
    $
    (9.67
    )
 The status of the Companys stock option plan is summarized below. Option outstandingAvailable
    
    Number of
    
    Weighted averagefor grant
    
    shares
    
    exercise price(in thousands)
    
    US$Outstanding at December 31, 2000
    
    
    52
    
    
    
    4,642
    
    
    
    8.52Cancelled
    
    
    1,457
    
    
    
    (1,457
    )
    
    
    19.31Forfeited
    
    
    18
    
    
    
    (18
    )
    
    
    20.31Outstanding at December 31, 2001
    
    
    1,527
    
    
    
    3,167
    
    
    
    3.54Expired
    
    
    
    
    
    
    (2,694
    )
    
    
    Outstanding at December 31, 2002
and 2003
    
    
    1,527
    
    
    
    473
    
    
    
    23.50
 There was no option granted in 2000 expired or forfeited in year 2003. F-22




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##### Table of Contents



The following table sets forth information about stock options outstanding
at December 31, 2003: Number of
    
    
    
    
    
    
    
    
    
    Number ofoutstanding
    
    Weighted
    
    
    
    
    
    exercisableshares as of
    
    average
    
    Weighted
    
    share as ofDecember 31,
    
    remaining
    
    average
    
    December 31,Range of exercise price
    
    2003
    
    contractual life
    
    exercise price
    
    2003US$15.0
    
    
    40,930
    
    
    1.09 years
    
    US$
    15.0
    
    
    
    40,930US$24.3
    
    
    432,100
    
    
    1.09 years
    
    US$
    24.3
    
    
    
    432,100473,030
    
    
    
    
    
    
    
    
    
    
    
    473,030
 Note 17.     INCOME TAXES The (benefit) expense for income taxes consists of the following: 2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$Income tax benefit computed at the
ROC statutory rate
    
    $
    (210,914
    )
    
    $
    (149,068
    )
    
    $
    (51,369
    )Non-deductible items
    
    
    20,829
    
    
    
    26,707
    
    
    
    14,271Benefit from operating losses not
recorded
    
    
    189,692
    
    
    
    117,978
    
    
    
    41,977Total (benefit) expense for income
taxes
    
    $
    (393
    )
    
    $
    (4,383
    )
    
    $
    4,879
 Significant components of the Companys deferred tax assets and
liabilities consist of the following: December 31,2002
    
    2003NT$
    
    NT$Deferred tax assets:Organization costs
    
    $
    1,859
    
    
    $
    27Net operating loss carryforwards
    
    
    651,854
    
    
    
    631,611Unrealized foreign exchange (gain) loss
    
    
    (2,807
    )
    
    
    3,141Allowance for inventory market value decline
and obsolete items
    
    
    11,245
    
    
    
    67,211Allowance for doubtful accounts
    
    
    12,723
    
    
    
    13,650Pension expense
    
    
    3,867
    
    
    
    4,321Investment credits
    
    
    4,154
    
    
    
    4,154Sub-total
    
    
    682,895
    
    
    
    724,115Less: valuation allowance
    
    
    (678,119
    )
    
    
    (724,115
    )Deferred tax assets  net
    
    $
    4,776
    
    
    $
    
 For the years ended December 31,2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$Valuation allowance:Balance at beginning of year
    
    $
    259,713
    
    
    $
    491,631
    
    
    $
    678,119Additions: charged to valuation
allowance
    
    
    231,918
    
    
    
    186,488
    
    
    
    45,996Balance at end of year
    
    $
    491,631
    
    
    $
    678,119
    
    
    $
    724,115
 Due to a history of losses, the Company does not believe that sufficient
objective, positive evidence currently exists to conclude that realization of
deferred tax assets is more likely than not. As a result, the Company has
provided a valuation allowance covering substantially all of the deferred tax
assets. As of December 31, 2002, the balance of deferred tax assets was
NT$4,776, which was related to one of the Companys subsidiaries. The Company
recorded the deferred tax assets as other current assets in the balance sheet. F-23




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##### Table of Contents



As at December 31, 2003, the Company has net operating loss carryforwards
of approximately NT$2,526,445. Currently, the net operating loss can be carried
forward for five years. The expiring years are as follows: AmountOccurred year
    
    NT$
    
    Expiring year1999
    
    $
    241,858
    
    
    
    20042000
    
    
    783,886
    
    
    
    20052001
    
    
    960,297
    
    
    
    20062002
    
    
    334,927
    
    
    
    20072003
    
    
    205,477
    
    
    
    2008Total
    
    $
    2,526,445
 Note 18.     RELATED PARTY TRANSACTIONS A.     Related Parties and Relationships Names of related partiesTeleFirst Cable Communication Co., Ltd. (TeleFirst)Everlasting CATV Inc. (Everlasting)Wonderful CATV Co., Ltd. (Wonderful)SunCrown CATV Co., Ltd. (SunCrown)Prosperity CATV Co., Ltd.GaHo Cable Co., Ltd.Twin Stars CATV Co., Ltd.Liguan CATV Co., Ltd.New Visual Wave Cable Communications (New Visual Wave)GangDu CATV Co., Ltd. (GangDu)Ching Lian Incorporated (Ching Lian)China Trust Commercial BankChailease Finance Co., Ltd. (Chailease)China Life Insurance Co., Ltd.China Securities Co., Ltd.Gamania Digital Entertainment Co., Ltd.Dynamix Media Technologies, Inc. (Dynamix)KGEx.ComChina Network Systems Co., Ltd. (China Network System)Taiwan Fuji Xerox Co., Ltd.Raymond ChangShu-Yun Huang
 The Company is a member of the Koos Group, a major conglomerate in Taiwan.
In the normal course of business, the Company conducted certain transactions
with the following companies and individuals affiliated with the Koos Group and
individuals: B.     Transactions with Related Parties a.     Sales to related parties: For the years ended December 31,Related Parties
    
    2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$Dynamix
    
    $
    7,190
    
    
    $
    
    
    
    $
    China Trust Commercial Bank
    
    
    7,114
    
    
    
    10,156
    
    
    
    10,195China Securities Co., Ltd.
    
    
    960
    
    
    
    6,881
    
    
    
    11,110KGEx.com
    
    
    
    
    
    
    3,248
    
    
    
    Others
    
    
    2,966
    
    
    
    4,787
    
    
    
    2,838Total
    
    $
    18,230
    
    
    $
    25,072
    
    
    $
    24,143
 F-24




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##### Table of Contents



b.     As part of revenue sharing arrangements with circuit partners, payments to
related parties for installation and access services are summarized as follows: For the years ended December 31,Related Parties
    
    2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$Everlasting
    
    $
    2,198
    
    
    $
    5,928
    
    
    $
    7,817Wonderful
    
    
    2,661
    
    
    
    4,060
    
    
    
    5,308GangDu
    
    
    3,333
    
    
    
    3,933
    
    
    
    3,913ChingLain
    
    
    2,683
    
    
    
    2,976
    
    
    
    3,419TeleFirst
    
    
    2,578
    
    
    
    4,178
    
    
    
    5,985KGEx.Com
    
    
    15,135
    
    
    
    29,034
    
    
    
    34,569Others
    
    
    9,819
    
    
    
    12,213
    
    
    
    19,321Total
    
    $
    38,407
    
    
    $
    62,322
    
    
    $
    80,332
 Access and installation revenue was recorded net of these payments. c.     Purchases of property, plant and equipment from a related party are
summarized as follows: For the years ended December 31,Related Parties
    
    2001
    
    2002
    
    2003NT$
    
    NT$
    
    NT$China Network Systems
    
    $
    4,314
    
    
    $
    
    
    
    $
    
 d.     The Company incurred sales commission expenses of NT$39,048, NT$2,493 and
NT$1,962 for the years ended December 31, 2001, 2002 and 2003, respectively,
with its cable partners. e.     The Company incurred expenses of NT$2,078, NT$4,354 and NT$3,470 for the
years ended December 31, 2001, 2002 and 2003, respectively, for consulting
services provided by China Network System. f.     Receivables (non interest-bearing) from related parties resulting from the
above transactions are summarized as follows: December 31,Related Parties
    
    2002
    
    2003NT$
    
    NT$China Trust Commercial Bank
    
    $
    1,753
    
    
    $
    1,775Others
    
    
    3,952
    
    
    
    6,066Total
    
    $
    5,705
    
    
    $
    7,841
 g.     Payables (non interest-bearing) to related parties resulting from the above
transactions are summarized as follows: December 31,Related Parties
    
    2002
    
    2003NT$
    
    NT$KGEx.COM
    
    $
    5,536
    
    
    $
    8,788Everlasting
    
    
    2,547
    
    
    
    1,187GangDu
    
    
    337
    
    
    
    345SunCrown
    
    
    478
    
    
    
    739Others
    
    
    11,613
    
    
    
    2,774Total
    
    $
    20,511
    
    
    $
    13,833
 h.     As of December 31, 2002 and 2003, receivables due from the Companys former
CEO, Mr. Raymond Chang, in the amount of NT$18,534 and NT$12,650, respectively,
was derived from a two-year loan agreement, bearing interest as 4.45% per
annum, signed between Mr. Chang and the Company on May 1, 2001. When the loan
was due in May 2003, the Company requested Mr. Raymond Chang to duly repay the
loan. On June 2, 2003, The Company and Mr. Raymond Chang agreed on a payment
schedule. The loan was fully repaid on June 15, 2004. i.     As of December 31, 2002, the Companys indirectly-owned subsidiary, Tachung
Records, had receivables of NT$88,000 from its former shareholders and the
receivables were recorded as other current assets in the balance sheet. An
executive officer of the Companys subsidiary, Shu-Yun Huang, was one of the
debtors and, F-25




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in accordance with the acquisition agreements with these former shareholders,
Shu-Yun Huang was required to be responsible for collecting the receivables as
of December 31, 2002. These receivables were fully collected subsequent to
December 31, 2002. j.     The Company leases its office premises from China Life Insurance Co., Ltd.
under an operating lease that expires in 2005. The Company incurred rental
expenses of NT$47,567, NT$12,910 and NT$12,800 with China Life Insurance Co.,
Ltd. for the years ended December 31, 2001 and 2002 and 2003, respectively. k.     Total bank deposits with a related party are summarized as follows: December 31,Related Parties
    
    2002
    
    2003NT$
    
    NT$China Trust Commercial Bank-Total
    
    $
    683,746
    
    
    $
    469,772
 Note 19.     FINANCIAL INSTRUMENTS The carrying amount of the Companys cash and cash equivalents
approximates their fair value because of the short maturity of these
instruments. The carrying value of receivables and payables approximates their
market values based on their short-term maturities. The carrying value of the
Companys available-for-sale investments approximates market values based on
the quoted market price or fair value of the securities at year-end. No cash
dividends were received during the three-year period ended December 31, 2003. Note 20.     COMMITMENTS AND CONTINGENCIES (a)     Operating Leases Future minimum payments under operating leases, including those with a
related party as disclosed in Note 18, for the Companys office premises
consisted of the following as of December 31, 2003: year
    
    NT$2004
    
    $
    197,2542005
    
    
    115,1212006
    
    
    65,6282007
    
    
    44,0932008 and after
    
    
    8,077
 Rental expense for the above operating leases amounted to NT$78,411,
NT$175,715 and NT$250,120 for the years ended December 31, 2001, 2002 and 2003,
respectively. (b)     Contingencies In December 2001, a class action lawsuit was filed in the United States
District Court for the Southern District of New York against the Company in
connection with the initial public offering of its stock. There are 309 issuers
who are defendants in this class action. The complaint alleged that the Company violated Sections 11 and Section 15
of the Securities Exchange Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On February 19,
2003, the court issued an Opinion and Order on the Companys motions to dismiss
the Rule 10b-5 claims without prejudice while the Section 11 claims survived
the motion. On June 26, 2003, the plaintiffs executive committee proposed a
settlement between plaintiffs and issuer defendants, including GigaMedias
officer and director defendants. A memorandum of understanding of proposed
settlement has been approved to form of counsel for the issuers and the process
of obtaining individual approval from each of 309 issuer defendants is
underway. The proposed settlement is subject to approval by the district court.
However, the proposed settlement does not resolve plaintiffs claims against
the underwriter defendants. F-26




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The principal components of the proposed settlement include (i) a release
of all of plaintiffs claims against the issuer defendants and their officers
and directors which have, or could have, been asserted in this litigation
arising out of the conduct alleged in the amended complaints to be wrongful,
(ii) the assignment by the issuers to the plaintiffs of certain potential
claims against the underwriter defendants and the agreement by the issuers not
to assert certain claims against the underwriter defendants, and (iii) an
undertaking by the insurers of the issuer defendants to pay to plaintiffs the
difference (the Recovery Deficit) between $1 billion and any lesser amount
recovered from the underwriter defendants in this litigation. If recoveries in
excess of $1 billion are obtained by plaintiffs from the underwriters, the
insurers of the settling issuer defendants will owe no money to the plaintiffs.
The plaintiffs and issuer defendants are currently negotiating the final
settlement agreement. Once the settlement agreement is agreed-upon, it must be
approved by the district court. Neither the Company nor the Companys defendant attorney is able to assess
the likelihood of an unfavorable outcome and can determine as to the amount or
range of potential loss, if any. The Company has entered into an insurance
policy with American Insurance Group with US$10 million of liability coverage
in which the Company is required to pay US$500,000 deductible. Accordingly, the
Company has recorded a provision of US$500,000, representing the Companys
deductible amount, related to these claims. The Company believes that the
insurance coverage is sufficient to cover the liability arising from the
settlement and claim. Note 21.     CONCENTRATION OF RISKS Concentration of Credit Risk The Companys online business provides Internet access and online content
services over the Internet to customers located in various cities in Taiwan.
The Company requires a security deposit from those customers who lease cable
modems for potential damages to the cable modem as well as uncollected monthly
charges at termination, but generally does not perform credit evaluations of
its customers. The Companys offline business requires cash or credit card payments at
the point of sale. Accordingly, the Companys exposure to credit risk of its
offline business is considered remote. None of the Companys customers accounted for over 10% of net operating
revenues in 2003, 2002, and 2001 or the balance of notes receivable and
accounts receivable as of December 31, 2003 and 2002. Cash Risk The Company maintains cash, cash equivalents and short-term and long-term
investments with various financial institutions, a majority of which are
located in Taiwan. The Companys policy is designed to limit exposure to any
one institution. The Company performs periodic evaluations of the relative
credit standing of those financial institutions that are considered in the
Companys investment strategy. The Company has not sustained material credit
losses from instruments held in financial institutions. Concentration of Exchange Rate Risk The exchange rate risk of the Companys online business is mainly derived
from purchases of cable modems from internationally reputable vendors with US
dollar-denominated pricing and payments for professional fees and commission
expenses denominated in US dollars. Fluctuations in exchange rates between the
US dollar and the NT dollar will subject the Company to exchange rate risk. The Companys offline business purchases inventories from vendors in
Taiwan. The purchases are denominated in NT dollars. Hence, the Company does
not have exposure to exchange rate risk for offline business. All of the Companys operations are located in Taiwan and all of its sales
are denominated in NT dollars. Accordingly, the Company does not have exposure
to exchange rate risk from its sales transactions. F-27




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Note 22.     SEGMENT INFORMATION Segment data Prior to 2002, the Company managed its business and measured results based
on a single Internet-related service industry segment. Due to the acquisitions
of Rose Records and Tachung Records in 2002, the Company has two reportable
segments: an online broadband ISP business segment and an offline music
distribution business segment. The online broadband ISP business segment mainly
derives its revenues from Internet-related services, including (1) Internet
access, (2) sales, rental and installation of cable modems, (3) Web
development, and (4) advertising and others. Offline music distribution
business segment mainly derived its revenues from the sales of compact disc,
video compact disc, digital versatile disc, audio and videocassettes, and
related accessories from its directly-owned stores in Taiwan. The Companys management relies on an internal management reporting
process that provides revenue and segment information for making financial
decisions and allocating resources. The results are based on the Companys
method of internal reporting and are not necessarily in conformity with
accounting principles generally accepted in the United States of America.
Management measures the performance of each segment based on several metrics,
including income or loss from operations. Financial information for each reportable segment was as follows as of and
for the years ended December 31, 2002 and 2003: Online Segment
    
    Offline Segment
    
    TotalNT$
    
    NT$
    
    NT$2002:Segment profit or loss:Net revenue from external customers
    
    $
    665,656
    
    
    $
    1,890,153
    
    
    $
    2,555,809Loss from operations
    
    $
    (455,595
    )
    
    $
    (340,839
    )
    
    $
    (796,434
    )Interest income
    
    $
    17,940
    
    
    $
    3,894
    
    
    $
    21,834Interest expenses
    
    $
    
    
    
    $
    (1,392
    )
    
    $
    (1,392
    )Depreciation
    
    $
    (166,373
    )
    
    $
    (29,973
    )
    
    $
    (196,346
    )Amortization, including intangible
assets
    
    $
    (75,994
    )
    
    $
    (21,465
    )
    
    $
    (97,459
    )Income tax benefit
    
    $
    4,383
    
    
    $
    
    
    
    $
    4,383Impairment loss on goodwill and
intangible assets
    
    $
    (80,627
    )
    
    $
    (242,938
    )
    
    $
    (323,565
    )Segment assets:Additions to property, plant and
equipment, net
    
    $
    89,060
    
    
    $
    215,681
    
    
    $
    304,741Additions to intangible assets
    
    $
    35,110
    
    
    $
    257,726
    
    
    $
    292,836Additions to goodwill
    
    $
    
    
    
    $
    268,327
    
    
    $
    268,327Total assets
    
    $
    2,508,511
    
    
    $
    1,201,854
    
    
    $
    3,710,365
 Online Segment
    
    Offline Segment
    
    TotalNT$
    
    NT$
    
    NT$2003:Segment profit or loss:Net revenue from external customers
    
    $
    671,253
    
    
    $
    2,608,869
    
    
    $
    3,280,123Loss from operations
    
    $
    (188,850
    )
    
    $
    (243,522
    )
    
    $
    (432,372
    )Interest income
    
    $
    7,799
    
    
    $
    2,464
    
    
    $
    10,263Interest expenses
    
    $
    
    
    
    $
    (1,247
    )
    
    
    1,248Depreciation
    
    $
    (159,391
    )
    
    $
    (20,878
    )
    
    $
    (180,269
    )Amortization, including intangible
assets
    
    $
    (43,112
    )
    
    $
    (33,567
    )
    
    $
    (76,679
    )Income tax expenses
    
    $
    4,776
    
    
    $
    103
    
    
    $
    4,879Impairment loss on property, plant and
equipment
    
    $
    53,567
    
    
    $
    
    
    
    $
    53,567
 F-28




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Online Segment
    
    Offline Segment
    
    TotalNT$
    
    NT$
    
    NT$Impairment loss on goodwill
    
    $
    
    
    
    $
    25,389
    
    
    $
    25,389Segment assets:Additions to property, plant and
equipment, net
    
    $
    58,564
    
    
    $
    7,251
    
    
    $
    65,815Total assets
    
    $
    2,393,223
    
    
    $
    862,695
    
    
    $
    3,255,918
 The reconciliation of segment information to GigaMedia consolidated totals
were as follows for the years ended December 31, 2002 and 2003: 2002
    
    2003NT$
    
    NT$Loss from operations:Total segments
    
    $
    (796,434
    )
    
    $
    (432,372
    )Corporate and unallocated costs and expenses
    
    
    (28,315
    )
    
    
    (55,108
    )Total GigaMedia consolidated
    
    $
    (824,749
    )
    
    $
    (487,480
    )Interest income:Total segments
    
    $
    21,834
    
    
    $
    10,263Corporate and unallocated interest income
    
    
    13,071
    
    
    
    4,151Total GigaMedia consolidated
    
    $
    34,905
    
    
    $
    14,414Total assets:Total segments
    
    $
    3,710,365
    
    
    $
    3,255,918Corporate and unallocated total assets
    
    
    985,673
    
    
    
    813,424Total GigaMedia consolidated
    
    $
    4,696,038
    
    
    $
    4,069,342
 Major Customers No single customer represented 10% or more of GigaMedias total net
revenues in any period presented. Geographic Information All of the Companys operations are located in Taiwan and its revenues are
all derived from customers located in Taiwan. Accordingly, the Company is not
required to disclose geographic information in any period presented. Note 23.     SUBSEQUENT EVENTS On March 17, 2004, the Company entered into an agreement with GV Holding
Company and three individuals, who are the shareholders of GV Holding Company,
to acquire all of the issued and outstanding shares of the capital stock of
Grand Virtual Inc., Grand Virtual (Alderney) Limited and Grand Virtual Limited
(collectively referred to herein as GV) for a cash consideration of US$32,500
thousand. The Company plans to finance this acquisition by its cash and cash
equivalents and short-term investments. GV is a software developer and application service provider. The companys
core operations, developing software for online entertainment services
including online gaming and social networking, were established in 1997. As an
application service provider, GV also offers turnkey solutions for games of
skill and chance, which it sells predominantly to online licensees in Europe
and Asia. GV has approximately 40 employees and operations are based in
Cambridge, Massachusetts. F-29