##### Table of Contents



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, 2006
 Commission File Number: 000-30540
 GIGAMEDIA LIMITED
 (Exact name of registrant as specified in its charter)
 
 REPUBLIC OF SINGAPORE
(Jurisdiction of incorporation or organization)
 14th Floor, 122 TUNHWA 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:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredOrdinary Shares
    
    The NASDAQ Stock Market LLC
 Securities registered or to be registered pursuant to Section 12(g) of the Exchange Act:
None
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
  51,495,156 ordinary shares
 o þ
 o þ
  þ o
  o þ o
 o þ
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I
    
    
    2ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    2ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    2ITEM 3. KEY INFORMATION
    
    
    2ITEM 4. INFORMATION ON THE COMPANY
    
    
    20ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    44ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    44ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    70ITEM 7. MAJOR SHAREHOLDERS AND RELATED-PARTY TRANSACTIONS
    
    
    76ITEM 8. FINANCIAL INFORMATION
    
    
    76ITEM 9. THE OFFER AND LISTING
    
    
    78ITEM 10. ADDITIONAL INFORMATION
    
    
    80ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    93ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    93PART II
    
    
    93ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    93ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
    
    
    94ITEM 15. CONTROLS AND PROCEDURES
    
    
    94ITEM
16. [RESERVED]
    
    
    95ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    95ITEM 16B. CODE OF ETHICS
    
    
    95ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    96ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    96ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
    
    
    96PART III
    
    
    97ITEM 17. FINANCIAL STATEMENTS
    
    
    97ITEM 18. FINANCIAL STATEMENTS
    
    
    97ITEM 19. EXHIBITS
    
    
    97SIGNATURE
    
    
    100EX-1.3 AMENDED MEMORANDUM AND ARTICLES OF ASSOCIATION OF GIGAMEDIA LIMITEDEX-4.42 AMENDED AND RESTATED SHAREHOLDERS' AGREEMENTEX-4.43 SHARE PURCHASE AGREEMENTEX-4.44 SHARE PURCHASE AGREEMENTEX-4.45 SHARE PURCHASE AGREEMENTEX-4.46 SHARE PURCHASE AGREEMENTEX-4.47 SUBSCRIPTION AGREEMENTEX-4.48 TERMINATION AGREEMENTEX-4.49 LICENSE AND DISTRIBUTION AGREEMENTEX-4.50 THIRD AMENDMENT TO LICENSE AGREEMENTEX-4.51 SHAREHOLDERS' AGREEMENT DEC 7, 2006EX-4.52 SHAREHOLDERS' AGREEMENT DATED FEB 2, 2007EX-12.1 CERTIFICATION BY CEOEX-12.2 CERTIFICATION BY CFOEX-13.1 CERTIFICATION BY CEOEX-13.2 CERTIFICATION BY CFOEX-15.1 CONSENT OF PRICEWATERHOUSECOOPERSEX-15.2 CONSENT OF GHP HORWATH
  USE OF CERTAIN TERMS
  DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
  1




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
    
    We believe that our cross-marketing relationships with certain well-known companies will
increase the recognition of our online game brands.
    
    To cope with competition, we aim to develop new features and services that we think our
players will pay for and enjoy.
    
    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; and
    
    We believe that our existing cash, cash equivalents, marketable securities and expected
cash flow from operations will be sufficient to meet our capital expenditure, working
capital, cash obligations under our existing lease arrangements, and other requirements
through 2007.
  
 PART I
 
 ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM
3. KEY INFORMATION
 Exchange Rates
   2002
    
    2003
    
    2004
    
    2005
    
    2006Year-end
    
    
    34.75
    
    
    
    33.97
    
    
    
    31.71
    
    
    
    32.85
    
    
    
    32.60Weighted-average
    
    
    34.55
    
    
    
    34.40
    
    
    
    33.41
    
    
    
    32.19
    
    
    
    32.54
  2




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A. Selected Financial Data
  For the Years Ended December 31,
 2002
    
    2003
    
    2004
    
    2005
    
    2006US$
    
    US$
    
    US$
    
    US$
    
    US$STATEMENT OF OPERATIONS DATA:OPERATING REVENUESSoftware licensing and online entertainment revenues
    
    
    0
    
    
    
    0
    
    
    
    11,434
    
    
    
    22,511
    
    
    
    55,019Online game revenues
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    18,692Internet access and service revenues
    
    
    19,144
    
    
    
    19,396
    
    
    
    21,303
    
    
    
    21,589
    
    
    
    20,537Other revenues
    
    
    122
    
    
    
    117
    
    
    
    107
    
    
    
    87
    
    
    
    44Total operating revenues
    
    
    19,266
    
    
    
    19,513
    
    
    
    32,844
    
    
    
    44,187
    
    
    
    94,292OPERATING COSTSCost of software licensing and online entertainment revenues
    
    
    0
    
    
    
    0
    
    
    
    (1,592
    )
    
    
    (3,327
    )
    
    
    (7,824
    )Cost of online game revenues
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (3,667
    )Cost of Internet access and service revenues
    
    
    (18,947
    )
    
    
    (15,093
    )
    
    
    (13,873
    )
    
    
    (13,568
    )
    
    
    (11,449
    )Cost of other revenues
    
    
    (1,008
    )
    
    
    (1,022
    )
    
    
    (644
    )
    
    
    (488
    )
    
    
    (391
    )Total operating costs
    
    
    (19,955
    )
    
    
    (16,115
    )
    
    
    (16,109
    )
    
    
    (17,383
    )
    
    
    (23,331
    )GROSS PROFIT
    
    
    (689
    )
    
    
    3,398
    
    
    
    16,735
    
    
    
    26,804
    
    
    
    70,961OPERATING EXPENSESProduct development and engineering expenses
    
    
    (1,865
    )
    
    
    (1,211
    )
    
    
    (2,513
    )
    
    
    (3,562
    )
    
    
    (5,738
    )Selling and marketing expenses
    
    
    (4,095
    )
    
    
    (2,432
    )
    
    
    (6,310
    )
    
    
    (10,777
    )
    
    
    (30,123
    )General and administrative expenses
    
    
    (4,155
    )
    
    
    (5,162
    )
    
    
    (5,657
    )
    
    
    (7,892
    )
    
    
    (12,421
    )Bad debt expenses
    
    
    (869
    )
    
    
    (128
    )
    
    
    220
    
    
    
    (207
    )
    
    
    (715
    )Impairment loss on intangible assets
    
    
    (2,334
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Impairment loss on property, plant and equipment
    
    
    0
    
    
    
    (1,557
    )
    
    
    0
    
    
    
    0
    
    
    
    0(13,318
    )
    
    
    (10,490
    )
    
    
    (14,260
    )
    
    
    (22,438
    )
    
    
    (48,997
    )Income (loss) from operations
    
    
    (14,007
    )
    
    
    (7,092
    )
    
    
    2,475
    
    
    
    4,366
    
    
    
    21,964Income (loss) from continuing operations
    
    
    (10,617
    )
    
    
    (9,799
    )
    
    
    1,253
    
    
    
    6,490
    
    
    
    30,784Income (loss) from discontinued operations
    
    
    (7,849
    )
    
    
    (4,296
    )
    
    
    429
    
    
    
    (154
    )
    
    
    0Net income (loss)
    
    
    (18,466
    )
    
    
    (14,095
    )
    
    
    1,682
    
    
    
    6,336
    
    
    
    30,784Earnings (loss) per share (in dollars)Basic:Income (loss) from continuing operations
    
    
    (0.21
    )
    
    
    (0.20
    )
    
    
    0.02
    
    
    
    0.13
    
    
    
    0.60Income (loss) from discontinued operations
    
    
    (0.16
    )
    
    
    (0.08
    )
    
    
    0.01
    
    
    
    0
    
    
    
    0Net income (loss)
    
    
    (0.37
    )
    
    
    (0.28
    )
    
    
    0.03
    
    
    
    0.13
    
    
    
    0.60Diluted:Income (loss) from continuing operations
    
    
    (0.21
    )
    
    
    (0.20
    )
    
    
    0.02
    
    
    
    0.12
    
    
    
    0.51Income (loss) from discontinued operations
    
    
    (0.16
    )
    
    
    (0.08
    )
    
    
    0.01
    
    
    
    0
    
    
    
    0Net income (loss)
    
    
    (0.37
    )
    
    
    (0.28
    )
    
    
    0.03
    
    
    
    0.12
    
    
    
    0.51
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As of December 31,
 2002
    
    2003
    
    2004
    
    2005
    
    2006US$
    
    US$
    
    US$
    
    US$
    
    US$BALANCE SHEET DATA:Total current assets
    
    
    82,812
    
    
    
    77,709
    
    
    
    67,726
    
    
    
    70,204
    
    
    
    64,176Property, plant and equipment-net
    
    
    21,264
    
    
    
    15,636
    
    
    
    15,056
    
    
    
    10,747
    
    
    
    10,098Goodwill
    
    
    731
    
    
    
    
    
    
    
    29,607
    
    
    
    29,243
    
    
    
    55,187Intangible assets-net
    
    
    6,964
    
    
    
    6,199
    
    
    
    8,372
    
    
    
    2,704
    
    
    
    23,067Total assets
    
    
    135,138
    
    
    
    119,792
    
    
    
    125,977
    
    
    
    113,519
    
    
    
    182,619Total shareholders equity (net assets)
    
    
    104,169
    
    
    
    90,363
    
    
    
    95,971
    
    
    
    100,648
    
    
    
    134,087Common shares, no par value, and additional paid-in capital
    
    
    239,004
    
    
    
    239,004
    
    
    
    287,657
    
    
    
    287,920
    
    
    
    289,495Number of issued shares (basic, in thousands)
    
    
    50,154
    
    
    
    50,154
    
    
    
    50,154
    
    
    
    50,344
    
    
    
    51,495Dividend declared per share (in dollars)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
  B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Risks Related to Our Business
 Our limited operating history as an software licensing and online entertainment provider and
an online games operator, and the unproven long-term potential of those business models make
evaluating our business and prospects difficult
   
    
    retain existing customers or attract new customers;
 
    
    license, develop, or acquire additional online games that are appealing to consumers;
 
    
    anticipate and adapt to changing consumer preferences;
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
    
    adapt to competitive market conditions;
 
    
    adapt to regulatory changes;
 
    
    respond to technological changes or resolve unexpected service interruptions in a timely manner;
 
    
    adequately and efficiently operate, upgrade and develop our transaction and service platforms; or
 
    
    maintain adequate control of our expenses.
  Our businesses face intense competition, which may adversely affect our revenues,
profitability and planned business expansion
  
    
    significantly greater technological, financial, sales and marketing resources;
 
    
    larger customer bases and longer operating histories;
 
    
    greater name recognition; and
 
    
    more established relationships with distribution partners, advertisers, content and
application providers and/or other strategic partners.
 Competition
in the software licensing and online entertainment business
    5




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Competition
in the online games business
     Competition in the Internet access service business
  6




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Our business could suffer if we do not successfully manage current growth and potential future
growth
 Hellgate:London Phantasy Star
Universe
  Our business strategy, which contemplates growth through acquisitions and strategic
investments, exposes us to significant risks
    7




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
    
    It may be difficult to assimilate the operations and personnel of an acquired business
into our own business;
 
    
    Management, information, and accounting systems of an acquired business would be
different from our current systems and would need to be successfully integrated;
 
    
    Our management must devote its attention to assimilating the acquired business, which
diverts attention from other business concerns;
 
    
    Suppliers, vendors and/or distributors may renegotiate or cancel contracts with us
following the acquisition of a business;
 
    
    We may enter markets in which we have limited prior experience. For example, in
December 2006, we entered into a strategic alliance with Infocomm Asia Holdings Pte Ltd
(Infocomm Asia), an online gaming operator and distributor operating primarily in the
Southeast Asian region and in June 2007, we also acquired control of a majority of the
voting rights over T2CN, an online casual sports game operator in China, a business in
which we had limited prior experience; and
 
    
    We may lose some of our key employees or key employees of an acquired business.
 Unauthorized use of our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our business
    Our results of operations are subject to significant fluctuations
 8




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
    
    Software licensing and online entertainment business: availability of Internet
infrastructure, competition from existing and new competitors, the revenues, expenses and
results of operations of our customer and major licensee, UIM, and the regulatory restrictions applicable to the Internet gaming industry.
 
    
    Online games business: existing and new competitors, the pace of rollout of new games
and price competition in the industry, regulatory and other risks arising in connection
with our China operations.
 
    
    Internet access service business: 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 services.
  The markets for our principal businesses are characterized by rapid technological change, and
failure to respond quickly and sufficiently to new Internet technologies or standards may have a
material adverse effect on our business
      9




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Our software licensing and online entertainment business, online games business, and Internet access service business depend on the reliability of our
network infrastructure, which is subject
to physical, technological, security and other risks
   The adoption of new laws or changes to or the application of existing laws relating to
Internet commerce may affect the growth of our software licensing and online entertainment and
online games businesses
   10




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The worldwide legal and regulatory environment in which our software licensing and online
entertainment business operates is characterized by uncertainties that could adversely affect our
business and operating results
      11




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Our
business is international and therefore faces associated risks
  Our
software licensing and online entertainment business is dependent on
one master licensee, and any
adverse effect on its business could have an adverse effect on our revenues, operating
results and financial condition
  Online gaming is a relatively new industry and therefore, we do not know if the market will
continue to grow
   We may be vulnerable to delays or interruptions due to our reliance on infrastructure and
related services provided by third parties
   The licensees of our gaming software depend on credit card transactions for a substantial
portion of the deposits or payments by their customers
  12




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Undetected programming errors or defects in our software, services and games and the
proliferation of cheating programs could materially and adversely affect our software licensing and
online entertainment and online games businesses, financial condition and results of operations
   We could be liable for breaches of security on our Web sites and fraudulent transactions by
users of our Web sites
  We face the risks of changing consumer preferences and uncertainty of market acceptance of our
new products in our online games business
  
    
    the popularity of existing and new online games operated by us;
 
    
    the introduction of new online games, competing with or replacing our existing online games;
 
    
    general economic conditions, particularly economic conditions adversely affecting
discretionary consumer spending;
 
    
    changes in customer tastes and preferences;
 
    
    the availability of other forms of entertainment; and
 13




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
    
    critical reviews and public tastes and preferences, all of which change rapidly and cannot be predicted.
   We
are exposed to risks associated with operating our online games
business in the PRC
  
    
    the limited use of personal computers in the PRC and the relatively high cost of
Internet access with respect to per capita gross domestic product may limit the development
of the online games business in the PRC and impede the growth of FunTown and T2CN;
 
    
    if the PRC government finds that the operating agreements establishing the structure for
FunTown or T2CNs operations in the PRC do not comply with PRC government restrictions on
foreign investment in the online game industry, the operating
agreements may not be enforced, and FunTown or T2CN could be subject to severe
penalties;
 
    
    our contractual arrangements with T2CN and its shareholders may not be as effective in
providing operational control as compared to direct ownership. In addition, these
arrangements may be difficult to enforce;
 
    
    the PRC government has promulgated regulations on investments made by PRC
companies and residents in offshore companies and reinvestments in the PRC made by such
offshore companies. These measures may have a significant impact on the business and
operations of FunTown or T2CN which may be subject to more restrictive governmental
supervision;
 
    
    the laws and regulations governing the online game industry and related businesses in
the PRC are developing and subject to future changes. If FunTown, T2CN or any of our
subsidiaries which operate in the PRC fail to obtain or maintain all applicable permits and
approvals, their, or our, business and operations would be materially and adversely
affected;
 
    
    the PRC government has announced its intention, and has begun, to intensify its
regulation of Internet cafes, where online game-players access the Internet and online
games. Intensified government regulation of Internet cafes could restrict FunTown or
T2CNs ability to maintain or increase its revenues and expand its customer base;
 
    
    currently there are no laws or regulations in the PRC governing virtual asset property
rights and therefore, it is not clear what liabilities, if any, online game operators may
have in respect of virtual assets;
 
    
    the PRCs economic, political and social conditions, as well as government policies,
could affect FunTown or T2CNs business;
 14




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
    
    uncertainty in the PRC legal system;
 
    
    restrictions on currency exchange may limit FunTown or T2CNs ability to utilize its
revenues effectively; and
 
    
    inflation in China could negatively affect the profitability and growth of FunTown or
T2CN.
     There are no clear laws or regulations governing virtual asset property rights, in particular,
in Greater China, and therefore, it is not clear what liabilities, if any, online game operators
may have in respect of virtual assets
  15




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Failure to achieve and maintain effective internal control could have a material adverse
effect on our business, results of operations and the trading price of our Shares
   16




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We may need additional capital in the future and it may not be available on acceptable terms
  
    
    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 depend on our key personnel, and our business and growth prospects may be severely
disrupted if we lose their services
   We may be classified as a passive foreign investment company for U.S. federal income tax
purposes. As a result, you may be subject to materially adverse tax consequences with respect to
our Shares
  17




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Fluctuations in the exchange rates between U.S. dollar and other currencies in which we
conduct our business could adversely affect our profitability
  We are controlled by the Koo family, which has significant influence in determining the
outcome of any corporate transaction or other matters submitted to our shareholders for approval,
and their interests may conflict with your interests
  Our transactions with affiliates may not benefit us and may harm our Company
  Our operating results and financial condition are affected by general economic conditions,
levels of consumer spending, political stability as well as the occurrence of natural disasters and
epidemics
  There are economic risks associated with doing business in Taiwan, particularly due to the
tense relationship between Taiwan and the PRC
  18




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The
ability of our subsidiaries to distribute dividends to us may be subject to restrictions under
the laws of Singapore, Taiwan and the PRC
   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
  Anti-takeover provisions under the Singapore Securities and Futures Act (Chapter 289) and the
Singapore Code on Take-overs and Mergers may delay, deter or prevent a future takeover or change of
control of our Company, which could adversely affect the price of our Shares
  You may be subject to Singapore taxes
  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
   19




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Risks Related to our Shares
 The price of our Shares has been volatile historically and may continue to be volatile, which
may make it difficult for holders to resell the Shares when desired or at attractive prices
  
 ITEM 4. INFORMATION ON THE COMPANY
 A. History and Development of our Company
         20




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B. Business Overview
    21




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Granado Espada Hellgate: London
 FreeStyle
  Software Licensing and Online Entertainment Business
 Overview
  22




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Our Products
   Online Entertainment Management
 Online Entertainment Modules
 Our Services
  Infrastructure Design Services 
 
    
    Infrastructure Design: Architecture design of servers, routers, firewalls, network
software and management tools required for an Internet property.
 
    
    Site Creation: Creation and branding of our clients Internet property, customized to
match our licensees unique identities and creative themes.
 Transaction Processing Design Services 
 
    
    Payment: Consultation for the design of timely collection and distribution of payments
through a variety of channels and merchants.
 
    
    Billing: Consultation for the design of real-time and out-of-band transaction processing
and order management.
 
    
    Risk Management: Consultation for design of tools and processes for fraud detection,
prevention, and management.
 Customer Support Services 
 
    
    Infrastructure Consultation Support: Complete round-the-clock consultation support to
help clients resolve infrastructure issues.
 23




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
    
    Platform Technical Support: Consultation during periodic maintenance to update, patch,
and fine-tune the system performance of our software solutions.
 Custom Gaming Software Development Services 
 
    
    Design and development of custom entertainment modules and interfaces for our platform
meeting client specific requests.
 Our Technology and Infrastructure
   UIM
     24




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Competition
      Online
Games
Business*
 Overview
      25




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Granado Espada Hellgate: London Hellgate: London Hellgate: London
 Nanaimo
 Phantasy Star Universe
 26




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Our Products
   MahJong
   Chinese Poker
  Chinese Chess
  Social Games
  Puzzle-Style Games
 Bejeweled
 27




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Advanced Casual Games
 Tales
Runner Nanaimo Nanaimo
 Chance-Based Games
  MMORPGs
 Hellgate:
London Hellgate: London
 Phantasy Star Universe Phantasy Star Universe Phantasy Star
 Our Services
  Player Clubs
  Tournaments
  28




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Friends and Family
  Social Networking
  Avatars
  Our Pricing, Distribution and Payment
    
    
    Physical distribution channels. Physical distribution channels include convenience
chain stores such as 7-11, and Internet cafés. At these locations, users may purchase
pre-paid cards with varying amounts of credits to play FunTowns suite of casual games. In
addition, players may purchase game packs to play specific games on FunTowns platform.
 
    
    Virtual distribution channels. Virtual distribution channels consist of various Web sites, including FunTowns official Web site. Users may purchase game credits through
online sites with their credit card or bill via their telecom carrier.
  Our Marketing
  
    
    In-Game Events. We organize in-game events for our users, which we believe encourages
the development of virtual communities among our users and increases user interest in our
games. Examples of in-game events include special challenges or features introduced to the
game environments for a scheduled period.
 29




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In addition, we use in-game events to introduce users to new features of our games. We may
also post announcements in the game environment to promote new features, other improvements
to the games, and in-game events.
 
    
    In-Game Marketing. We may conduct in-game marketing programs from time to time,
including online contests for prizes.
 
    
    Cross-Marketing. We have cross-marketing relationships with popular consumer brands,
technology companies and major telecom carriers. We believe that our cross-marketing
relationships with certain well-known companies, including Intel Corporation (Intel) and
Microsoft Corporation (Microsoft), will increase the recognition of our online game
brands.
 
    
    Open Beta Testing. Our open beta testing system tests both the operation of new games
under open market conditions and introduces new games to users. During open beta testing,
we do not charge users to play the new game. Open beta testing provides an initial user
base and creates initial interest and word-of-mouth publicity to support the commercial
launch of the game.
 
    
    Offline Events/Promotions. From time to time we distribute free game-related posters,
promotional prepaid cards for beginners, and game-related souvenirs at trade shows,
selected Internet cafés and other locations. We may conduct events at popular venues to
stage exhibitions, distribute software and game content-related merchandise, and interact
directly with our user base. Furthermore, we may sponsor select media events, such as
industry-related awards shows and TV shows, to promote our brand names and our games.
 
    
    TV Commercials.We use TV commercials to attract
potential customers and to promote our games and brand.
 
    
    Marketing Research.We use various qualitative and
quantitative market research methods to analyze our target market and to
differentiate our product offerings from those of our competitors.
 
    
    Game Magazine Advertisements.We also advertise certain of our games in various game
magazines. From time to time, we also collaborate with such magazines in various promotions, including
giving away copies of certain games free of charge with each magazine sold.
 
    
    Direct Marketing.We use
telemarketing and email correspondence to inform our users of new products, promotions, and
other product related services.
  
    
    our call center in FunTowns offices in Taiwan, which serves our customers 24 hours a
day, seven days a week;
 
    
    our walk-in customer service centers in Taipei and Hong Kong; and
 
    
    e-mail and facsimile letters.
   30




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##### Table of Contents



Our Players
  Our Sources of Products and Services
 Tales Runner Fortress 2 Hellgate: London Phantasy Star Universe Nanaimo
  Our Technology and Infrastructure
   Competition
   31




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##### Table of Contents



Intellectual Property and Proprietary Rights
  Tales
Runner, Fortress 2, Hellgate: London, Phantasy
Star Universe Nanaimo.
 Internet Access Services Business
 Our Services
  Internet Access Services Offerings
    32




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##### Table of Contents



Markets for Internet Access Services
   Number of SubscribersDate
    
    2004
    
    2005
    
    200631-Mar
    
    
    18,798
    
    
    
    18,645
    
    
    
    16,41730-Jun
    
    
    18,495
    
    
    
    17,929
    
    
    
    15,15430-Sep
    
    
    18,454
    
    
    
    17,386
    
    
    
    13,18531-Dec
    
    
    18,440
    
    
    
    16,534
    
    
    
    11,447
   Other Services
  Our Broadband Network  Cable and ADSL Network
  33




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##### Table of Contents




    
    the provision of key community services, including electronic mail, photo albums 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.
   Data Backbone
    Information System
  Sales and Marketing
  34




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##### Table of Contents



Customer Service
   Competition
     35




---



##### Table of Contents



Intellectual Property and Proprietary Rights
  Regulation
 Regulation Relating to Online Gaming
       36




---



##### Table of Contents



37




---



##### Table of Contents



Regulations Relating to Online Games in Taiwan
  Rating of Internet Content
 Computer Software Ratings.
 Online Game Contract Template
 Regulations Relating to Online Games in the PRC
     Telecommunications Regulation in Taiwan
   Regulation of Type II Operators
 38




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##### Table of Contents




    
    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. KBTs license is due to expire in 2012.
 
    
    Tariff Regulation. Type II operators are required to announce their business
regulations with respect to the terms for provision of services, including tariffs for
major rates and charges. Any changes to the business regulations must be filed with the
NCC 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 NCC. For change
of the systems structure stated in the business plan, a report shall be filed with the NCC
for recording within one month from the effective date of change of such system structure.
In addition, Type II operators must report to the NCC and inform their customers in advance
of any plan to suspend or terminate any of their businesses.
 
    
    Technical Standards. Special 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 NCC.
 Regulation of Type I Operators
 Liberalization of Type I Fixed Network Licensing.
 Content Liability
 Cable Regulation in Taiwan
 Regulation on Shareholding
 39




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##### Table of Contents



Operating Licenses
  Market Share Limitations
 Competition
 Open Access Regulation
 40




---



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C. Organizational Structure
  41




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42




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##### Table of Contents



Place of
    
    OurYear of
    
    
    Incorporation
    
    PercentageEntity
    
    Incorporation
    
    
    Operation
    
    Holding

    
    Principal ActivitiesHeld by our CompanyGigaMedia International Holdings Limited
    
    
    2004
    
    
    British Virgin Islands
    
    
    100
    %
    
    Holding companyHoshin GigaMedia Center Inc.
    
    
    1998
    
    
    Taiwan
    
    
    100
    %
    
    Cable-based Internet access services and FunTown online games portalHeld by HoshinGigaMedia Center IncKoos Broadband Telecom Co., Ltd.
    
    
    2001
    
    
    Taiwan
    
    
    100
    %
    
    Broadband Internet access services targeting business clientsHeld by GigaMediaInternational Holdings
LimitedCambridge Entertainment Software Limited
    
    
    2004
    
    
    British Virgin Islands
    
    
    100
    %
    
    Holding companyFunTown World Limited
    
    
    2005
    
    
    British Virgin Islands
    
    
    100
    %
    
    Holding companyGigaMedia Asia Limited
    
    
    2005
    
    
    British Virgin Islands
    
    
    100
    %
    
    Holding companyGigaMedia Asia Pacific Limited
    
    
    2006
    
    
    British Virgin Islands
    
    
    100
    %
    
    Holding companyGigaMedia Finance International Limited
    
    
    2000
    
    
    Cayman Islands
    
    
    100
    %
    
    Holding companyGigaMedia Global Limited
    
    
    2004
    
    
    British Virgin Islands
    
    
    100
    %
    
    Online game companyGigaMedia (HK) Limited
    
    
    2004
    
    
    Hong Kong
    
    
    100
    %
    
    Holding companySkyace Pacific Limited
    
    
    2006
    
    
    British Virgin Islands
    
    
    100
    %
    
    Holding companyHeld by FunTown World
LimitedFunTown Hong Kong Limited
    
    
    1999
    
    
    Hong Kong
    
    
    100
    %
    
    Online games portalHeld by GigaMedia Asia
LimitedGigaMedia China Limited
    
    
    2005
    
    
    British Virgin Islands
    
    
    100
    %
    
    Holding companyHeld by Skyace Pacific LimitedDragongate
Enterprises Limited
    
    
    2006
    
    
    British Virgin Islands
    
    
    70
    %
    
    Online game developer and operator
 43




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Place of
    
    OurYear of
    
    
    Incorporation
    
    PercentageEntity
    
    Incorporation
    
    
    Operation
    
    Holding
    
    Principal ActivitiesHeld by CambridgeEntertainment Software
LimitedCambridge Interactive Development Corporation
    
    
    1997
    
    
    U.S.A.
    
    
    100
    %
    
    Software developer and application service providerCambridge Interactive Development Corporation (Quebec) Inc.
    
    
    2005
    
    
    Canada
    
    
    100
    %
    
    Financial and management servicesInternet Media Licensing Limited
    
    
    2005
    
    
    British Virgin Islands
    
    
    100
    %
    
    Software developer and application service providerHeld
by GigaMediaChina
LimitedT2CN Holding
Limited
    
    
    2004
    
    
    British Virgin Islands
    
    
    51.12
    %*
    
    Online game developer and operator
 
  D. Property, Plant and Equipment
     
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 A. Operating Results
  Overview
  44




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##### Table of Contents




    
    Our software licensing and online entertainment business is operated through our
subsidiary, CESL. CESL is a software developer and support services provider. CESL
develops software for online entertainment services. As a software developer and support
services provider, CESL offers software solutions for online entertainment, which it
licenses to UIM under a software license and support service contract.
 
    
    Our online games business is operated through our subsidiaries Hoshin GigaMedia and
FunTown World Limited.
 
    
    Our Taiwan Internet access service business is operated through our subsidiary, Hoshin
GigaMedia, which focuses on consumer users, and Hoshin GigaMedias subsidiary, KBT, which
focuses on corporate users.
   Software Licensing and Online Entertainment Business.
    Online Games Business.
 45




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##### Table of Contents



Granado Espada Hellgate: London Hellgate: London Hellgate: London
   Internet Access Service Business.
     46




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Subsequent Events
  Acquisition of Controlling Interest in T2CN
   (a)
    
    US$1.05 per common share if the adjusted net operating income of T2CN for the first
half of 2007 was not more than US$1 million;
 (b)
    
    US$1.25 per common share if the adjusted net operating income of T2CN for the first
half of 2007 was between US$1 million and US$1.5 million; or
 (c)
    
    US$1.45 per common share if the adjusted net operating income of T2CN for the first
half of 2007 was not less than US$2.5 million.
    47




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Termination of Subscription Agreement with Wretch
   Investment in Softstar Entertainment Inc.
  Certain Significant Events Affecting Our Results of Operations for 2004, 2005 and 2006
 Change in Reporting Currency and Basis of Presentation
  Discontinued Operations
 Divestiture  Music Distribution Business
   48




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##### Table of Contents



2004
    
    
    2005(in US$ thousands)Revenues
    
    $
    66,975
    
    
    $
    37,907Income (loss) before tax and minority interest income
    
    $
    752
    
    
    $
    (1,861
    )Income tax (benefit)/expenses
    
    $
    5
    
    
    $
    (1
    )Minority interest income (loss)
    
    $
    318
    
    
    $
    (796
    )Income (loss) from discontinued operations
    
    $
    429
    
    
    $
    (154
    )
  (in US$ thousands)Cash (including restricted cash)
    
    $
    3,098Accounts receivable
    
    
    1,842Inventory
    
    
    6,679Other current assets
    
    
    683Property and equipment
    
    
    1,666Intangible assets
    
    
    4,689Other assets
    
    
    1,553Total Assets
    
    $
    20,210Accounts payable
    
    $
    11,239Other liabilities
    
    
    1,945Total liabilities
    
    $
    13,184
 Divestiture of our ADSL Business
   Consolidation of UIM Under FIN 46(R)
  49




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Critical Accounting Policies
  Acquisitions
   (i)
    
    If the increase in 2006 was 30 percent or more, an
additional payment of US$5 million;
 (ii)
    
    If the increase in 2006 was 15 percent or above but less than 30 percent, a reduced
incentive payment; or
 (iii)
    
    If the increase in 2006 was less than 15 percent, no additional payment.
  50




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Revenue Recognition
    Software Licensing and Online Entertainment Revenues
   51




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##### Table of Contents



Online Game Revenues
    Internet Access Service Revenues
     52




---



##### Table of Contents



Other Revenues
  Discontinued Operations
   Deferred Revenues
    Operation Costs
  Allowance for Doubtful Accounts
  Classification of Marketable Securities
   53




---



##### Table of Contents



Rock Mobile (Cayman) Corporation (RMC)
  T2CN
    54




---



##### Table of Contents



Infocomm Asia
      55




---



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Impairment of Long-Lived Assets
  Impairment of Intangible Assets
  Impairment of Goodwill
  Income Taxes
  Minority Interest
  56




---



##### Table of Contents



Share-Based Compensation
   Retirement Plan and Net Periodic Pension Cost
   57




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##### Table of Contents



Recent Accounting Pronouncements
       Foreign Currency Exchange
  58




---



##### Table of Contents



Taxation
     Discussions of Results of Operations
 Factors Affecting Our Performance
  Acquisitions and dispositions.
 Development of online gaming and online games industries.
 
    
    the development and regulation of these industries generally;
 
    
    our adaptation to technological change;
 
    
    changing consumer preferences;
 59




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##### Table of Contents




    
    legal development affecting these industries, in particular the online gaming industry; and
    
    general economic conditions in the markets where we or our licensees operate.
 Competition.
   For the year ended December 31,2004
    
    2005
    
    2006Amount
    
    % of
    
    Amount
    
    % of
    
    Amount
    
    % ofin US$
    
    total
    
    in US$
    
    total
    
    in US$
    
    totalParticulars
    
    thousands
    
    revenues
    
    thousands
    
    revenues
    
    thousands
    
    revenuesOPERATING REVENUESSoftware licensing and online entertainment
revenues
    
    
    11,434
    
    
    
    34.8
    
    
    
    22,511
    
    
    
    50.9
    
    
    
    55,019
    
    
    
    58.3Online game revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,692
    
    
    
    19.8Internet access and service revenues
    
    
    21,303
    
    
    
    64.9
    
    
    
    21,589
    
    
    
    48.9
    
    
    
    20,537
    
    
    
    21.8Other revenues
    
    
    107
    
    
    
    0.3
    
    
    
    87
    
    
    
    0.2
    
    
    
    44
    
    
    
    0.1Total operating revenues
    
    
    32,844
    
    
    
    100.0
    
    
    
    44,187
    
    
    
    100.0
    
    
    
    94,292
    
    
    
    100.0OPERATING COSTSCost of software licensing and online
entertainment revenues
    
    
    1,592
    
    
    
    4.8
    
    
    
    3,327
    
    
    
    7.5
    
    
    
    7,824
    
    
    
    8.3Cost of online game revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,667
    
    
    
    3.9Cost of Internet access and service revenues
    
    
    13,873
    
    
    
    42.2
    
    
    
    13,568
    
    
    
    30.7
    
    
    
    11,449
    
    
    
    12.1Cost of other revenues
    
    
    644
    
    
    
    2.0
    
    
    
    488
    
    
    
    1.1
    
    
    
    391
    
    
    
    0.4Total operating costs
    
    
    16,109
    
    
    
    49.0
    
    
    
    17,383
    
    
    
    39.3
    
    
    
    23,331
    
    
    
    24.7Gross profit
    
    
    16,735
    
    
    
    51.0
    
    
    
    26,804
    
    
    
    60.7
    
    
    
    70,961
    
    
    
    75.3OPERATING EXPENSESProduct development and engineering expenses
    
    
    2,513
    
    
    
    7.7
    
    
    
    3,562
    
    
    
    8.1
    
    
    
    5,738
    
    
    
    6.1Selling and marketing expenses
    
    
    6,310
    
    
    
    19.2
    
    
    
    10,777
    
    
    
    24.4
    
    
    
    30,123
    
    
    
    31.9General and administrative expenses
    
    
    5,657
    
    
    
    17.2
    
    
    
    7,892
    
    
    
    17.9
    
    
    
    12,421
    
    
    
    13.2Bad debt expense
    
    
    (220
    )
    
    
    (0.6
    )
    
    
    207
    
    
    
    0.4
    
    
    
    715
    
    
    
    0.8Total operating expenses
    
    
    14,260
    
    
    
    43.5
    
    
    
    22,438
    
    
    
    50.8
    
    
    
    48,997
    
    
    
    52.0Income from operations
    
    
    2,475
    
    
    
    7.5
    
    
    
    4,366
    
    
    
    9.9
    
    
    
    21,964
    
    
    
    23.3NON-OPERATING INCOME (EXPENSES)
    
    
    (1,143
    )
    
    
    (3.5
    )
    
    
    2,710
    
    
    
    6.1
    
    
    
    10,690
    
    
    
    11.3INCOME TAX BENEFIT (EXPENSE)
    
    
    84
    
    
    
    0.3
    
    
    
    (436
    )
    
    
    (1.0
    )
    
    
    (1,549
    )
    
    
    (1.6
    )INCOME FROM CONTINUING OPERATIONS
    
    
    1,253
    
    
    
    3.8
    
    
    
    6,490
    
    
    
    14.7
    
    
    
    30,784
    
    
    
    32.6INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    
    
    429
    
    
    
    1.3
    
    
    
    (154
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    NET INCOME
    
    
    1,682
    
    
    
    5.1
    
    
    
    6,336
    
    
    
    14.3
    
    
    
    30,784
    
    
    
    32.6
 60




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For the Years Ended December 31, 2005 and 2006
 Consolidated Results Of Operations
   61




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Business Segment Results
 Software Licensing and Online Entertainment Business
      62




---



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Online Games Business
   Internet Access Service Business
      63




---



##### Table of Contents



For the Years Ended December 31, 2004 and 2005
 Consolidated Results Of Operations
       64




---



##### Table of Contents



Business Segment Results
 Software Licensing and Online Entertainment Business
        65




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Internet Access Service Business
        66




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##### Table of Contents



B. Liquidity and Capital Resources
   
    
    the rate at which we enter into strategic transactions;
    
    the rate of which we expand our operations and employee base;
    
    the timing of entry into new markets and new services offered;
    
    changes in revenues and cost splits with our business partners;
    
    the rate at which we invest in improving our products and upgrading and maintaining our
network and future technologies; and
    
    the rate at which we grow and monetize our customer bases.
 Hellgate: London
  67




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##### Table of Contents



Capital Expenditures
  Indebtedness
   (in US$ thousands)
    
    
    
    
    
    
    
    As atName
    
    Nature
    
    Interest rate range
    
    Maturity date of Facility
    
    December 31, 2006China Trust Commercial Bank
    
    Unsecured revolving facility
    
    2.35% - 2.45%
    
    March 10, 2007
    
    
    6,135China Trust Commercial Bank
    
    Secured revolving facility
    
    1.735% - 1.865%
    
    March 10, 2007
    
    
    2,117Taishin International bank
    
    Secured revolving facility
    
    2.90% - 2.95%
    
    September 30, 2007
    
    
    4,60112,853
 Dividends From Our Subsidiaries in Taiwan
  68




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C.
Research, Development, Patents and Licenses, etc.
  D. Trend Information
  E. Off-Balance Sheet Arrangements
 Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others Consolidation of Variable Interest Entities
 69




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##### Table of Contents



F. Tabular Disclosure of Contractual Obligations
 Payment Due by Period (in US$ thousands)Less than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating leases
    
    
    3,886
    
    
    
    1,876
    
    
    
    1,945
    
    
    
    65
    
    
    
    0Minimum guarantee against royalties
    
    
    6,500
    
    
    
    2,500
    
    
    
    2,500
    
    
    
    1,500
    
    
    
    0Total contractual cash obligations
    
    
    10,386
    
    
    
    4,376
    
    
    
    4,445
    
    
    
    1,565
    
    
    
    0Other long-term obligations
    
    
    605
    
    
    
    0
    
    
    
    534
    
    
    
    71
    
    
    
    0Other liabilities  Accrued
pension liabilities
    
    
    434
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    434
 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  YearAppointed toCurrentName
    
    Age
    
    Position
    
    PositionWU, Daniel Chuen-Tai
    
    
    59
    
    
    Chairman of the Board
    
    
    2003BAO, Gilbert
    
    
    43
    
    
    Independent Non-Executive Director
    
    
    2003CHANG, Nelson
    
    
    42
    
    
    Independent Non-Executive Director
    
    
    2004DING, Michael Y.J.
    
    
    50
    
    
    Independent Non-Executive Director
    
    
    2003HSU, Emmet Yu-Jui
    
    
    44
    
    
    Independent Non-Executive Director
    
    
    2003HU ZEE, Nancy Jing-Ying
    
    
    48
    
    
    Independent Non-Executive Director
    
    
    2003LEE, Howe Yong
    
    
    51
    
    
    Independent Non-Executive Director
    
    
    2004LEE, Yichin
    
    
    46
    
    
    Independent Non-Executive Director
    
    
    2003WANG, Arthur M.
    
    
    46
    
    
    Chief Executive Officer and Director
    
    
    2003HUI, Thomas T.
    
    
    35
    
    
    Chief Financial Officer and Director
    
    
    2004/2005CAHILL, Robert J.
    
    
    41
    
    
    Head of Software Licensing and Online Entertainment
Business
    
    
    2004CHOU, Samuel
    
    
    46
    
    
    Head of Online Games Business
    
    
    2007CHU, Michel
    
    
    38
    
    
    Executive Vice President and Chief Technology Officer
    
    
    2000HUANG, Kenny Ching-Kun
    
    
    42
    
    
    Senior Vice President
    
    
    2004MAI, Falco
    
    
    45
    
    
    Executive Vice President and Chief Administrative
Officer
    
    
    2001SHEA, Joseph
    
    
    41
    
    
    Executive Vice President
    
    
    2004TARN, Chen-Wen
    
    
    47
    
    
    Head of Internet Access Service Business
    
    
    2003TSENG, Jennifer
    
    
    38
    
    
    Senior Vice President and General Counsel
    
    
    2004
    70




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B. Compensation
  C. Board Practices
   D. Employees
  E. Share Ownership
 Share Ownership of Directors and Executive Officers
  Number of SharesNumber of
    
    Issuable uponPerson
    
    Common Shares
    
    exercise of optionsWU, Daniel Chuen-Tai
    
    
    0
    
    
    
    *BAO, Gilbert T.C.
    
    
    0
    
    
    
    *CHANG, Nelson
    
    
    0
    
    
    
    *DING, Michael Y.J.
    
    
    0
    
    
    
    *HSU, Emmet Yu-Jui
    
    
    0
    
    
    
    *HU ZEE, Nancy Jing-Ying
    
    
    0
    
    
    
    *LEE, Howe Yong
    
    
    0
    
    
    
    *LEE, Yichin
    
    
    0
    
    
    
    *WANG, Arthur M.
    
    
    *
    
    
    
    2,500,000HUI, Thomas T.
    
    
    *
    
    
    
    1,200,000CAHILL, Robert J.
    
    
    0
    
    
    
    *CHOU, Samuel
    
    
    0
    
    
    
    0CHU, Michel
    
    
    *
    
    
    
    *
 73




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##### Table of Contents



Number of SharesNumber of
    
    Issuable uponPerson
    
    Common Shares
    
    exercise of optionsHUANG, Kenny Ching-Kun
    
    
    *
    
    
    
    *MAI, Falco
    
    
    *
    
    
    
    *SHEA, Joseph
    
    
    *
    
    
    
    *TARN, Chen-Wen
    
    
    *
    
    
    
    *TSENG, Jennifer
    
    
    *
    
    
    
    *
 
 *
    
    Less than 1 percent  Beneficial Ownership
  Employee Share Option Plans
 2002 Option Plan
   2004 Option Plan
   74




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2006 Equity Incentive Plan
     Options
   Employee Share Purchase Plan
  75




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ITEM
7. MAJOR SHAREHOLDERS AND RELATED-PARTY TRANSACTIONS
 A. Major Shareholders
  Shares
    
    Percentage ofName of Owner
    
    Owned
    
    
    Shares OwnedBest Method Limited (1)
    
    
    10,799,999
    
    
    
    20.53
    %Directors and executive officers as a group (10 persons)
    
    
    402,222
    
    
    
    0.76
    %
 
 (1)
    
    Through Best Method Limited, Jeffrey Koo, Jr. and Andre Koo jointly have a beneficial
ownership of 10,799,999 common shares of our Company.   B.
Related-Party Transactions
  C. Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 A. Consolidated Statements and Other Financial Information
 Financial Statements
  Information on Legal or Arbitration Proceedings
 Class Action
  76




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77




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
    
    Class Certification: The plaintiffs are considering a new class definition, which
is regarded as a priority by the District Court;
    
    Tolling Agreement: The plaintiffs requested tolling agreements for class members in the
focus cases from the underwriters. If the underwriters do not agree to toll the
plaintiffs claims, the plaintiffs may file individual actions. In such case, the
underwriters may want to have these claims arbitrated;
    
    Settlements: The District Court indicated that the issuers settlement cannot stand in
its present form, and any further discussions on the settlement between the issuers and
the plaintiffs should depend on the plaintiffs new proposed class definition; and
    
    Discovery: The stay of discovery is continuing and will be addressed by the District
Court at the next conference.
  
    
    New Class Definition: the plaintiffs proposed a new class definition and moved for class certification;
    
    Statutes of Limitation: the underwriters refused to agree to toll the statute of
limitations on plaintiffs claims, which caused plaintiffs to file a motion of individuals
to intervene as plaintiffs in a focus case in which the plaintiffs think that the statue
of limitations is close to running;
    
    Issuers Settlement: Since the settlement in its present form is not viable, the
issuers will ask the District Court to deny the motion to approve the settlement without
prejudice to application to the District Court regarding any future settlement; and
    
    Discovery: There were unresolved issues regarding the scope of discovery and may
further be discussed at the next conference.
   Dividend Policy
  B. Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
 A. Offer and listing details
  78




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##### Table of Contents



Common SharesYear Ending December 31, 2002
    
    High
    
    Low(in US$)First quarter
    
    $
    2.88
    
    
    $
    2.30Second quarter
    
    $
    1.25
    
    
    $
    0.67Third quarter
    
    $
    1.30
    
    
    $
    0.63Fourth quarter
    
    $
    0.84
    
    
    $
    0.42
 Common SharesYear Ending December 31, 2003
    
    High
    
    Low(in US$)First quarter
    
    $
    1.52
    
    
    $
    0.66Second quarter
    
    $
    1.21
    
    
    $
    0.86Third quarter
    
    $
    2.98
    
    
    $
    1.17Fourth quarter
    
    $
    3.35
    
    
    $
    1.44
 Common SharesYear Ending December 31, 2004
    
    High
    
    Low(in US$)First quarter
    
    $
    2.07
    
    
    $
    1.33Second quarter
    
    $
    1.87
    
    
    $
    1.06Third quarter
    
    $
    1.43
    
    
    $
    0.70Fourth quarter
    
    $
    2.43
    
    
    $
    1.30
 Common SharesYear Ending December 31, 2005
    
    High
    
    Low(in US$)First quarter
    
    $
    1.86
    
    
    $
    1.30Second quarter
    
    $
    2.48
    
    
    $
    1.38Third quarter
    
    $
    2.66
    
    
    $
    1.68Fourth quarter
    
    $
    2.99
    
    
    $
    1.76
 Common SharesYear Ending December 31, 2006
    
    High
    
    Low(in US$)First quarter
    
    $
    6.01
    
    
    $
    2.90Second quarter
    
    $
    10.39
    
    
    $
    6.13Third quarter
    
    $
    12.38
    
    
    $
    7.30Fourth quarter
    
    $
    11.06
    
    
    $
    8.86
 Year Ending December 31, 2007
    
    High
    
    Low(in US$)First quarter
    
    $
    14.34
    
    
    $
    9.28Second quarter (only through June 15, 2007)
    
    $
    15.97
    
    
    $
    13.92
 B. Plan of Distribution
  C. Markets
     D. Selling Shareholders
  E. Dilution
  79




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F. Expenses of the issue
  
 ITEM 10. ADDITIONAL INFORMATION
 A. Share Capital
  B. Memorandum and Articles of Association
  Singapore Companies Act
  DIRECTORS
  
    
    He is prohibited from acting as a director by reason of any order made pursuant to the
Singapore Companies Act;
    
    He ceases to be a director by virtue of any of the provisions of the Singapore Companies
Act or the Articles of Association of our Company;
    
    He resigns from his office;
    
    He receives a bankruptcy order made against him;
    
    He has a receiving order made against him or suspends payment or compounds with this
creditors generally;
    
    He is found to be a 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.
   80




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AUDIT COMMITTEE
   DIVIDENDS
   LIQUIDATION DISTRIBUTION
  SHAREHOLDERS MEETINGS
  81




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##### Table of Contents



VOTING RIGHTS
  SHARE CAPITAL
    (i)
    
    consolidate and divide all of our Shares;(ii)
    
    subject to the Singapore Companies Act, sub-divide some or all of our Shares, 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; and(iii)
    
    subject to the Singapore Companies Act and our Articles of Association, convert any
class of shares into any other class of shares.
    MODIFICATION OF RIGHTS
  TRANSFER OF SHARES
  82




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TAKEOVERS
  AMENDMENTS TO THE ARTICLES OF ASSOCIATION
  C. Material Contracts
  End-User License Agreement, dated April 1, 2004, between IML and UIM, as amended by the Second
Amendment to the End-User License Agreement, dated March 1, 2006 and the Third Amendment to the
End-User License Agreement, dated March 1, 2007.
   Purchase and Sale Agreement, dated June 23, 2005, between Hoshin GigaMedia and Webs-TV
  83




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Share Purchase Agreement, dated September 17, 2005, between GigaMedia and Nextbase
International Ltd.
  Asset Sale and Purchase Agreement, dated December 19, 2005, between GigaMedia, FunTown World
Limited, Hoshin GigaMedia and TWP
   (i)
    
    If the growth of the adjusted pre-tax net income of FunTown in 2006 is 30 percent or
more, the additional payment will be US$5 million;(ii)
    
    If the growth of the adjusted pre-tax net income of FunTown in 2006 is 25 percent or
above but less than 30 percent, the additional payment will be US$4.17 million;(iii)
    
    If the growth of the adjusted pre-tax net income of FunTown in 2006 is 20 percent or
above but less than 25 percent, the additional payment will be US$3.33 million;(iv)
    
    If the growth of the adjusted pre-tax net income of FunTown in 2006 is 15 percent or
above but less than 20 percent, the additional payment will be US$2.5 million; and(v)
    
    If the growth of the adjusted pre-tax net income of FunTown in 2006 is less than 15
percent, no additional payment will be made by GigaMedia.
 Put-Call Option Agreement, dated December 21, 2005, between Hoshin GigaMedia and JSDWAY
  84




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##### Table of Contents



Subscription Rights Agreement, dated March 10, 2006, between Hoshin GigaMedia, Wretch and the
shareholders of Wretch
  Series A Preferred Share Purchase Agreement, dated April 27, 2006, between GigaMedia China
Limited and T2CN and certain shareholders of T2CN
  Strategic Partnership Agreement, dated April 27, 2006, between T2CN and GigaMedia China
  Shareholders Agreement, dated April 27, 2006, between GigaMedia China, T2CN and certain
shareholders of T2CN, as amended and restated by the Amended and Restated Shareholders Agreement
dated November 25, 2006
  Asset Purchase and Sale Agreement, dated May 15, 2006, between Hoshin GigaMedia and Webs-TV
  85




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##### Table of Contents



Service Agreement, dated May 15, 2006, between Hoshin GigaMedia and Webs-TV
  Subscription Agreement, dated December 7, 2006, between GigaMedia Asia Pacific Limited and
Infocomm Asia
  Termination Agreement, dated December 12, 2006, between Hoshin GigaMedia, KBT, Wretch and
certain shareholders of Wretch
  (a)
    
    if the final acquisition price exceeded US$24 million but was less than or equal to
US$36 million, the additional payment would be equal to 18 percent of US$24 million;(b)
    
    if the final acquisition price exceeded US$36 million but was less than or equal to
US$48 million, the additional payment would be equal to the sum of US$2,160,000 and 16
percent of US$ 36 million; and(c)
    
    if the final acquisition price exceeded US$48 million, the additional payment would be
equal to the sum of US$4,080,000 and 14 percent of US$48 million.
  License and Distribution Agreement, dated December 13, 2006, between Dragongate Enterprises
and HanbitSoft Inc.
 Hellgate: London
 Share Purchase Agreements, dated January 1, 2007 to January 17, 2007, between GigaMedia China
Limited and certain shareholders of T2CN
  86




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##### Table of Contents



(a)
    
    US$1.05 per share if the net operating income of T2CN for the first half of 2007 is not
more than US$1 million;(b)
    
    US$1.25 per share if the net operating income of T2CN for the first half of 2007 is
equal to US$1.5 million; or(c)
    
    US$1.45 per share if the net operating income of T2CN for the first half of 2007 is
equal to US$2.5 million,
  Shareholders Agreement, dated December 7, 2006, as amended on February 2, 2007, between GigaMedia
Asia Pacific, Bodhi China and India LLC, Etherfast Pte Ltd, Global Star International Development
Limited, Commerzbank Infocomm Segregated Portfolio, Infocomm Investments Pte Ltd, Management
Capital International Ltd and Infocomm Asia
 th
 D. Exchange Controls
  E. Taxation
 Singapore Tax Considerations
 Taxation of Dividends received by Singapore Resident Shareholders
    87




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Gains on Disposal of Shares
  Stamp Duty
   Singapore Estate Duty
   88




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U.S. Federal Income Tax Considerations for U.S. Holders
  
    
    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 percent or more of the combined voting
power of all classes of our stock; or
    
    a person whose functional currency is not the U.S. dollar.
   
    
    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 U.S. federal income taxation regardless of
its source; or
    
    a trust if (1) it is subject to the primary supervision of a court within the United
States and one or more U.S. persons have the authority to control all substantial decisions
of the trust, or (2) has otherwise elected to be treated as a U.S. person under the
Internal Revenue Code.
   89




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Taxation of Dividends
    Sale or other disposition of shares.
 Passive Foreign Investment Company Rules
  90




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##### Table of Contents




    
    the excess distribution or gain would be allocated ratably over 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 classified as a PFIC (a pre-PFIC year) would be taxable as
ordinary income;
    
    the amount allocated to each prior taxable year, other than the current taxable year or
a pre-PFIC 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 prior taxable year, other than the current taxable year or a
pre-PFIC year.
    91




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##### Table of Contents



Information Reporting and Backup Withholding
   
    
    a U.S. person;
    
    a foreign person 50 percent or more of whose gross income is effectively connected with
a U.S. trade or business for a specified three-year period;
    
    a controlled foreign corporation for U.S. 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 percent of the income or capital interest in the
partnership; or
    
    such foreign partnership is engaged in a U.S. trade or business;
   F. Dividends and Paying Agents
  G. Statements by Experts
  H. Documents on Display
   92




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##### Table of Contents



I. Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Foreign Currency Exchange
    Interest Rate Sensitivity
  Other Market Risk
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  93




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ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
  
 ITEM 15.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control Over Financial Reporting
    94




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Attestation Report of the Registered Public Accounting Firm
  Changes in Internal Control Over Financial Reporting
  ITEM 16. [Reserved]
 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
    95




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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Year Ended December 31,2005
    
    2006(in US$)
    
    (in US$)Audit Fees
    
    
    360,959
    
    
    
    492,922Audit-Related Fees
    
    
    2,245
    
    
    
    0Tax Fees
    
    
    11,967
    
    
    
    32,515Other Fees
    
    
    0
    
    
    
    0
 A. Audit Fees
  B. Audit-Related Fees
  C. Tax Fees
  D. Other Fees
  E. Audit Committee Pre-Approval Policies and Procedures
   
 ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
  96




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##### Table of Contents



PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  Page
    
    Page(a)
    
    Reports of Independent Registered Public Accounting Firms
    
    F-1, F-2(b)
    
    Consolidated Balance
Sheets as of December 31, 2005 and 2006
    
    F-3(c)
    
    Consolidated
Statements of Operations for the years ended December 31, 2004,
2005 and 2006
    
    F-5(d)
    
    Consolidated Statements of Shareholders Equity for the years ended December 31, 2004,
2005 and 2006
    
    F-7(e)
    
    Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006
    
    F-8(f)
    
    Notes to the Consolidated Financial Statements
    
    F-10
 
 ITEM 19. EXHIBITS
 EXHIBIT INDEX
 1.1
    
    Memorandum of Association of our Company*1.2
    
    Articles of Association of our Company*1.3
    
    Amended Memorandum and Articles of
Association of our Company4.1
    
    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
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
Twinstar CATV Co. Ltd., dated April 16, 1999 (including English summary)**4.14
    
    Broadband Internet over Cable Service Agreement between Hoshin GigaMedia Center, Inc. and
Sun Crown CATV Co. Ltd., dated April 16, 1999 (including English summary)**4.15
    
    Broadband Internet over Cable Service Agreement between Hoshin GigaMedia Center, Inc. and
Shinyeongan CATV Co. Ltd., dated May 21, 1999 (including English summary)**
 97




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##### Table of Contents



4.16
    
    Broadband Internet over Cable Service Agreement between Hoshin GigaMedia Center, Inc. and
Chung Lian Inc., dated April 16, 1999 (including English summary)**4.17
    
    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)**4.18
    
    Broadband Internet over Cable Service Agreement between Hoshin GigaMedia Center, Inc. and
Union Cable TV Co. Ltd., dated May 14, 1999 (including English summary)**4.19
    
    Broadband Internet over Cable Service Agreement between Hoshin GigaMedia Center, Inc. and
North Taoyuan CATV Company, dated August 9, 1999 (including English summary)**4.20
    
    Broadband Internet over Cable Service Agreement between Hoshin GigaMedia Center, Inc. and
Top Cable TV System Co., dated November 1, 1999 (including English summary)**4.21
    
    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)**4.22
    
    Broadband Internet over Cable Service Agreement between Hoshin GigaMedia Center, Inc. and
Shuang Shing Cable TV Co., dated June 16, 1999 (including English summary)**4.23
    
    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)**4.24
    
    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)**4.25
    
    Registration Rights Agreement among GigaMedia Limited and Microsoft Corporation, dated
November 23, 1999**4.26
    
    Shareholders Agreement among GigaMedia Limited and Microsoft Corporation, Koos Develop
Corp., Kudos Fund, Best Method Limited, 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**4.27
    
    Business Co-Operation Agreement among Hoshin GigaMedia Center, Inc. and Microsoft
Corporation, dated November 1, 1999**4.28
    
    Strategic Alliance Agreement among GigaMedia Limited, Hoshin GigaMedia Center Inc., and
Gamania Digital Entertainment Co., LTD., dated March 1, 2001***4.29
    
    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******4.30
    
    End User License Agreement between Internet Media Licensing Limited and Ultra Internet
Media S.A., dated April 1, 2004*******4.31
    
    Purchase and Sale Agreement between Hoshin GigaMedia Center, Inc. and Webs-TV, Digital
International Corporation, dated June 23, 2005*******4.32
    
    Put-Call Option Agreement between Hoshin GigaMedia Center, Inc. and JSDWAY Digital
Technology Co. Ltd., dated December 21, 2005*4.33
    
    Assets Sale and Purchase Agreement among GigaMedia Limited, FunTown World Limited, Hoshin
GigaMedia Center, Inc. and TWP Corporation, dated December 19, 2005*4.34
    
    Share Purchase Agreement between GigaMedia Limited and Nextbase International Limited,
dated September 17, 2005*4.35
    
    Subscription Rights Agreement between Hoshin GigaMedia Center, Inc. Wretch Co., Ltd. and
the shareholders of Wretch Co. Ltd, dated March 10, 2006*4.36
    
    Series A Preferred Share Purchase Agreement among T2CN Holding Limited, GigaMedia China
Limited, and certain shareholders of T2CN, dated April 27, 2006*4.37
    
    Shareholders Agreement among T2CN Holding Limited and the Shareholders dated April 27,
2006*4.38
    
    Strategic Partnership Agreement between T2CN Holding Limited and GigaMedia China Limited,
dated April 27, 2006*4.39
    
    Assets Purchase and Sale Agreement between Hoshin GigaMedia Center, Inc. and Webs-TV
Digital International Corporation, dated May 15, 2006*4.40
    
    Service Agreement between Hoshin GigaMedia Center, Inc. and Webs-TV Digital International
Corporation, dated May 15, 2006*4.41
    
    Second Amendment to the End User License Agreement between Internet Media Licensing Limited
and Ultra Internet Media S.A., dated March 1, 2006*4.42
    
    Amended and Restated Shareholders Agreement between T2CN Holding Ltd., certain
shareholders of T2CN, GigaMedia China Limited, Marvel City Investments Limited, Patriot
Capital Limited, TAE LLC and Ant Bridge No. 2 Venture Capital Secondary Investment Limited
Partnership, dated November 25, 2006
 98




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##### Table of Contents



4.43
    
    Share Purchase Agreement between
GigaMedia China Limited, Newmargin T2CN Investment
Ltd. and Shanghai Newmargin Venture Capital Co., Ltd dated January 1, 20074.44
    
    Share Purchase Agreement between GigaMedia China Limited and Chengwei (China) Investment
Company, Greg. Wei Gang Ye, and Jia Yi Wan, dated January 1, 20074.45
    
    Share Purchase Agreement between GigaMedia China Limited and certain shareholders of T2CN,
dated January 17, 20074.46
    
    Share Purchase Agreement between
GigaMedia China Limited, Shanghai Newmargin Venture Capital Co. Ltd. and Newmargin Happydigital
Investment Partners Inc., dated January 1, 20074.47
    
    Subscription Agreement between GigaMedia Asia Pacific Limited and Infocomm Asia Holdings
Pte. Ltd., dated December 7, 20064.48
    
    Termination Agreement between Hoshin GigaMedia Center Inc., Koos Broadband Telecom Co.,
Ltd, Wretch Co., Ltd and certain shareholders of Wretch Co., Ltd, dated December 12, 20064.49
    
    License and Distribution Agreement between Dragongate Enterprises Limited and HanbitSoft
Inc., dated December 13, 20064.50
    
    Third Amendment to the End User License Agreement dated March 1, 2007, between Internet
Media Licensing Limited and Ultra Internet Media, S.A.4.51
    
    Shareholders Agreement
between GigaMedia Asia Pacific Limited, Management Capital
International Ltd, Infocomm Investments Pte Ltd, Commerzbank Infocomm
Segregated Portfolios, Global Star International Development Limited
and Etherfast Pte Ltd, dated December 7, 2006.4.52
    
    Shareholders Agreement, between GigaMedia Asia Pacific Limited,
Bodhi China and India Investments LLC, Etherfast Pte Ltd, Global Star International
Development Limited, Commerzbank Infocomm Segregated Portfolio, Infocomm Investments Pte
Ltd, Management Capital International Ltd and Infocomm Asia, dated
February 2, 20074.53
    
    2006 Equity Incentive Plan********8.1
    
    List of Subsidiaries*11
    
    Code of ethics adopted by the registrant on April 21, 2004, as amended on December 19, 2005*12.1
    
    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 Rule13a-14(b) of the Securities
Exchange Act13.1
    
    Certification by our Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
    
    Certification by our Chief
Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1
    
    Consent of PricewaterhouseCoopers, Independent Registered Public Accounting Firm15.2
    
    Consent of GHP Horwath, P.C., Independent Registered Public Accounting Firm.
 
 *
    
    Filed with the Commission with the original 2005 annual report on Form 20-F of GigaMedia,
Ltd. on June 28, 2006.**
    
    Incorporated by reference from our Registration Statement on Form F-1, file number
333-11416 filed with the Commission on February 2, 2000.***
    
    Incorporated by reference from our annual report on Form 20-F, file number 000-30540 filed
with the Commission on June 28, 2001.******
    
    Incorporated by reference from our annual report on Form 20-F, file number 000-30540 filed
with the Commission on June 30, 2004.*******
    
    Incorporated by reference from our annual report on Form 20-F, file number 000-30540 filed
with the Commission on June 30, 2005.********
    
    Incorporated by reference from our Registration Statement on Form S-8, file number
333-142963 filed with the Commission on May 15, 2007+
    
    Does not contain portions for which confidential treatment has been requested. 99




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##### Table of Contents



SIGNATURE
  GIGAMEDIA LIMITED
 By:
    
    /s/ Arthur WangArthur WangChief Executive OfficerDate: June 29, 2007
 100




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Share-Based Payment
 
 
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 F-2




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##### Table of Contents



GIGAMEDIA LIMITED
 
 CONSOLIDATED BALANCE SHEETS  December 31, 2005 and 2006
 December 312005
    
    
    2006ASSETSCURRENT ASSETSCash and cash equivalents (Note 8)
    
    $
    41,731
    
    
    $
    22,372Marketable securities-current (Note 9)
    
    
    20,404
    
    
    
    13,816Notes and accounts receivable-net (Note 10)
    
    
    6,443
    
    
    
    15,076Inventories-net (Note 11)
    
    
    58
    
    
    
    123Prepaid expenses (Note 22)
    
    
    274
    
    
    
    3,196Restricted cash (Note 13)
    
    
    
    
    
    
    2,697Other receivable (Note 4)
    
    
    1,231
    
    
    
    6,268Other current assets
    
    
    63
    
    
    
    628Total Current Assets
    
    
    70,204
    
    
    
    64,176Marketable securities-noncurrent (Note 12)
    
    
    
    
    
    
    25,000PROPERTY, PLANT AND EQUIPMENTLand
    
    
    676
    
    
    
    682Building
    
    
    1,153
    
    
    
    1,162Information and communication equipment
    
    
    20,647
    
    
    
    18,200Modems rented
    
    
    2,085
    
    
    
    2,010Office furniture and fixtures
    
    
    1,445
    
    
    
    1,919Transportation equipment
    
    
    369
    
    
    
    368Leasehold improvements
    
    
    1,841
    
    
    
    2,15728,216
    
    
    
    26,498Less: Accumulated depreciation
    
    
    (17,469
    )
    
    
    (16,400
    )10,747
    
    
    
    10,098GOODWILL (Notes 5 and 6)
    
    
    29,243
    
    
    
    55,817INTANGIBLE ASSETS-NET (Notes 5 and 7)
    
    
    2,704
    
    
    
    23,067OTHER ASSETSDeferred assets
    
    
    91
    
    
    
    217Refundable deposits
    
    
    500
    
    
    
    838Prepaid royalty (Note 22)
    
    
    
    
    
    
    3,374Other (Note 20)
    
    
    30
    
    
    
    32Total Other Assets
    
    
    621
    
    
    
    4,461TOTAL ASSETS
    
    $
    113,519
    
    
    $
    182,619
 F-3




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##### Table of Contents



GIGAMEDIA LIMITED  CONSOLIDATED BALANCE SHEETS-(Continued)  December 31, 2005 and 2006
 December 312005
    
    
    2006LIABILITIES & SHAREHOLDERS EQUITYCURRENT LIABILITIESShort-term loans (Note 14)
    
    $
    
    
    
    $
    12,853Notes and accounts payable
    
    
    1,427
    
    
    
    1,751Accrued compensation
    
    
    1,194
    
    
    
    3,458Accrued expenses
    
    
    1,791
    
    
    
    4,786Other current liabilities (Note 15 and 20)
    
    
    6,245
    
    
    
    22,359Total Current Liabilities
    
    
    10,657
    
    
    
    45,207OTHER LIABILITIESRefundable deposits
    
    
    831
    
    
    
    752Accrued pension liabilities (Note 17)
    
    
    819
    
    
    
    434Convertible notes (Note 16)
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    605Total Other Liabilities
    
    
    1,650
    
    
    
    1,791Total Liabilities
    
    
    12,307
    
    
    
    46,998MINORITY INTERESTS
    
    
    564
    
    
    
    1,534COMMITMENTS AND CONTINGENCIES (Note 22)
    
    
    
    
    
    
    SHAREHOLDERS EQUITYCommon shares, no par value, and
additional paid-in capital; issued 50,344
thousand and 51,495 thousand shares on
December 31, 2005 and 2006 (Note 18)
    
    
    287,920
    
    
    
    289,495Accumulated deficit (Note 18)
    
    
    (159,223
    )
    
    
    (128,439
    )Accumulated other comprehensive loss
    
    
    (28,049
    )
    
    
    (26,969
    )Total Shareholders Equity
    
    
    100,648
    
    
    
    134,087TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    113,519
    
    
    $
    182,619
  F-4




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##### Table of Contents



GIGAMEDIA LIMITED
 
 CONSOLIDATED STATEMENTS OF OPERATIONS  For the Years Ended December 31, 2004, 2005 and 2006
 2004
    
    
    2005
    
    
    2006OPERATING REVENUESSoftware licensing and online entertainment
revenues
    
    $
    11,434
    
    
    $
    22,511
    
    
    $
    55,019Online game revenues
    
    
    
    
    
    
    
    
    
    
    18,692Internet access and service revenues
    
    
    21,303
    
    
    
    21,589
    
    
    
    20,537Other revenues
    
    
    107
    
    
    
    87
    
    
    
    44Total
    
    
    32,844
    
    
    
    44,187
    
    
    
    94,292OPERATING COSTSCost of software licensing and online
entertainment revenues
    
    
    (1,592
    )
    
    
    (3,327
    )
    
    
    (7,824
    )Cost of online game revenues
    
    
    
    
    
    
    
    
    
    
    (3,667
    )Cost of Internet access and service revenues
    
    
    (13,873
    )
    
    
    (13,568
    )
    
    
    (11,449
    )Cost of other revenues
    
    
    (644
    )
    
    
    (488
    )
    
    
    (391
    )(16,109
    )
    
    
    (17,383
    )
    
    
    (23,331
    )GROSS PROFIT
    
    
    16,735
    
    
    
    26,804
    
    
    
    70,961OPERATING EXPENSESProduct development and engineering expenses
    
    
    (2,513
    )
    
    
    (3,562
    )
    
    
    (5,738
    )Selling and marketing expenses
    
    
    (6,310
    )
    
    
    (10,777
    )
    
    
    (30,123
    )General and administrative expenses
    
    
    (5,657
    )
    
    
    (7,892
    )
    
    
    (12,421
    )Bad debt expenses
    
    
    220
    
    
    
    (207
    )
    
    
    (715
    )(14,260
    )
    
    
    (22,438
    )
    
    
    (48,997
    )INCOME FROM OPERATIONS
    
    
    2,475
    
    
    
    4,366
    
    
    
    21,964NON-OPERATING INCOME (EXPENSES)Interest income
    
    
    140
    
    
    
    411
    
    
    
    722Gains on sales of marketable securities
    
    
    1,230
    
    
    
    850
    
    
    
    2,189Other-than-temporary impairment of
marketable securities (Note 12)
    
    
    (1,833
    )
    
    
    
    
    
    
    Interest expense
    
    
    (4
    )
    
    
    
    
    
    
    (582
    )Foreign exchange gain (loss)
    
    
    (765
    )
    
    
    151
    
    
    
    (161
    )Gain (loss) on disposal of property, plant
and equipment
    
    
    (44
    )
    
    
    204
    
    
    
    (37
    )Gain on divestiture of business (Note 4)
    
    
    
    
    
    
    
    
    
    
    7,668Other (Note 16)
    
    
    133
    
    
    
    1,094
    
    
    
    891(1,143
    )
    
    
    2,710
    
    
    
    10,690INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTERESTS
    
    
    1,332
    
    
    
    7,076
    
    
    
    32,654
 F-5




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##### Table of Contents



2004
    
    
    2005
    
    
    2006INCOME TAX BENEFIT (EXPENSES) (Note 20)
    
    
    84
    
    
    
    (436
    )
    
    
    (1,549
    )INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS
    
    
    1,416
    
    
    
    6,640
    
    
    
    31,105MINORITY INTERESTS INCOME
    
    
    (163
    )
    
    
    (150
    )
    
    
    (321
    )INCOME FROM CONTINUING OPERATIONS
    
    
    1,253
    
    
    
    6,490
    
    
    
    30,784INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    
    
    429
    
    
    
    (154
    )
    
    
    $
    1,682
    
    
    $
    6,336
    
    
    $
    30,784EARNINGS PER SHARE (Note 2)Basic:Income from continuing operations
    
    $
    0.02
    
    
    $
    0.13
    
    
    $
    0.60Income from discontinued operations
    
    
    0.01
    
    
    
    
    
    
    
    Net income
    
    $
    0.03
    
    
    $
    0.13
    
    
    $
    0.60Diluted:Income from continuing operations
    
    $
    0.02
    
    
    $
    0.12
    
    
    $
    0.51Income from discontinued operations
    
    
    0.01
    
    
    
    
    
    
    
    Net income
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.51WEIGHTED AVERAGE SHARES USED TO COMPUTEEARNINGS PER SHARE (Note 2)Basic
    
    
    50,154
    
    
    
    50,312
    
    
    
    50,921Diluted
    
    
    51,701
    
    
    
    55,059
    
    
    
    61,114
  F-6




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##### Table of Contents



GIGAMEDIA LIMITED
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY  For the Years Ended December 31, 2004, 2005 and 2006
 AccumulatedCommon shares
    
    
    
    
    
    
    
    
    otherand additional paid-in
    
    
    
    
    
    Accumulated
    
    
    comprehensivecapital
    
    
    Warrant
    
    
    deficit
    
    
    incomeShares
    
    
    Amount
    
    
    outstanding
    
    
    (Note 18)
    
    
    (loss)
    
    Total2004Balance as of January 1, 2004
    
    
    50,154
    
    
    $
    239,004
    
    
    $
    48,653
    
    
    
    ($167,241
    )
    
    
    ($30,053
    )
    
    $
    90,363Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    
    
    
    
    1,682Cancellation of warrant
    
    
    
    
    
    
    48,653
    
    
    
    (48,653
    )
    
    
    
    
    
    
    
    
    
    
    Components of other
comprehensive income (loss):Net unrealized loss on
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (357
    )
    
    
    (357
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,283
    
    
    
    4,283Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,608Balance as of December 31, 2004
    
    
    50,154
    
    
    
    287,657
    
    
    
    
    
    
    
    (165,559
    )
    
    
    (26,127
    )
    
    
    95,9712005Issuance of common shares for
employee stock purchase plan
    
    
    190
    
    
    
    263
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    263Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,336
    
    
    
    
    
    
    
    6,336Components of other
comprehensive income (loss):Net unrealized loss on
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (333
    )
    
    
    (333
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,589
    )
    
    
    (1,589
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,414Balance as of December 31, 2005
    
    
    50,344
    
    
    
    287,920
    
    
    
    
    
    
    
    (159,223
    )
    
    
    (28,049
    )
    
    
    100,6482006Issuance of common shares
from exercise of stock
options
    
    
    1,151
    
    
    
    1,265
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,265Stock-based compensation
    
    

    

    
    
    
    310
    
    
    

    
    
    
    

    
    
    
    

    
    
    
    
    310Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,784
    
    
    
    
    
    
    
    30,784Components of other
comprehensive income (loss):Net unrealized gain on
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    335
    
    
    
    335Adjustment to initially
apply FAS 158
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235
    
    
    
    235Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    510
    
    
    
    510Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,864Balance as of December 31, 2006
    
    
    51,495
    
    
    $
    289,495
    
    
    $
    
    
    
    
    ($128,439
    )
    
    
    ($26,969
    )
    
    $
    134,087
  F-7




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##### Table of Contents



GIGAMEDIA LIMITED
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  For the Years Ended December 31, 2004, 2005 and 2006
 2004
    
    
    2005
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,682
    
    
    $
    6,336
    
    
    $
    30,784Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation
    
    
    4,675
    
    
    
    4,203
    
    
    
    3,167Amortization
    
    
    2,545
    
    
    
    2,202
    
    
    
    2,876Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    310Provision for bad debt expenses
    
    
    247
    
    
    
    307
    
    
    
    715Provision for (reversal of) inventory loss
    
    
    (300
    )
    
    
    507
    
    
    
    36Gain on divestiture of business
    
    
    
    
    
    
    (911
    )
    
    
    (7,668
    )Loss on physical inventory
    
    
    9
    
    
    
    
    
    
    
    Loss (gain) on disposal of property, plant and equipment
    
    
    106
    
    
    
    (204
    )
    
    
    37Gain on sale of marketable securities
    
    
    (1,230
    )
    
    
    (958
    )
    
    
    (2,189
    )Premium from debt securities
    
    
    
    
    
    
    (3
    )
    
    
    (7
    )Interest income from premium of convertible notes
    
    
    
    
    
    
    
    
    
    
    (140
    )Gain on early redemption of convertible notes
    
    
    
    
    
    
    
    
    
    
    (625
    )Transfer property, plant, and equipment, and deferred assets to expenses
    
    
    
    
    
    
    
    
    
    
    34Cash dividend to minority interest shareholders of variable interest entity
    
    
    
    
    
    
    
    
    
    
    (100
    )Minority interests income (loss)
    
    
    481
    
    
    
    (646
    )
    
    
    321Other-than-temporary impairment on marketable securities
    
    
    1,833
    
    
    
    
    
    
    
    Net changes in operating assets and liabilities:Notes and accounts receivable
    
    
    699
    
    
    
    (2,193
    )
    
    
    (5,723
    )Inventories
    
    
    (5,531
    )
    
    
    3,186
    
    
    
    (45
    )Prepaid expenses
    
    
    730
    
    
    
    185
    
    
    
    (2,422
    )Other receivables
    
    
    (236
    )
    
    
    (695
    )
    
    
    (62
    )Other current assets
    
    
    145
    
    
    
    28
    
    
    
    (376
    )Notes and accounts payable
    
    
    (4,089
    )
    
    
    (1,371
    )
    
    
    69Accrued expenses
    
    
    (924
    )
    
    
    (1,177
    )
    
    
    2,419Accrued compensation
    
    
    236
    
    
    
    (18
    )
    
    
    2,264Other current liabilities
    
    
    981
    
    
    
    2,663
    
    
    
    7,694Accrued pension liabilities
    
    
    309
    
    
    
    62
    
    
    
    (150
    )Others
    
    
    22
    
    
    
    19
    
    
    
    (1,776
    )Net cash provided by operating activities
    
    
    2,390
    
    
    
    11,522
    
    
    
    29,443CASH FLOWS FROM INVESTING ACTIVITIES:Decrease (increase) in restricted cash
    
    
    419
    
    
    
    176
    
    
    
    (2,697
    )Proceeds from disposal of marketable securities
    
    
    69,352
    
    
    
    36,970
    
    
    
    26,700Divestiture of business, net of cash transferred
    
    
    
    
    
    
    3,253
    
    
    
    3,318Purchase of property, plant and equipment
    
    
    (2,587
    )
    
    
    (2,652
    )
    
    
    (2,716
    )Proceeds from disposal of property, plant and equipment
    
    
    415
    
    
    
    949
    
    
    
    8Purchase of marketable securities
    
    
    (60,834
    )
    
    
    (20,184
    )
    
    
    (42,509
    )Purchase of intangible assets
    
    
    (663
    )
    
    
    (1,005
    )
    
    
    (2,583
    )Acquisitions, net of cash acquired
    
    
    (32,797
    )
    
    
    
    
    
    
    (26,760
    )Decrease (increase) in refundable deposits
    
    
    1,450
    
    
    
    42
    
    
    
    (197
    )Increase (decrease) in other assets
    
    
    1
    
    
    
    (16
    )
    
    
    (82
    )Increase in deferred assets
    
    
    (193
    )
    
    
    (331
    )
    
    
    (368
    )Cash recognized on initial consolidation of variable interest entity
    
    
    94
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (25,343
    )
    
    
    17,202
    
    
    
    (47,886
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from (repayment of) short-term loan
    
    
    269
    
    
    
    (284
    )
    
    
    12,853Redemption of convertible notes
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Increase (decrease) in refundable deposits
    
    
    125
    
    
    
    268
    
    
    
    (80
    )Acquisition of minority interests
    
    
    (238
    )
    
    
    
    
    
    
    
 F-8




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##### Table of Contents



2004
    
    
    2005
    
    
    2006Cash received from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    1,265Issuance of common shares for employee stock purchase plan
    
    
    
    
    
    
    263
    
    
    
    Net cash provided by (used in) financing activities
    
    
    156
    
    
    
    247
    
    
    
    (962
    )Exchange difference
    
    
    736
    
    
    
    (473
    )
    
    
    46NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (22,061
    )
    
    
    28,498
    
    
    
    (19,359
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    35,294
    
    
    
    13,233
    
    
    
    41,731CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    13,233
    
    
    $
    41,731
    
    
    $
    22,372SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid during the year
    
    $
    7
    
    
    $
    
    
    
    $
    581Income tax paid during the year
    
    $
    9
    
    
    $
    323
    
    
    $
    455NON-CASH FINANCING AND INVESTING ACTIVITIES:Unrealized holding gain (loss) on available-for-sale securities
    
    
    ($357
    )
    
    
    ($333
    )
    
    $
    335Issuance of convertible notes as acquisition consideration
    
    
    
    
    
    
    
    
    
    $
    15,000Adjustment to acquisition purchase price
    
    
    
    
    
    
    
    
    
    $
    5,000Divestiture of business
    
    
    
    
    
    
    
    
    
    $
    4,966
  F-9




---



##### Table of Contents



Notes to the Consolidated Financial Statements
 NOTE 1. BUSINESS OVERVIEW, BASIS OF PRESENTATION, AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES
 Business Overview
     Basis of Presentation
  Principles of Consolidation
 Reporting Currency and Foreign Currency Translation
  F-10




---



##### Table of Contents



2004
    
    
    2005
    
    
    2006Year-end
    
    
    31.71
    
    
    
    32.85
    
    
    
    32.60Weighted average
    
    
    33.41
    
    
    
    32.19
    
    
    
    32.54
 Use of Estimates
  Revenue Recognition
 General
  Multiple-Element Arrangement
   Software Licensing and Online Entertainment Revenues
  F-11




---



##### Table of Contents



Online Game Revenues
    Internet Access and Service Revenues
   F-12




---



##### Table of Contents



Other Revenues
  Discontinued Operations
   Deferred Revenues
  F-13




---



##### Table of Contents



Operation Costs
  Fair Value of Financial Instruments
  Cash Equivalents
  Marketable Securities
  Allowance for Doubtful Accounts
  F-14




---



##### Table of Contents



Inventories
  Property, Plant and Equipment
  Item
    
    YearsBuildings
    
    50Information and communication equipment
    
    2 to 5Modems rented
    
    3 to 5Office furniture and equipment
    
    3 to 5Transportation equipment
    
    3 to 5Leasehold improvements
    
    5
  Intangible Assets and Goodwill
   Impairment of Long-Lived Assets
  F-15




---



##### Table of Contents



Software Cost
  Product Development and Engineering
  Advertising
  Stock-Based Compensation
  (in US$ thousands,
    
    Years Ended December 31,except per share figures)
    
    2004
    
    
    2005Net income (loss)As reported
    
    $
    1,682
    
    
    $
    6,336Less: Stock compensation expense,
net of related tax effects
    
    
    (3,421
    )
    
    
    (1,951
    )Pro-forma
    
    $
    (1,739
    )
    
    $
    4,385Earnings (loss)per share:As reported  basic
    
    $
    0.03
    
    
    $
    0.13As reported  diluted
    
    
    0.03
    
    
    
    0.12Pro-forma  basic
    
    
    (0.03
    )
    
    
    0.09Pro-forma  diluted
    
    
    (0.03
    )
    
    
    0.08
 F-16




---



##### Table of Contents



Retirement Plan and Net Periodic Pension Cost
   Comprehensive Income (Loss)
  F-17




---



##### Table of Contents



Accounting for Income Taxes
  Earnings (Loss) Per Share
  Minority Interest
    Reclassification
  F-18




---



##### Table of Contents



Recent Accounting Pronouncements
      F-19




---



##### Table of Contents



NOTE 2. EARNINGS (LOSS) PER SHARE
 For the years end December 31,(in US$ thousands, except per share figures)
    
    2004
    
    
    2005
    
    
    2006Weighted average outstanding sharesBasic
    
    
    50,154
    
    
    
    50,312
    
    
    
    50,921Effect of dilutive securitiesEmployee share-based compensation
    
    
    1,547
    
    
    
    4,747
    
    
    
    7,509Convertible notes
    
    
    
    
    
    
    
    
    
    
    2,684Diluted
    
    
    51,701
    
    
    
    55,059
    
    
    
    61,114Earnings Per Share  BasicIncome from continuing operations
    
    $
    1,253
    
    
    $
    6,490
    
    
    $
    30,784Income (loss) from discontinued operations,
net of taxes
    
    
    429
    
    
    
    (154
    )
    
    
    Net income
    
    $
    1,682
    
    
    $
    6,336
    
    
    $
    30,784Earnings per shareContinuing operations
    
    $
    0.02
    
    
    $
    0.13
    
    
    $
    0.60Discontinued operations
    
    
    0.01
    
    
    
    
    
    
    
    $
    0.03
    
    
    $
    0.13
    
    
    $
    0.60Earnings Per Share  DilutedIncome from continuing operations
    
    $
    1,253
    
    
    $
    6,490
    
    
    $
    30,784Interest charges associated with convertible notes
    
    
    
    
    
    
    
    
    
    
    288Income from continuing operations after assumed
conversion of convertible notes
    
    
    1,253
    
    
    
    6,490
    
    
    
    31,072Income (loss) from discontinued operations,
net of taxes
    
    
    429
    
    
    
    (154
    )
    
    
    Net income after assumed conversion of convertible
notes
    
    $
    1,682
    
    
    $
    6,336
    
    
    $
    31,072Earnings per shareContinuing operations
    
    $
    0.02
    
    
    $
    0.12
    
    
    $
    0.51Discontinued operations
    
    
    0.01
    
    
    
    
    
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.51
 NOTE 3. VARIABLE-INTEREST ENTITY
   F-20




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##### Table of Contents



NOTE 4. DIVESTITURES
 Divestiture  Music Distribution Business
   (in US$ thousands)
    
    2004
    
    
    2005Revenue
    
    $
    66,975
    
    
    $
    37,907Income (loss) before tax and
minority interest income
    
    $
    752
    
    
    $
    (1,861
    )Income tax (benefit)/expense
    
    $
    5
    
    
    $
    (1
    )Minority interest income (loss)
    
    $
    318
    
    
    $
    (796
    )Income (loss) from discontinued
operations
    
    $
    429
    
    
    $
    (154
    )
  (in US$ thousands)Cash (including restricted cash)
    
    $
    3,098Accounts receivable
    
    
    1,842Inventory
    
    
    6,679Other current assets
    
    
    683Property and equipment
    
    
    1,666Intangible assets
    
    
    4,689Other assets
    
    
    1,553Total assets
    
    $
    20,210Accounts payable
    
    $
    11,239Other liabilities
    
    
    1,945Total liabilities
    
    $
    13,184
 F-21




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##### Table of Contents



Divestiture  ADSL Business
   NOTE 5. ACQUISITIONS
 Acquisition  FunTown
   (i)
    
    If the increase in 2006 was 30 percent or more, an additional payment of $5 million;(ii)
    
    If the increase in 2006 was 15 percent or above but less than 30 percent, a reduced incentive
payment;(iii)
    
    If the increase in 2006 was less than 15 percent, no additional payment.
  F-22




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##### Table of Contents



Amortization life
    
    
    Original
    
    
    Price
    
    
    Total(in US$ thousands)
    
    (in years)
    
    
    amount
    
    
    adjustment
    
    
    allocationCash acquired
    
    
    
    
    
    $
    463
    
    
    $
    
    
    
    $
    463Accounts receivable
    
    
    
    
    
    
    3,626
    
    
    
    
    
    
    
    3,626Other current assets
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    106Fixed assets / non-current assets
    
    
    
    
    
    
    628
    
    
    
    
    
    
    
    628Intangible assets
    
    
    
    
    
    
    Trade name and trademark
    
    
    N/A
    
    
    
    10,795
    
    
    
    
    
    
    
    10,795Customer relationships
    
    
    9
    
    
    
    5,546
    
    
    
    
    
    
    
    5,546Completed technology
    
    
    7
    
    
    
    2,301
    
    
    
    
    
    
    
    2,301Self-developed software
    
    
    5
    
    
    
    1,534
    
    
    
    
    
    
    
    1,534Others
    
    
    5
    
    
    
    73
    
    
    
    
    
    
    
    73Goodwill
    
    
    N/A
    
    
    
    21,409
    
    
    
    5,000
    
    
    
    26,409Total assets acquired
    
    
    
    
    
    
    46,481
    
    
    
    5,000
    
    
    
    51,481Current liabilities
    
    
    
    
    
    
    (3,501
    )
    
    
    
    
    
    
    (3,501
    )Noncurrent liabilities
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Total liabilities assumed
    
    
    
    
    
    
    (3,502
    )
    
    
    
    
    
    
    (3,502
    )Total purchase price
    
    
    
    
    
    $
    42,979
    
    
    $
    5,000
    
    
    $
    47,979
  Year ended(in US$ thousands,
    
    December 31, 2005except per share figures)
    
    UnauditedNet revenue
    
    $
    61,219Income from operations
    
    
    8,949Net income
    
    
    11,279Basic earnings per share
    
    
    0.22Diluted earnings per share
    
    
    0.20
  Acquisition  CESL
  F-23




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##### Table of Contents



Amortization life
    
    
    Original
    
    
    
    
    
    
    Total(in US$ thousands)
    
    (in years)
    
    
    amount
    
    
    Price adjustment
    
    
    allocationCash acquired
    
    
    
    
    
    $
    21
    
    
    $
    
    
    
    $
    21Accounts receivable
    
    
    
    
    
    
    1,186
    
    
    
    
    
    
    
    1,186Other current assets
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    127Fixed assets / non-current assets
    
    
    
    
    
    
    450
    
    
    
    
    
    
    
    450Intangible assetsCompleted technology
    
    
    3
    
    
    
    1,300
    
    
    
    
    
    
    
    1,300Trade name and trademark
    
    
    10
    
    
    
    700
    
    
    
    
    
    
    
    700Non-competition agreement
    
    
    5
    
    
    
    200
    
    
    
    
    
    
    
    200Others
    
    
    2-4
    
    
    
    373
    
    
    
    
    
    
    
    373Goodwill
    
    
    N/A
    
    
    
    29,398
    
    
    
    (364
    )
    
    
    29,034Total assets acquired
    
    
    
    
    
    
    33,755
    
    
    
    (364
    )
    
    
    33,391Current liabilities
    
    
    
    
    
    
    (573
    )
    
    
    
    
    
    
    (573
    )Noncurrent liabilities
    
    
    
    
    
    
    (364
    )
    
    
    364
    
    
    
    Total liabilities assumed
    
    
    
    
    
    
    (937
    )
    
    
    364
    
    
    
    (573
    )Total purchase price
    
    
    
    
    
    $
    32,818
    
    
    $
    
    
    
    $
    32,818
  Year ended December 31(in US$ thousands,
    
    2004except per share figures)
    
    UnauditedNet revenue
    
    $
    102,668Income (loss) from operations
    
    
    4,440Net income (loss)
    
    
    3,103Basic earnings (loss) per share
    
    
    0.06Diluted earnings (loss) per share
    
    
    0.06
 F-24




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##### Table of Contents



NOTE 6. GOODWILL
 Softwarelicensing andonline(in US$ thousands)
    
    entertainment
    
    
    Online game
    
    
    TotalBalance as of December 31, 2004
    
    $
    29,607
    
    
    $
    
    
    
    $
    29,607Post-acquisition adjustment
    
    
    (364
    )
    
    
    
    
    
    
    (364
    )Balance as of December 31, 2005
    
    
    29,243
    
    
    
    
    
    
    
    29,243Acquisition
    
    
    
    
    
    
    21,409
    
    
    
    21,409Post-acquisition adjustment
    
    
    
    
    
    
    5,000
    
    
    
    5,000Translation adjustment
    
    
    
    
    
    
    165
    
    
    
    165Balance as of December 31, 2006
    
    $
    29,243
    
    
    $
    26,574
    
    
    $
    55,817
  NOTE 7. INTANGIBLE ASSETS  NET
  December 31, 2005Gross carrying
    
    
    Accumulated(in US$ thousands)
    
    amount
    
    
    amortization
    
    
    NetCompleted technology
    
    $
    1,300
    
    
    $
    (758
    )
    
    $
    542Trade name
trademark and non-competition agreement
    
    
    900
    
    
    
    (193
    )
    
    
    707Capitalized software cost
    
    
    2,155
    
    
    
    (753
    )
    
    
    1,402Other
    
    
    66
    
    
    
    (13
    )
    
    
    53Total
    
    $
    4,421
    
    
    $
    (1,717
    )
    
    $
    2,704
 F-25




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##### Table of Contents



December 31, 2006Gross carrying
    
    
    Accumulated(in US$ thousands)
    
    amount
    
    
    amortization
    
    
    NetCompleted technology
    
    $
    3,619
    
    
    $
    (1,523
    )
    
    $
    2,096Trade name
trademark and non-competition agreement
    
    
    11,841
    
    
    
    (307
    )
    
    
    11,534Capitalized software cost
    
    
    6,333
    
    
    
    (1,910
    )
    
    
    4,423Customer relationships
    
    
    5,589
    
    
    
    (621
    )
    
    
    4,968Other
    
    
    66
    
    
    
    (20
    )
    
    
    46Total
    
    $
    27,448
    
    
    $
    (4,381
    )
    
    $
    23,067
   Amount(in US$ thousands)2007
    
    $
    2,8602008
    
    
    2,3212009
    
    
    1,9442010
    
    
    1,6372011
    
    
    1,035$
    9,797
 NOTE 8. CASH AND CASH EQUIVALENTS
 December 31,(in US$ thousands)
    
    2005
    
    
    2006Checking and savings accounts
    
    $
    36,831
    
    
    $
    22,372Time deposits
    
    
    4,900
    
    
    
    Total
    
    $
    41,731
    
    
    $
    22,372
 F-26




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##### Table of Contents



NOTE 9. MARKETABLE SECURITIES  CURRENT
 December 31,2005
    
    
    2006Percentage
    
    
    
    
    
    
    Percentage(in US$ thousands)
    
    Amount
    
    
    held
    
    
    Amount
    
    
    heldAvailable-for-sale securitiesDebt securities due within one year
    
    $
    4,957
    
    
    
    
    
    
    $
    
    
    
    
    Open-end funds
    
    
    12,655
    
    
    
    
    
    
    
    13,816
    
    
    
    Equity Securities  Gamania DigitalEntertainment Co., Ltd. (Gamania)
    
    
    2,792
    
    
    
    3.34
    
    
    
    
    
    
    
    Total
    
    $
    20,404
    
    
    
    
    
    
    $
    13,816
   Less than 12 months(in US$ thousands)
    
    Fair Value
    
    
    Unrealized LossesDebt securitiesFreddie Mac N1206
    
    $
    4,957
    
    
    $
    (36
    )
    F-27




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##### Table of Contents



NOTE 10. NOTES AND ACCOUNTS RECEIVABLE  NET
 December 31,(in US$ thousands)
    
    2005
    
    
    2006Notes and accounts receivable
    
    $
    8,127
    
    
    $
    16,971Less: Allowance for doubtful accounts
    
    
    (1,684
    )
    
    
    (1,895
    )Net
    
    $
    6,443
    
    
    $
    15,076
 For the years ended December 31,(in US$ thousands)
    
    2004
    
    
    2005
    
    
    2006Allowance for doubtful accountsBalance at beginning of year
    
    $
    1,731
    
    
    $
    2,050
    
    
    $
    1,684Acquisition
    
    
    
    
    
    
    
    
    
    
    163Additions: Bad debt expenses
    
    
    247
    
    
    
    203
    
    
    
    715Less: Write-offs
    
    
    (73
    )
    
    
    
    
    
    
    (681
    )Divestiture  Music
distribution business
    
    
    
    
    
    
    (489
    )
    
    
    Translation adjustment
    
    
    145
    
    
    
    (80
    )
    
    
    14Balance at end of year
    
    $
    2,050
    
    
    $
    1,684
    
    
    $
    1,895
 NOTE 11. INVENTORIES  NET
 December 31,(in US$ thousands)
    
    2005
    
    
    2006Cable modems
    
    $
    100
    
    
    $
    142Merchandise
    
    
    12
    
    
    
    20Subtotal
    
    
    112
    
    
    
    162Less: Allowance for inventory market value
decline and obsolescence
    
    
    (54
    )
    
    
    (39
    )Total
    
    $
    58
    
    
    $
    123
 F-28




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##### Table of Contents



For the years ended December 31,(in US$ thousands)
    
    2004
    
    
    2005
    
    
    2006Allowance for inventory market value decline
and obsolescenceBalance at beginning of year
    
    $
    2,080
    
    
    $
    1,912
    
    
    $
    54Additions: Charges for (reversal of) obsolete items
    
    
    (300
    )
    
    
    33
    
    
    
    36Reductions: Written-off allowance for
inventory market value decline and obsolescence
    
    
    
    
    
    
    (1,554
    )
    
    
    (53
    )Divestiture  Music distribution business
    
    
    
    
    
    
    (298
    )
    
    
    Translation adjustment
    
    
    132
    
    
    
    (39
    )
    
    
    2Balance at end of year
    
    $
    1,912
    
    
    $
    54
    
    
    $
    39
 NOTE 12. MARKETABLE SECURITIES  NONCURRENT
 December 31,2005
    
    
    2006Percentage
    
    
    
    
    
    
    Percentage(in US$ thousands)
    
    Amount
    
    
    held
    
    
    Amount
    
    
    heldEquity Securities:T2CN Holding Limited (T2CN)
    
    $
    
    
    
    
    
    
    
    $
    15,000
    
    
    
    13.41Infocomm Asia Holdings Pte Ltd.
(Infocomm Asia)
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    32.26Rock Mobile (Cayman) Corporation (RMC)
    
    
    
    
    
    
    1.04
    
    
    
    
    
    
    
    0.88Total
    
    $
    
    
    
    
    
    
    
    $
    25,000
  T2CN
    F-29




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##### Table of Contents



Infocomm Asia
      F-30




---



##### Table of Contents



RMC
   NOTE 13. RESTRICTED CASH
  (in US$ thousands)Restricted cash  current assets
Time deposit pledged to China Trust Commercial Bank as a
guarantee for bank loan
    
    $
    2,697
  NOTE 14. SHORT-TERM LOANS
 (in US$ thousands)
    
    
    
    
    
    Range of
    
    
    
    
    
    December 31,Name
    
    Nature
    
    
    interest rate
    
    
    Due Date
    
    
    2006China Trust Commercial
Bank
    
    Unsecured loans
    
    
    2.35%~2.45
    %
    
    Mar. 10, 2007
    
    $
    6,135China Trust Commercial
Bank
    
    Secured loans
    
    
    1.735%~1.865
    %
    
    Mar. 10, 2007
    
    
    2,117Taishin International Bank
    
    Secured loans
    
    
    2.90%~2.95
    %
    
    Sept. 30, 2007
    
    
    4,601$
    12,853
 *
    
    As of December 31, 2006, the weighted-average interest rate on total short-term
loans was 2.48 percent.  F-31




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##### Table of Contents



NOTE 15. OTHER CURRENT LIABILITIES
 December 31,(in US$ thousands)
    
    2005
    
    
    2006Player account balances
    
    $
    2,087
    
    
    $
    9,527Deferred revenue
    
    
    2,434
    
    
    
    3,222Incentive payment for FunTown acquisition (See Note 5,
Acquisitions)
    
    
    
    
    
    
    5,000Other
    
    
    1,724
    
    
    
    4,610Total
    
    $
    6,245
    
    
    $
    22,359
 NOTE 16. CONVERTIBLE NOTES
   NOTE 17. PENSION BENEFITS
  Defined Benefit Pension Plan
  F-32




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##### Table of Contents



Before
    
    
    
    
    
    
    After(in US$ thousands)
    
    Application of
    
    
    
    
    
    
    Application ofAt December 31, 2006:
    
    FAS No. 158
    
    
    Adjustments*
    
    
    FAS No. 158Other assets
    
    $
    90
    
    
    $
    (58
    )
    
    $
    32Total assets
    
    
    182,677
    
    
    
    (58
    )
    
    $
    182,619Accrued pension liabilities
    
    
    727
    
    
    
    (293
    )
    
    $
    434Total liabilities
    
    
    47,291
    
    
    
    (293
    )
    
    $
    46,998Accumulated other
comprehensive loss
    
    
    (27,204
    )
    
    
    235
    
    
    $
    (26,969
    )Total stockholders equity
    
    
    133,852
    
    
    
    235
    
    
    $
    134,087
 
 *
    
    Adjustments are primarily comprised of previously unrecognized gains/(losses) and transition obligations.   (in US$ thousands)
    
    2005
    
    
    2006Change in benefit obligationBenefit obligation at beginning of year
    
    $
    941
    
    
    $
    449Divestitures of music distribution business
    
    
    (328
    )
    
    
    Service cost
    
    
    88
    
    
    
    12Interest cost
    
    
    21
    
    
    
    16Plan participants contribution
    
    
    
    
    
    
    Actuarial gain
    
    
    (255
    )
    
    
    103Curtailment
    
    
    
    
    
    
    (42
    )Benefits paid
    
    
    
    
    
    
    Exchange diff.
    
    
    (18
    )
    
    
    3Benefit obligation at end of year
    
    $
    449
    
    
    $
    541
 F-33




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##### Table of Contents



(in US$ thousands)
    
    2005
    
    
    2006Change in plan assetsFair value of plan assets at beginning of year
    
    $
    
    
    
    $
    50Actual return on plan assets
    
    
    
    
    
    
    2Employer contribution
    
    
    
    
    
    
    83Plan participants contributions
    
    
    49
    
    
    
    Benefit paid
    
    
    
    
    
    
    Fair value of plan assets at end of year
    
    $
    49
    
    
    $
    135Accumulated benefit obligation
    
    $
    (364
    )
    
    $
    (443
    )
 (in US$ thousands)Funded status
    
    $
    (399
    )
    
    $
    (406
    )Unrecognized net actuarial gain
    
    
    (461
    )
    
    NAUnrecognized prior service cost
    
    
    
    
    
    NAUnrecognized transition obligation
    
    
    82
    
    
    NANet amount recognized
    
    $
    (778
    )
    
    NA
  Pension Benefits(in US$ thousands)
    
    2005
    
    
    2006Accrued benefit cost
    
    $
    (811
    )
    
    $
    (406
    )Deferred pension cost (other assets)
    
    
    33
    
    
    NAAccumulated other comprehensive income
    
    
    
    
    
    
    (235
    )Net amount recognized
    
    $
    (778
    )
    
    NA
  (in US$ thousands)Projected benefit obligation
    
    $
    (449
    )Accumulated benefit obligation
    
    
    (364
    )Fair value of plan assets
    
    
    49
  F-34




---



##### Table of Contents



(in US$ thousands)
    
    2004
    
    
    2005
    
    
    2006Service cost
    
    $
    249
    
    
    $
    88
    
    
    $
    12Interest cost
    
    
    39
    
    
    
    21
    
    
    
    16Expected return on plan assets
    
    
    
    
    
    
    
    
    
    
    (4
    )Amortization of transition obligation
    
    
    8
    
    
    
    4
    
    
    
    4Amortization of prior service cost
    
    
    28
    
    
    
    
    
    
    
    Amortization of net (gain) loss
    
    
    (15
    )
    
    
    (20
    )
    
    
    (47
    )Net periodic benefit cost
    
    $
    309
    
    
    $
    93
    
    
    $
    (19
    )Curtailment loss (gain)
    
    $
    
    
    
    $
    
    
    
    $
    (42
    )
 Assumptions
  2004
    
    
    2005
    
    
    2006Discount rate
    
    
    3.50
    %
    
    
    3.50
    %
    
    
    2.75
    %Rate of return on plan assets
    
    
    N/A
    
    
    
    3.50
    %
    
    
    2.75
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    1.00
    %
    
    
    1.00
    %
     F-35




---



##### Table of Contents



Defined Contribution Pension Plan
    NOTE 18. SHAREHOLDERS EQUITY
   NOTE 19. SHARE-BASED COMPENSATION
  F-36




---



##### Table of Contents



(in US$ thousands)
    
    2006Cost of Internet access and services revenues
    
    $
    20Product development & engineering expenses
    
    
    127Selling and marketing expenses
    
    
    67General and administrative expenses
    
    
    96Pre-tax stock-based compensation expense
    
    
    310Income tax benefit
    
    
    60Total stock-based compensation expense
    
    $
    250
   2002 Share Option Plan
   2004 Share Purchase Plan
  F-37




---



##### Table of Contents



2004 Share Option Plan
      F-38




---



##### Table of Contents



2006 Equity Incentive Plan
     Options
     For the years ended December 31,
    
    2004
    
    
    2005
    
    
    2006Option term (years)
    
    
    3.35
    
    
    
    3.35
    
    
    
    3.35Volatility
    
    
    92.94
    %
    
    
    85.74
    %
    
    
    85.74
    %Risk-free interest rate
    
    
    2.92
    %
    
    
    3.17
    %
    
    
    3.17
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted-average fair value of option granted
    
    
    0.45
    
    
    
    0.56
    
    
    
    0.56
  F-39




---



##### Table of Contents



,
    2004
    
    
    2005
    
    
    2006Weighted-
    
    
    AggregateWeighted
    
    
    No.of
    
    
    Weighted
    
    
    No.of
    
    
    Weighted
    
    
    No.of
    
    
    Average
    
    
    IntrinsicAvg.
    
    
    Shares
    
    
    Avg.
    
    
    Shares
    
    
    Avg.
    
    
    Shares
    
    
    Remaining
    
    
    ValueExercise
    
    
    (in
    
    
    Exercise
    
    
    (in
    
    
    Exercise
    
    
    (in
    
    
    Contractual
    
    
    (inPrice
    
    
    thousands)
    
    
    Price
    
    
    thousands)
    
    
    Price
    
    
    thousands)
    
    
    Term
    
    
    thousands)Balance at
January 1,
    
    $
    23.50
    
    
    
    473
    
    
    $
    2.00
    
    
    
    8,844
    
    
    $
    1.11
    
    
    
    10,000Options granted
    
    
    0.79
    
    
    
    8,463
    
    
    
    2.49
    
    
    
    1,905
    
    
    
    
    
    
    
    0Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1,152
    )Options
Forfeited/canceled
/expired
    
    
    0.79
    
    
    
    (92
    )
    
    
    15.13
    
    
    
    (749
    )
    
    
    1.48
    
    
    
    (59
    )Balance at
December 31,
    
    $
    2.00
    
    
    
    8,844
    
    
    $
    1.11
    
    
    
    10,000
    
    
    $
    1.11
    
    
    
    8,789
    
    
    
    7.49
    
    
    $
    76,083Exercisable at
December 31,
    
    $
    2.18
    
    
    
    7,737
    
    
    $
    1.09
    
    
    
    9,170
    
    
    $
    1.08
    
    
    
    8,318
    
    
    
    7.49
    
    
    $
    72,285Vested and expected
to vest at
December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1.11
    
    
    
    8,783
    
    
    
    7.49
    
    
    $
    76,029
   F-40




---



##### Table of Contents



Options outstanding
    
    Options currently exercisableWeighted averageRange of
    
    No. of Shares
    
    remaining
    
    Weighted average
    
    No. of Sharesexercise price
    
    (in thousands)
    
    contractual life
    
    exercise price
    
    (in thousands)$0.79
    
    
    7,109
    
    
    7.49 years
    
    $
    0.79
    
    
    
    6,910$1.45
    
    
    100
    
    
    7.49 years
    
    $
    1.45
    
    
    
    63$2.55
    
    
    1,580
    
    
    7.49 years
    
    $
    2.55
    
    
    
    1,3458,789
    
    
    
    
    
    
    
    
    
    
    
    8,318
 RSUs
  Number of units
    
    Weighted-average(in thousands)
    
    grant date fair valueNonvested at December 31, 2005
    
    
    
    
    
    
    Granted
    
    
    115
    
    
    $
    9.81Vested
    
    
    (8
    )
    
    $
    9.81Forfeited
    
    
    
    
    
    
    Nonvested at December 31, 2006
    
    
    107
    
    
    $
    9.81
   NOTE 20. INCOME TAXES
 For the years ended December 31,(in US$ thousands)
    
    2004
    
    
    2005
    
    
    2006Income (loss) from continuing
operations before income taxesU.S. operations
    
    $
    (4,392
    )
    
    $
    516
    
    
    $
    865Non-U.S. operations
    
    
    5,724
    
    
    
    6,560
    
    
    
    31,789Total income (loss) from continuing
operations before income taxes
    
    $
    1,332
    
    
    $
    7,076
    
    
    $
    32,654
  F-41




---



##### Table of Contents



For the years ended December 31,(in US$ thousands)
    
    2004
    
    
    2005
    
    
    2006U.S. operations
    
    $
    (88
    )
    
    $
    304
    
    
    $
    366Non-U.S. operations
    
    
    4
    
    
    
    132
    
    
    
    1,183$
    (84
    )
    
    $
    436
    
    
    $
    1,549
  For the years ended December 31,(in US$ thousands)
    
    2004
    
    
    2005
    
    
    2006U.S. federalCurrent
    
    $
    7
    
    
    $
    233
    
    
    $
    266Deferred
    
    
    (19
    )
    
    
    17
    
    
    
    8(12
    )
    
    
    250
    
    
    
    274U.S. state and local:Current
    
    
    12
    
    
    
    60
    
    
    
    90Deferred
    
    
    (88
    )
    
    
    (6
    )
    
    
    2(76
    )
    
    
    54
    
    
    
    92Non  U.S.:Current
    
    
    4
    
    
    
    132
    
    
    
    1,199Deferred
    
    
    
    
    
    
    
    
    
    
    (16
    )4
    
    
    
    132
    
    
    
    1,183Total income tax
provisions (benefit)
    
    $
    (84
    )
    
    $
    436
    
    
    $
    1,549
  F-42




---



##### Table of Contents



For the years ended December 31,(in US$ thousands)
    
    2004
    
    2005
    
    2006Federal statutory rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    34.00
    %State and local  net of federal tax benefit
    
    
    6.27
    %
    
    
    6.91
    %
    
    
    6.78
    %Foreign tax differential
    
    
    (9.00
    %)
    
    
    (15.91
    %)
    
    
    (8.28
    %)Valuation allowance for deferred tax assets
    
    
    (25.00
    %)
    
    
    (25.00
    %)
    
    
    (25.00
    %)Other
    
    
    (12.58
    %)
    
    
    6.16
    %
    
    
    (2.76
    %)Effective rate
    
    
    (6.31
    %)
    
    
    6.16
    %
    
    
    4.74
    %
  For the years ended December 31,(in US$ thousands)
    
    2004
    
    
    2005Provision on income from discontinued operations
    
    $
    5
    
    
    $
    (1
    )Provision on gain on disposal of discontinued operations
    
    $
    
    
    
    $
    
  December 31,(in US$ thousands)
    
    2005
    
    
    2006Deferred tax assets:Net operating loss carryforwards
    
    $
    9,458
    
    
    $
    3,082Unrealized foreign exchange (gain) loss
    
    
    3
    
    
    
    (1
    )Allowance for inventory market value
decline and obsolete items
    
    
    14
    
    
    
    10Allowance for doubtful accounts
    
    
    400
    
    
    
    397Pension expense
    
    
    197
    
    
    
    162Investment credits
    
    
    175
    
    
    
    104Property, plant & equipment
    
    
    149
    
    
    
    272Others
    
    
    
    
    
    
    2110,396
    
    
    
    4,047Less: valuation allowance
    
    $
    (10,396
    )
    
    $
    (4,032
    )Deferred tax assets  net
    
    $
    
    
    
    $
    15
 F-43




---



##### Table of Contents



December 31,(in US$ thousands)
    
    2005
    
    
    2006Deferred tax liabilities:Depreciation and amortization
    
    $
    11
    
    
    $
    39Others
    
    
    (5
    )
    
    
    (43
    )Deferred tax liabilities  net
    
    $
    6
    
    
    $
    (4
    )
 For the years ended December 31,(in US$ thousands)
    
    2004
    
    
    2005
    
    
    2006Valuation allowance:Balance at beginning of year
    
    $
    21,316
    
    
    $
    22,499
    
    
    $
    10,396Additions: charged to (realization of) valuation allowance
    
    
    (336
    )
    
    
    (5,863
    )
    
    
    (6,443
    )Divestiture
    
    
    
    
    
    
    (5,405
    )Exchange difference
    
    
    1,519
    
    
    
    (835
    )
    
    
    79Balance at end of year
    
    $
    22,499
    
    
    $
    10,396
    
    
    $
    4,032
    (in US$ thousands)Year incurred
    
    Amount
    
    
    Expiring year2002
    
    $
    8,533
    
    
    
    20072003
    
    
    3,463
    
    
    
    20082004
    
    
    273
    
    
    
    20092006
    
    
    84
    
    
    InfinityTotal
    
    $
    12,353
 NOTE 21. RELATED-PARTY TRANSACTIONS
  F-44




---



##### Table of Contents



NOTE 22. COMMITMENTS AND CONTINGENCIES
   AmountYear
    
    (in US$ thousands)2007
    
    $
    1,8762008
    
    
    8732009
    
    
    5342010
    
    
    5382011
    
    
    65
  (b) Webs-TV Services Related Commitment
 F-45




---



##### Table of Contents



(c) HanbitSoft Inc. License and Distribution Agreement
  (i)
    
    $2.5 million during the 12-month period immediately following the commercial release date,
which shall be paid to HBS on the earlier of either March 31, 2007 or the launch date in the
territory (this amount was paid on March 30, 2007);(ii)
    
    $2 million during the second 12-month period following the commercial release date;(iii)
    
    $2 million during the third 12-month period following the commercial release date.
   (i)
    
    For the period from the agreement date to the commercial release date, a sum of not less than
$5 million;(ii)
    
    For the remaining period after the commercial release date, a sum of not less than $5 million.
 (d) World Series of MahJong Partnership Agreement
  F-46




---



##### Table of Contents



(e) T2CN Put Option
  (f) Contingencies
  NOTE 23. LITIGATION
     F-47




---



##### Table of Contents



F-48




---



##### Table of Contents



NOTE 24. SEGMENT INFORMATION
 Segment data
   F-49




---



##### Table of Contents



SoftwareInternet
    
    
    licensing andaccess and
    
    
    online(in US$ thousands)
    
    service
    
    
    entertainment
    
    
    Total2004:Segment profit or loss:Net revenue from external customers
    
    $
    21,390
    
    
    $
    11,454
    
    
    $
    32,844Income from operations
    
    $
    959
    
    
    $
    2,777
    
    
    $
    3,736Interest income
    
    $
    45
    
    
    $
    6
    
    
    $
    51Interest expenses
    
    $
    
    
    
    $
    4
    
    
    $
    4Gain on sales of marketable securities
    
    $
    1,222
    
    
    $
    
    
    
    $
    1,222Foreign exchange gain (loss)
    
    $
    533
    
    
    $
    8
    
    
    $
    541Other-than-temporary loss on marketable securities
    
    $
    (1,833
    )
    
    $
    
    
    
    $
    (1,833
    )Depreciation
    
    $
    3,895
    
    
    $
    267
    
    
    $
    4,162Amortization, including intangible assets
    
    $
    1,060
    
    
    $
    521
    
    
    $
    1,581Income tax expenses ( benefit )
    
    $
    
    
    
    $
    (87
    )
    
    $
    (87
    )Segment assets:Additions to property, plant and equipment
    
    $
    1,866
    
    
    $
    567
    
    
    $
    2,433Additions to intangible assets
    
    $
    
    
    
    $
    3,327
    
    
    $
    3,327Additions to goodwill
    
    $
    
    
    
    $
    29,607
    
    
    $
    29,607Total assets
    
    $
    29,861
    
    
    $
    38,476
    
    
    $
    68,337
 F-50




---



##### Table of Contents



SoftwareInternet
    
    
    licensing andaccess and
    
    
    online(in US$ thousands)
    
    service
    
    
    entertainment
    
    
    Total2005:Segment profit or loss:Net revenue from external customers
    
    $
    21,676
    
    
    $
    22,511
    
    
    $
    44,187Income from operations
    
    $
    2,123
    
    
    $
    5,957
    
    
    $
    8,080Interest income
    
    $
    5
    
    
    $
    92
    
    
    $
    97Interest expenses
    
    $
    
    
    
    $
    
    
    
    $
    Gain on sales of marketable securities
    
    $
    466
    
    
    $
    
    
    
    $
    466Foreign exchange gain (loss)
    
    $
    (144
    )
    
    $
    9
    
    
    $
    (135
    )Depreciation
    
    $
    3,651
    
    
    $
    266
    
    
    $
    3,917Amortization, including intangible assets
    
    $
    413
    
    
    $
    1,023
    
    
    $
    1,436Income tax expenses ( benefit )
    
    $
    110
    
    
    $
    325
    
    
    $
    435Segment assets:Additions to property, plant and equipment
    
    $
    1,782
    
    
    $
    474
    
    
    $
    2,256Additions to intangible assets
    
    $
    
    
    
    $
    1,005
    
    
    $
    1,005Additions to goodwill
    
    $
    
    
    
    $
    
    
    
    $
    Total assets
    
    $
    31,344
    
    
    $
    45,413
    
    
    $
    76,757
 F-51




---



##### Table of Contents



SoftwareInternet
    
    
    licensing andaccess and
    
    
    online(in US$ thousands)
    
    service
    
    
    entertainment
    
    
    Online game
    
    
    Total2006:Segment profit or loss:Net revenue from external customers
    
    $
    20,581
    
    
    $
    55,019
    
    
    $
    18,692
    
    
    $
    94,292Income from operations
    
    $
    4,185
    
    
    $
    16,772
    
    
    $
    5,618
    
    
    $
    26,575Share-based compensation
    
    $
    85
    
    
    $
    82
    
    
    $
    101
    
    
    $
    268Gain on divestiture of business
    
    $
    7,668
    
    
    $
    
    
    
    $
    
    
    
    $
    7,668Interest income
    
    $
    6
    
    
    $
    212
    
    
    $
    20
    
    
    $
    238Interest expenses
    
    $
    154
    
    
    $
    
    
    
    $
    1
    
    
    $
    155Gain on sales of marketable securities
    
    $
    2,119
    
    
    $
    
    
    
    $
    4
    
    
    $
    2,123Foreign exchange gain (loss)
    
    $
    (39
    )
    
    $
    (27
    )
    
    $
    (1
    )
    
    $
    (67
    )Depreciation
    
    $
    2,400
    
    
    $
    517
    
    
    $
    250
    
    
    $
    3,167Amortization, including intangible assets
    
    $
    145
    
    
    $
    1,292
    
    
    $
    1,423
    
    
    $
    2,860Income tax expenses ( benefit )
    
    $
    1,026
    
    
    $
    415
    
    
    $
    108
    
    
    $
    1,549Segment assets:Additions to property, plant and equipment
    
    $
    750
    
    
    $
    1,701
    
    
    $
    738
    
    
    $
    3,189Additions to intangible assets
    
    $
    
    
    
    $
    1,172
    
    
    $
    21,359
    
    
    $
    22,531Additions to goodwill
    
    $
    
    
    
    $
    
    
    
    $
    26,409
    
    
    $
    26,409Total assets
    
    $
    58,589
    
    
    $
    56,850
    
    
    $
    54,457
    
    
    $
    169,896
  F-52




---



##### Table of Contents



2004
    
    
    2005
    
    
    2006Income (loss) from operations:Total segments
    
    $
    3,736
    
    
    $
    8,080
    
    
    $
    26,575Adjustment*
    
    
    (1,261
    )
    
    
    (3,714
    )
    
    
    (4,611
    )Total GigaMedia consolidated
    
    $
    2,475
    
    
    $
    4,366
    
    
    $
    21,964Share-based compensationTotal segments
    
    $
    
    
    
    $
    
    
    
    $
    268Adjustment*
    
    
    
    
    
    
    
    
    
    
    42Total GigaMedia consolidated
    
    $
    
    
    
    $
    
    
    
    $
    310Interest income:Total segments
    
    $
    51
    
    
    $
    97
    
    
    $
    238Adjustment*
    
    
    89
    
    
    
    314
    
    
    
    484Total GigaMedia consolidated
    
    $
    140
    
    
    $
    411
    
    
    $
    722Interest expense:Total segments
    
    $
    4
    
    
    $
    
    
    
    $
    155Adjustment*
    
    
    
    
    
    
    
    
    
    
    427Total GigaMedia consolidated
    
    $
    4
    
    
    $
    
    
    
    $
    582Gain on sales of marketable securities:Total segments
    
    $
    1,222
    
    
    $
    466
    
    
    $
    2,123Adjustments*
    
    
    8
    
    
    
    384
    
    
    
    66Total GigaMedia consolidated
    
    $
    1,230
    
    
    $
    850
    
    
    $
    2,189Foreign exchange gain (loss):Total segments
    
    $
    541
    
    
    $
    (135
    )
    
    $
    (67
    )Adjustments*
    
    
    (1,306
    )
    
    
    286
    
    
    
    (94
    )Total GigaMedia consolidated
    
    $
    (765
    )
    
    $
    151
    
    
    $
    (161
    )Depreciation:Total segments
    
    $
    4,162
    
    
    $
    3,917
    
    
    $
    3,167Adjustments*
    
    
    7
    
    
    
    
    
    
    
    Total GigaMedia consolidated
    
    $
    4,169
    
    
    $
    3,917
    
    
    $
    3,167Amortization:Total segments
    
    $
    1,581
    
    
    $
    1,436
    
    
    $
    2,860Adjustments*
    
    
    
    
    
    
    
    
    
    
    16Total GigaMedia consolidated
    
    $
    1,581
    
    
    $
    1,436
    
    
    $
    2,876Income tax benefit (expense):Total segments
    
    $
    87
    
    
    $
    (435
    )
    
    $
    (1,549
    )Adjustments*
    
    
    (3
    )
    
    
    (1
    )
    
    
    Total GigaMedia consolidated
    
    $
    84
    
    
    $
    (436
    )
    
    $
    (1,549
    )Total assets:Total segments
    
    $
    68,337
    
    
    $
    76,757
    
    
    $
    169,896Adjustment**
    
    
    57,640
    
    
    
    36,762
    
    
    
    12,723Total GigaMedia consolidated
    
    $
    125,977
    
    
    $
    113,519
    
    
    $
    182,619
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##### Table of Contents



*
    
    Adjustment items include corporate and certain back-office costs and expenses
not attributable to any specific segment.**
    
    Adjustment items include total corporate assets, the divested music
distribution business segment and eliminations. Major Customers
  Geographic Information
  (in US$ thousands)Geographic region/country
    
    2004
    
    2005
    
    2006Taiwan
    
    $
    21,390
    
    
    $
    21,676
    
    
    $
    37,435Canada
    
    
    11,454
    
    
    
    22,511
    
    
    
    55,019Hong Kong
    
    
    
    
    
    
    
    
    
    
    1,831Others
    
    
    
    
    
    
    
    
    
    
    7
  (in US$ thousands)
    
    December 31,Geographic region
    
    2004
    
    
    2005
    
    
    2006Asia
    
    $
    14,672
    
    
    $
    10,156
    
    
    $
    55,378North America
    
    
    1,309
    
    
    
    1,351
    
    
    
    2,419Europe
    
    
    1,797
    
    
    
    
    
    
    
    Latin America
    
    
    35,257
    
    
    
    31,187
    
    
    
    31,185Total
    
    $
    53,035
    
    
    $
    42,694
    
    
    $
    88,982
 Note 25. SUBSEQUENT EVENTS
 a.
    
    On December 12, 2006, our wholly-owned subsidiary Hoshin GigaMedia entered into an agreement
with Wretch Co., Ltd. (Wretch) to terminate the subscription rights agreement we signed on
March 10, 2006, as Wretch was in the process of being acquired by an independent third party.
Under this termination agreement, we gave up the subscription rights to acquire up to a 20
percent equity stake in Wretch if and when Wretch increases its share capital within three
years of the date of the subscription right agreement, and we will no longer be obligated to
provide Wretch with certain free Internet services after December 31, 2006. Our right to
acquire Wretch shares was terminated on May 8, 2007, the closing date of the acquisition of
Wretch. Pursuant to the termination agreement, Hoshin GigaMedia obtained compensation from
Wretch in the amount of approximately $613 thousand (NT$20 million) (including VAT tax).
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##### Table of Contents



b.
    
    On February 12, 2007, our Company, through our wholly-owned subsidiary GigaMedia China
Limited, acquired 18,118,926 common shares of T2CN at the following purchase price.(i) $1.05 per share if the adjusted net operating income of T2CN for the first half of 2007 is
not more than $1 million;(ii) $1.25 per share if the adjusted net operating income of T2CN for the first half of 2007 is
between $1.0 million and $1.5 million; or(iii) $1.45 per share if the adjusted net operating income of T2CN for the first half of 2007 is
not less than $2.5 million.
     F-55