B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

We have a limited operating history, which may make it difficult for you to evaluate our business

 We began offering our online access services in Taiwan in late 1998. Our operating history in respect of retail music distribution and online gaming is even more limited since we only acquired our two music store chains in 2002 and acquired Grand Virtual in April 2004. Our financial success will depend on the commercial acceptance and profitability of our services. If we are unsuccessful in addressing these risks or in executing our business strategy, our business and financial results will suffer.

We have a history of losses and maycannot assure you that we will not incur substantial losses in future periods

 We have never been profitable.

We have incurred net losses in each of our previous fiscal years except 2004, in which we recorded our first ever full-year profit with net income of US$1.7 million. Our history of losses was a result of the substantial costs to operate and growwe incurred in operating our broadband Internet access services and music distribution business and the decrease in revenues from our retail music distribution business. We incurred a net loss of approximately NT$484.9 million (US$14.3 million) in 2003 and as of December 31, 2003, we had an accumulated net loss of approximately NT$5.5 billion (US$163.3 million). Our limited operating history and market conditions make predicting our results of operations difficult, and we may incur substantial losses in the future.

We may have operating losses in the future and we may not be able to sustain net profitability due to several factors, including:

In addition, after the adoption of a new accounting standard in 2002, we are required to perform annual impairment tests of goodwill. As a result, we wrote off goodwill associated with the music businesses we acquired in 2002distribution business in the amount of NT$242.9US$7.0 million in 2002 and US$738 thousand in 2003, which reduced our profitability in 2002.both years. As of December 31, 2004, we carry goodwill in the amount of US$29.6 million associated with the entertainment software business we acquired in 2004. Any similar write-off of goodwill in the future may have a negative impact on our financial results.

Our efforts to improve the performance of our retail music distribution business may be unsuccessful

     We operate Taiwan’s two major music store chains. This business experienced substantial operating losses in 2002 and 2003. We are currently taking several steps with a view to improving the performance of this business, including, among other things, reducing costs, improving our management information systems with a view to operating the business more efficiently and improving our operating margins. If our strategies for our retail music business prove unsuccessful, this business will likely experience continuing losses, which would likely have a material and adverse effect on our financial condition and results of operations.

The cyclical nature of the music industry, the impact of technological innovations and the prevalence of piracy could materially and adversely affect our business, financial condition or results of operations

     Our retail music business is affected by the release of “hit” music titles, which can create cyclical trends in sales distinctive to the music industry. It is not possible to determine the timing of these cycles or the future availability of “hit” titles. Our business is also affected by changes in music entertainment technology. While technological advances such as CDs have had a favorable impact on industry growth in the past, there is no assurance that future advances will continue to have a favorable impact on music entertainment product retailers. In particular, the Internet and cable set-top boxes, coupled with high quality digital recording technologies, facilitate and encourage direct downloading of recorded music by consumers, reducing the demand for CDs, thus negatively impacting the physical retail music distribution channels. In addition, Taiwan continues to experience relatively high levels of physical and online music piracy, which has further eroded the retail music distribution industry. If the music industry experiences a lull in “hit” music titles, or such technological innovations were to result in significant changes in existing distribution channels for pre-recorded music, or music piracy continues to be flagrant in Taiwan, our business, financial condition or results of operations could be materially and adversely affected.

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Our results of operations are subject to significant fluctuations, which may adversely affect our business and financial results

     Our revenues, expenses and results of operations have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are beyond our control. The key factors affecting our retail music distribution business include the frequency with which “hit” music titles are introduced, the seasonality of market demand for our retail music products and our ability to enter into and maintain strategic alliances with major record companies. The main factors affecting our online business include price competition in the Internet access business, the rate at which new customers subscribe to our services, subscriber turnover rates and the pace of rollout of our service to our cable partners. In addition, our operating expenses are based on our expectations of the future demand for our services and are relatively fixed in the short term. We may be unable to adjust spending quickly enough to offset any unexpected demand shortfall. A shortfall in revenues in relation to our expenses could have a material and adverse effect on our business and financial results.

Our businesses face intense competition, which may adversely affect our revenues, profitability and planned business expansion

We face competition from many competitors, and we expect to face competition from additional potential competitors, including competitors with:

	•		significantly greater technological financial, sales and marketing resources;
	•		larger customer bases, longer operating histories;
	•		greater name recognition; and
	•		more established relationships with music label companies, cable partners, advertisers, content and application providers and/or other strategic partners than we have.

COMPETITION IN THE RETAIL MUSIC DISTRIBUTION BUSINESS. Taiwan’s retail music distribution industry is fragmented and competitive. In addition to our Rose Records and Tachung Records chains, there are several other record distribution chains operating in Taiwan as well as convenience stores, individual music stores and night markets. Hypermarket chains, such as Carrefour and specialty entertainment chains, such as FNAC, reflect a small, but growing, segment of the market; some of these competitors have greater financial and other resources than our Companyus, and have been expanding into our markets. Alternative distribution channels, such as Internet sale of physical recorded music and Internet-based music downloads or streaming, which enjoy lower inventory and distribution costs, have also begun to emerge in recent years as competitive distribution channels and have adversely affected our popular music sales. Going forward, we anticipate that an increasing proportion of popular music sales is likely to continue to be effected through such alternative distribution channels, particularly Internet-based downloading, which will further erode our sales of popular music. Further, we expect continued growth in competing home entertainment options, including the Internet and large numbers of television and music channels offered by cable companies. In addition, the prevalent practice of physical and online piracy in Taiwan presents a continuing threat to the growth of the music distribution industry in Taiwan. Such competitionCompetition may reduce sales at music stores, put pressure on gross margins, increase operating expenses and reduce profit margins. There can be no assurance that the retail music business will continue to be a viable business, that retail stores will continue to be a primary distribution channel for recorded music, or that we will continue to compete successfully within the retail music store sector or the retail music business generally.

COMPETITION IN THE INTERNET ACCESSBROADBAND ISP BUSINESS. Our main competitors in the consumer broadband ISP business are fixed-line service providers and other ISPs in Taiwan that offer asymmetrical digital subscriber line, or ADSL, broadband services, including Chunghwa Telecom’s HiNet, the overwhelmingly dominant provider of broadband services.services; Taiwan Fixed Network, a fixed-line service provider; and Seednet, SoNet and Asia Pacific Online, all Internet service providers. Our competitors also include cable-based Internet access companies that have developed their own cable-based services and market those services to cable operators. We also compete with other cable-based data service providersoperators and those that are seeking to contract with cable operators to bring their services into geographic areas that are not covered by an exclusive relationship between our Company and our cable partners. Our corporate ISP business faces competition from fixed-line service providers, including Chunghwa Telecom, Taiwan Fixed Network, Sparq’s NCIC and Asia Pacific Online. In recent years, we have experienced a reduction in the number of our new consumer subscribers and our total consumer subscribers. The primary basis of competition in the onlineInternet access business industry is price. We can offer no assurance that we will be able to attract new subscribers or retain existing subscribers, as a result of which our revenues may decline. Due to this intense competition, there may be a limited market opportunity for our broadband access services. We cannot assure you that we will be successful in achieving widespread acceptance of our services before our competitors offer services similar to our current or prospective offerings, which might preclude or delay purchasing decisions by potential subscribers or cause us to lose our existing subscribers.

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COMPETITION IN THE INTERNET GAMINGENTERTAINMENT SOFTWARE BUSINESS. The Internet gamingentertainment software industry is characterized by rapid technological change and we face significant and intense competition infrom online entertainment software design houses and application service providers. However, given the arealow barrier to entry of software developmentindustry and provisionthe increasing popularity of application services.Internet-based businesses, there are a large number of potential competitors from many different segments of software and Internet industries. We also face the likelihood of new competitors entering this industry, including traditional entertainment service providers, many of which have significant financial resources. Traditional entertainment service providers might expand and provide an Internet-based entertainment service and such internet service providers and entertainment service provider may also develop and offer the underlying software solutions and tools to others, and thus directly compete with us. Some of our competitors and those of Ultra Internet Media, S.A., or UIM, our sole licensee, are more established, enjoy greater market recognition, are substantially larger and have substantially greater resources and distribution capabilities than we do. We also face the likelihood of new competitors offering Internet gaming software technology entering this industry. There is no assurance that we or UIM will be able to compete successfully with existing and future competitors, which could have a material and adverse effect on our business, financial condition or results of operations. See Item 4 — “Information on the Company — Entertainment Software Business — Competition” for additional information.

Our entertainment software business has a sole licensee, and any adverse effect on its business could have an adverse effect on our revenues, operating results and financial condition

All of our revenues from our entertainment software business are derived from UIM, currently sole licensee of our software products, the results of which have been consolidated into our financial statements as of and for the nine months ended December 31, 2004. See Item 5 — “Operating and Financial Review and Prospects — A. Operating Results — Overview — Consolidation of UIM Under FIN 46(R)” for more details. We do not own any shares of UIM or control its management and hence have no control over its business decisions. A decision by UIM to terminate its contract with us or any adverse effect on its business, operating results or financial performance could have a direct adverse effect on our business, operating results and financial performance. Further, any significant increase in UIM’s liabilities or decrease in its assets would adversely affect our balance sheet. We continue to explore developing business relations with other clients but there is no assurance that such efforts will be successful.

Our results of operations are subject to significant fluctuations, which may adversely affect our business and financial results

Our revenues, expenses and results of operations have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are beyond our control. The key factors affecting our music distribution business include the frequency with which “hit” music titles are introduced, the seasonality of market demand for our retail music products and our ability to enter into and maintain strategic alliances with major record companies. The main factors affecting our broadband Internet service provider, or ISP, business include price competition in the Internet access business, the rate at which new customers subscribe to our services, subscriber turnover rates and the pace of rollout of our service. The key factors affecting our entertainment software business include availability of Internet infrastructure, existing and new competitors, the retainment of key licenses by our licensee, our relationship with our licensee and the regulatory restrictions applicable to the Internet gaming industry. In addition, our operating expenses are based on our expectations of the future demand for our services and are relatively fixed in the short term. We may be unable to adjust spending quickly enough to offset any unexpected demand shortfall. A shortfall in revenues in relation to our expenses could have a material and adverse effect on our business and financial results.

Our efforts to improve the performance of our music distribution business may be unsuccessful

We operate Taiwan’s two largest music store chains. This business experienced substantial operating losses in 2002 and 2003 in line with a decline in the value of worldwide sales of recorded music. Illegal downloading of music from the Internet, CD ROM piracy, industrial piracy, economic recession, bankruptcies of record wholesalers and retailers and growing competition for consumer discretionary spending and retail shelf space may all be contributing to a declining recorded music industry. We have taken steps with a view to improving the performance of this business, including, among other things, reducing costs, improving our management information systems with a view to operating the business more efficiently and improving our operating margins, and implementing a store sharing strategy to lower fixed costs for the stores and generate extra revenues. In 2004, our music distribution business recorded an operating income of US$542 thousand, representing a US$7.6 million turnaround from an operating loss of US$7.1 million in 2003, mainly due to a decrease in costs and expenses to approximately US$66.4 million in 2004 from approximately US$82.9 million in 2003. Total revenues decreased to approximately US$67.0 million in 2004 from approximately US$75.8 million in 2003. However, we cannot assure you that our strategies for our music distribution business will continue to be successful. This business may still incur losses in the future, which would likely have a material and adverse effect on our financial condition and results of operations.

The nature of the music industry and the impact of technological innovations and the prevalence of piracy could materially and adversely affect our business, financial condition or results of operations

Our music distribution business is affected by the release of “hit” music titles, which can create trends in sales distinctive to the music industry. It is not possible to determine the timing of these cycles or the future availability of “hit” titles. Also, retail music sales in Taiwan are typically higher during the Chinese New Year and in the summer due to increased store traffic and buying by students and youths on school vacation. Rose Records and Tachung Records are similarly exposed to this trend in seasonality of sales, and rely heavily on the Chinese New Year and summer sales to achieve annual financial targets. Any disruption in sales during this period could have an adverse affect on our revenues from the music distribution business.

Our business is also affected by changes in music entertainment technology. While technological advances such as CDs have had a favorable impact on industry growth in the past, there is no assurance that future advances will continue to have a favorable impact on distributors of music entertainment product. While DVD–Audio, DualDisc and downloadable digital files are thought to represent potential new avenues for growth, no significant new legitimate audio format has yet emerged to take the place of the CD. Moreover, the Internet and cable set-top boxes, coupled with high quality digital recording technologies, facilitate and encourage direct downloading of recorded music by consumers, reducing the demand for CDs, thus negatively impacting the physical retail music distribution channels.

We may have difficulty addressing the threats to our business associated with home copying and Internet downloading

The combined effect of the decreasing cost of electronic and computer equipment and related technology such as CD burners and the conversion of music into digital formats have made it easier for consumers to create unauthorized copies of our recordings in the form of, for example, CDs and MP3 files. We believe that in the future, younger purchaser of popular music are likely to turn increasingly to alternative music distribution channels, such as Internet-based downloads, and that an increasing proportion of the physical retail music distribution will comprise more specialized areas of music, such as classical and jazz. A substantial portion of our revenues comes from the sale of audio products that are potentially subject to unauthorized consumer copying and widespread dissemination on the Internet without an economic return to us.

Organized industrial piracy may lead to decreased sales

The global organized commercial pirate trade is a significant threat to the music industry. Worldwide, industrial pirated music (which encompasses unauthorized physical copies manufactured for sale but does not include Internet downloads or home CD burning) is estimated to have generated over US$4.5 billion in revenues in 2003, according to International Federation of the Phonographic Industry, or IFPI. IFPI estimates that 1.1 billion pirated units were manufactured in 2003. According to IFPI estimates, approximately 35% of all music CDs sold worldwide in 2003 were pirated. Unauthorized copies and piracy contributed to the decrease in the volume of legitimate sales and put pressure on the price of legitimate sales. They have had, and may continue to have, an adverse effect on our business.

The benefits of our exclusive agreements with thecertain cable partners may be substantially diminished by open-access proposals, which would require our exclusive cable partners to grant our competitors access to their systems

We have entered into exclusive agreements with 11 out of 19 of our cable partners (not including Original Equipment Manufacturers, or OEM, partners)granting us the exclusive right to provide services through their cable systems. Under a regulationAs per new regulations in Taiwan, our cable partners must obtain leased-circuit licenses to leaseprovide their circuits to us in order for us to provide two-way cable services. In addition, any holder of leased-circuit licenses, including any of the cable partners having exclusive relationships with us, may be required to grant our competitors access to its cable system if it is deemed to be a dominant leased-circuit operator. In that event:

	•		Other other Internet and online service providers could potentially provide services over these cable partners’ cable systems that compete with our services;
	•		our rights as the exclusive broadband Internet access provider over these cable partners’ systems could be lost; and
	•		our business, financial condition and results of operations would likely be adversely affected.

Our controlling shareholder has significant influence in determining the outcome of any corporate transaction or other matters submitted to the shareholders for approval, and their interests may conflict with your interests

     Members of the Koos Group currently beneficially own approximately 28.7% of our outstanding shares. Accordingly, the Koos Group has significant influence in determining the outcome of any corporate transaction or other matters submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of the Koos Group may differ from or conflict with your interests.

Our relationship with our major shareholders may not benefit us inservices;

experienced and may, in the future, experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. We may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. There can be no assurance that any measures implemented will not be circumvented in the future.

The markets for our Internet accessbroadband ISP business and online gamingentertainment software and application servicesbusiness are characterized by rapid technological changes, and our inability to respond quickly and sufficiently to new Internet technologies or standards may have a material and adverse effect on our business

The markets for our Internet accessbroadband ISP business and online gamingentertainment software and application services are characterized by rapid technological advances, evolving industry standards, changes in user requirements and frequent new service introductions and enhancements. The number of consumer subscribers of our broadband ISP services declined from approximately 108,000 in 2002 to approximately 95,000 in 2004. If we are unable to effectively use leading technologies, continue to develop our technological expertise, enhance our current services and continue to improve the performance, features and reliability of our products and services, or we are unable to respond quickly and sufficiently to new Internet technologies or standards, thenwe may not be able to attract new customers and our business and financial results may be materially and adversely affected.

Our Internet accessbroadband ISP business and online gamingentertainment software and application services businessesbusiness depend on the reliability of our network infrastructure, which is subject to physical, technological, security and other risks

The development and operation of our online networks are subject to physical, technological, security and other risks which may result in interruption in service or reduced capacity for customers. These risks include physical damage, power loss, telecommunications failure, capacity limitation, hardware or software failures or defects and breaches of security by computer viruses, break-ins or otherwise. The occurrence of any of these events could result in interruptions, delays or cessation in service to users of our online services, which could have a material adverse effect on our business and operating results. An increase in the volume of usage of online services could strain the capacity of our software and hardware employed, which could result in slower response time or systemssystem failures.

We do not have redundant facilities in the event of an emergency, but we have a variety of backup servers at our primary site to deal with system failures.

The licensees

While we have implemented industry-standard security measures, our network may still be vulnerable to unauthorized access, computer viruses, denial of service attacks and other disruptive problems. A party that is able to circumvent security measures could misappropriate proprietary information and, perhaps, most importantly, cause interruptions in our operations. Internet gaming software and application services business depend on credit card transactions foronline service providers have, in the past, experienced and may, in the future, experience, interruptions in service as a substantial portionresult of the depositsaccidental or paymentsintentional actions of Internet users, current and former employees or others. We may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by their customers

     Our Internet gaming software and application services business derives most of its revenues from its licensees. A substantial portion of the deposits or payments made to licensees are made through credit card transactions. If credit card companies were to stop processing online gaming transactions, either generally or in jurisdictions where our licensees operate, our Internet gaming software and application services business couldsuch breaches. There can be materially and adversely affected.

     Many issuing banks of major credit cards (such as Visa and Mastercard) have announcedno assurance that theyany measures implemented will decline authorization to U.S. persons who attempt to use their credit cards for online gaming. U.S. and non-U.S. banks which process online gaming transactions for U.S. persons face potential criminal proceedings under the U.S. Patriot Act, as U.S. jurisdiction under the Patriot Act extends to non-U.S. banks that have correspondent accountsnot be circumvented in the United States. This could result in issuing banks deciding not to process online gaming transactions generally. In addition, it is possible that other jurisdictions may enact legislation or take other actions which result in credit card companies being unwilling or unable to process online gaming transactions.future.

 Furthermore, there is a higher incidence of fraud associated with online credit card payments than with respect to other types of transactions, which could further discourage issuing banks from processing online gaming transactions.

The worldwide legal and regulatory environment in which our Internet gamingentertainment software business operates embodies uncertainties that could adversely affect our business and operating results

 The licensees

UIM, the sole licensee of our software products and our business of software development and application service provision itself are subject to applicable laws and regulations in various jurisdictions. Companies and consumers involved in Internet gaming are located around the world, including the end-usersend users of our licensees.licensee. As such, it is

9

in many cases uncertain which governments have authority to regulate or legislate with respect to different aspects of this industry. The Internet gaming industry is still in an early stage of development, and as such, the worldwide legal and regulatory environment in which the business operates is highly fluid, and subject to change. Most foreign jurisdictions have some form of legal framework applicable to games of chance, but few provide any guidance on how this framework applies to Internet gaming. Issues such as physical location of the gaming event, foreign jurisdictional law, “Cyberlaws”, and “control of the Internet” all make traditional legal and regulatory laws difficult to apply. In addition, the very nature of Internet gaming creates new and unique forms of entertainment that were neither contemplated nor feasible in the past. Due to the uncertainties in the worldwide legal and regulatory environment in which our Internet gamingentertainment software business operates, we cannot assure you that our status or operations as an application service provider to the gaming industry is in compliance with all laws and regulations of the jurisdictions in which we operate, or that changes in such laws and regulations, or in their interpretation, will not adversely affect our business and operating results. Also, the substantial uncertainties in the global regulatory environment relating to online gaming expose us to a real risk of regulatory authorities in various jurisdictions considering us as providing online gaming services rather than only providing software and application services to our licensee and hence subjecting us to gaming regulations in such jurisdiction.

Our Company and the industry as a whole may be affected by efforts by members of the U.S. Congress to ban certain Internet gambling. Early in the 108th Congress, U.S. Congressman Jim Leach (R-IA) introduced HR 21, the Unlawful Internet Gambling Funding Prohibition Act, which attempts to prohibit Internet gambling by forbidding the use of credit instruments of United States banks from being used to make bets or wagers over the Internet. Shortly afterwards, U.S. Senator Jon Kyl (R-AZ) introduced similar legislation, S. 627S-627 in the U.S. Senate. In June 2003, HR 21 was reintroduced as HR 2143 by U.S. Congressman Spencer Bachus (R-AL) without any civil and criminal sanctions in order to bypass the U.S. House of Representatives Committee on Judiciary. After a very close vote on an amendment to HR 2143, the House of Representatives passed that legislation. In late JulyOctober 2003, the U.S. Senate’s Committee on Banking, voted to reportHousing, and Urban Affairs placed an alteredamended version of S. 627.S-627 on the Senate Legislative Calendar under General Orders. We continue to monitor this situation since the passage of this legislation could have a substantial impact on the business of our licenseeslicensee and ultimately our Company. If this legislation passes and becomes law, it would have an immediate detrimental effect on the industry and would pose a serious threat to the continued operation of our online gamingentertainment software business.

In March 2003,November 2004, the World Trade Organization, heldor WTO, found that the U.S. was in favorviolation of its commitments under the General Agreement on Trade in Services, or GATS, by not allowing operators of online gaming services licensed in Antigua and Barbuda to access U.S. markets. The decision was appealed and, againstin April 2005, the Appellate Body of the WTO found that the provisions of the Wire Act, Travel Act and Illegal Gambling Business Act are inconsistent with the U.S.’s obligations under the GATS, but also that the U.S. had shown that such measures are necessary to protect public morals or maintain public order and therefore fall within an exception to its general obligations. However, the Appellate Body further found that, in the light of U.S. legislation in respect of online gambling on horseracing, the U.S. had failed to demonstrate that the Wire Act, Travel Act and Illegal Gambling Business Act are applied equally to both foreign and domestic providers of online gambling services for horseracing and therefore recommended that the U.S. bring its legislation into conformity with regardits obligations under the GATS.

It is unclear what steps the U.S. will take following the decision of the Appellate Body of the WTO and whether the threat of any sanction or fine relating to unlawful trade restrictionsa failure to implement the recommendation of the Appellate Body would be sufficient to lead to a change in U.S. online gaming policy. A number of states are lobbying/petitioning the U.S. authorities to ensure they retain the ability to regulate state gaming and that this ability is not affected by the WTO decision.

The adoption of new laws or changes to or the application of existing laws relating to Internet gaming. Duecommerce may affect the growth of our entertainment software business

In addition to regulations pertaining specifically to online entertainment, we may become subject to a number of laws and regulations that may be adopted with respect to the recent timingInternet and electronic commerce. Moreover, current laws, which predate or are incompatible with Internet commerce, may be enforced in a manner that restricts the electronic commerce market. However, the application of this rulingsuch pre-existing U.S. and withoutinternational laws regulating communications or commerce in the ruling being publishedcontext of the Internet and electronic commerce is uncertain.

Moreover, it may take years to determine the extent to which existing laws relating to issues such as intellectual property ownership and infringement, libel and personal privacy are applicable to the Internet. The United States Federal Trade Commission and government agencies in full,certain states of the United States have been investigating certain Internet companies regarding their use of personal information. We could incur additional expenses if these agencies choose to investigate, or if any new regulations regarding the use of personal information are introduced affecting the way in which we do business.

New laws and regulations that address issues such as user privacy, pricing, online content regulation, taxation, advertising, intellectual property, information security, and the characteristics and quality of online products and services may be enacted.

The adoption of new laws or regulations relating to the Internet, or particular applications or interpretations of existing laws, could decrease the growth in the use of the Internet, decrease the demand for our products and services, increase our cost of doing business or could otherwise have a material adverse affect on our business, revenues, operating results and financial condition.

We are subject to risks associated with all of our entertainment software business conducted in non-U.S. jurisdictions

All of our revenues is derived from licensing and support fees in non-U.S jurisdictions. We currently provide user interface and end-user support in 16 languages. Our ability to further expand our business in certain countries will require modification of our products, particularly domestic language and currency support. Once a licensee has posted its gaming site on the Internet, the site is available to users around the world. However, there can be no assurance that we will be able to sustain or increase revenues derived from international operations or that we will be able to penetrate linguistic, cultural or other barriers to new foreign markets.

In addition to uncertainty regarding the local legal status of Internet gaming in other jurisdictions, there are certain difficulties and inherent risks faced by our subsidiary, CESL, in doing business internationally, including the burden of complying with multiple and conflicting regulatory requirements, foreign exchange controls, potential restrictions or tariffs on gaming activities that may be imposed, potentially adverse tax consequences and tax risks. Changes in the political and economic stability, regulatory and taxation structures, and the interpretation thereof, of jurisdictions in which we or our subsidiaries operate, and in which our licensee’s customers are located could have a material adverse effect on our business, 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 develop and our products and services will continue to be in demand

Both the Internet and online gaming industries are relatively new industries that continue to rapidly evolve and are characterized by an increasing number of market entrants. The demand and market acceptance for recently introduced products and services are typically subject to a high level of uncertainty. The success of our entertainment software business will depend on the widespread adoption of the Internet for commercial transactions. There can be no assurance that entertainment on the Internet will become widespread.

All of our revenues from our entertainment software business to date have been derived from the licensing of our online entertainment software and the support of our associated services through our licensing subsidiary. Our continued success will depend in large part upon the success of our online entertainment software. If the market fails to develop, develops more slowly than expected, or becomes saturated with competitors or if our services do not achieve market acceptance, our business, revenues, operating results and financial condition could be materially adversely affected.

We may be vulnerable to delays or interruptions due to our reliance on other parties

Our electronic commerce product for handling transactions over the Internet relies on ISP to allow our licensee’s customers and servers to communicate with each other. If all of the ISPs experienced lengthy service interruptions, it would prevent communication over the Internet and would greatly impair our ability to carry on business.

Our ability to process e-commerce transactions depends on bank processing and credit card systems. In order to prepare for certain types of system problems, we are developing a formal disaster recovery plan. Nevertheless, any system failure, including network, software or hardware failure, which causes a delay or interruption in our e-commerce services could have a material adverse effect on our business, revenues, operating results and financial condition.

The licensee of our entertainment software depends on credit card transactions for a substantial portion of the deposits or payments by their customers

Our entertainment software business derives all of its revenues from its licensee. A substantial portion of the deposits or payments made to our licensee are made through credit card transactions. If credit card companies were to stop processing online gaming transactions, either generally or in jurisdictions where our licensee operates, our entertainment software business could be materially and adversely affected.

Many issuing banks of major credit cards decline authorization to U.S. persons who attempt to use their credit cards for online gaming. We may be adversely affected by the provisions of the U.S. Patriot Act. U.S. and non-U.S. banks which process online gaming transactions for U.S. persons face potential criminal proceedings under the U.S. Patriot Act, as U.S. jurisdiction under the Patriot Act extends to non-U.S. banks that have correspondent accounts in the United States. This could result in issuing banks deciding not to process online gaming transactions generally. For example, following pressure from Eliot Spitzer, in June 2002 Citibank started to block credit card payments to known online gaming sites and, later that year, the Delaware payment processing firm PayPal stopped processing payments for the purposes of online gaming. In addition, it is too earlypossible that other jurisdictions may enact legislation or take other actions which result in credit card companies being unwilling or unable to process online gaming transactions.

Furthermore, there is a higher incidence of fraud associated with online credit card payments than with respect to other types of transactions, which could further discourage issuing banks from processing online gaming transactions.

Defects in our entertainment software and application services could harm our reputation and thus our business

The performance of our entertainment software and application service is critical to the success of our entertainment software business, which is subject to serious potential risks. These risks include the risk of defects in our software and application service or system failures, which could result in losses to our licensee, end users and to us; and the risk from claims resulting from losses to end users, which could damage our reputation and subject us to liability.

We may need additional capital in the future and it may not be available on acceptable terms

The development of our business may require significant additional capital in the future to:

We cannot assure you that additional financing will be available on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be forced to curtail or cease our operations. Moreover, even if we are able to continue our operations, any failure to obtain additional financing could have a material and adverse effect on our business, financial condition and results of operations and we may need to delay the deployment of our services. See Item 5 — “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources”.

We believe that we were a passive foreign investment company for the taxable year 2004 and we may continue to be classified as a passive foreign investment company for the taxable year 2005. As a result, unless you determine what, if any, influence thisto make a “qualifying electing fund” or mark-to-market election, you may be subject to materially adverse tax consequences with respect to our shares

Based upon an analysis of our income and assets for the 2004 taxable year, we believe that we were a passive foreign investment company for the 2004 taxable year and we may continue to be classified as a passive foreign investment company for the taxable year 2005. For a discussion of the factors that will affect whether or not we are classified as passive foreign investment company, see Item 10 — “Additional Information — E. Taxation — United States Federal Income Tax Considerations For U.S. Holders — Passive Foreign Investment Company Rules”. If you are a U.S. person holding our shares, (or have held our shares during a taxable year in respect of which we were classified as a passive foreign investment company and you continue to hold such shares or portion thereof) and we continue to be a passive foreign investment company and you do not determine to make a “qualifying electing fund” or mark-to-market election, you will be subject to special U.S. federal income tax rules that may have materially adverse tax consequences and will require annual reporting. See Item 10 — “Additional Information — E. Taxation — United States Federal Income Tax Considerations For U.S. Holders — Passive Foreign Investment Company Rules”.

Fluctuations in the exchange rates between U.S. dollar and other currencies in which we do our business could adversely affect our profitability

Our financial results since January 1, 2004 are reported in U.S. currency, which is subject to fluctuations in respect of the currencies of the countries in which we operate. The operations of our entertainment software licensee are conducted in most major currencies, including U.S. dollars, British pound sterling and Euros and we earn revenues from these sources in such currencies, as well as incurring expenses in U.S. dollars. Accordingly, fluctuations in the exchange rate of world currencies could have a positive or negative effect on United States-led legislation.the reported results of our entertainment software business. Given the constantly changing currency exposures and the substantial volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurance that we will not experience currency losses in the future, which could have a material adverse effect on our business, revenues, operating results and financial condition.

Our controlling shareholder has significant influence in determining the outcome of any corporate transaction or other matters submitted to the shareholders for approval, and their interests may conflict with your interests

Members of the Koo family currently beneficially own approximately 21.45% of our outstanding shares. Accordingly, such members of the Koo family have significant influence in determining the outcome of any corporate transaction or other matters submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of such members of the Koo family may differ from or conflict with your interests.

Our transactions with affiliates may not benefit us and may harm our Company

We have entered into several transactions with our affiliates. Our policy is that transactions with affiliates are to be conducted on an arm’s-length basis and on terms as favorable to us as with non-affiliates. However, we cannot assure you that all our future transactions with affiliates will be beneficial to us.

Our operating results and financial condition are affected by general economic conditions, and levels of consumer spending, political stability as well as the occurrence of natural disasters and epidemics

Our operating results and financial condition, particularly in relation to our retail music distribution business and our online entertainment software business, are directly dependent upon general economic conditions and levels of consumer spending. Political unrest, war, acts of terrorism and other instability, as well as natural disasters such as earthquakes and typhoons which are common in Taiwan, can result in disruption to our business or the businesses of our customers. Similar occurrences in the future could result in increased volatility in or damage to the global financial markets, which in turn may adversely affect our business and results of operations. Past economic downturns have resulted in lower levels of consumer spending, thus negatively impacted our sales and profit. There can be no assurance that rising interest rates, an economic recession, other adverse economic developments, or natural disasters or epidemics will not have a material adverse effect on our cashflow, profitability or financial condition.

There are economic risks associated with doing business in Taiwan, particularly due to the tense relationship between Taiwan and China

Our principal executive offices and our operations in respect of our onlinebroadband ISP and retail music distribution businesses are located in Taiwan and all of our net revenues in respect of our onlinebroadband ISP and retail music distribution businesses are derived from customers in Taiwan. Taiwan, as part of the Republic of China, has a unique international political status. The People’s Republic of China, or the PRC, asserts sovereignty over mainland China and Taiwan and does not recognize the legitimacy of the Taiwan government. Although significant economic and cultural relations have been established during recent years between Taiwan and the PRC, the PRC government has indicated that it may use military force to gain control over Taiwan if Taiwan declares independence or if any foreign power interferes in Taiwan’s affairs. Relations between Taiwan and the PRC and other factors affecting the political or economic conditions of Taiwan could also affect our onlinebroadband ISP and retail music distribution businesses.

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We may be subject to heightened scrutiny by Taiwan’s Fair Trade Commission due to our sizeable share of the recorded music retail distribution market in Taiwan, which could result in new regulations that may negatively impact our results of operations

Since we hold a sizeable market share of Taiwan’s recorded music retail distribution market, we could be deemed a monopoly by Taiwan’s Fair Trade Commission. This could result in heightened scrutiny of our retail music distribution operations and regulations.operations. Any existing or new regulations that govern the activities of a monopoly could restrict the scope of our music distribution business, which could negatively impact our financial condition and results of operations.

Fluctuations in the exchange rate between New Taiwan dollars and U.S. dollars could increase our costs relative to our revenues, which could adversely affect our profitability

     Historically, all of our revenues and a majority of our expenses and liabilities have been denominated in New Taiwan dollars, the currency of Taiwan. We also generate expenses and liabilities in U.S. dollars. In the future, we may also conduct business in additional foreign countries and generate revenues, expenses and liabilities in other foreign currencies. As a result, we are subject to the effects of exchange rate fluctuations with respect to any of these currencies. We have not entered into agreements or purchase instruments to hedge our exchange rate risks although we may do so in the future. If we do so in the future, these agreements and instruments may not help us to hedge our exchange rate risks completely.

Any future outbreak of severe acute respiratory syndrome, or SARS, may materially and adversely affect our business and results of operations

     Since March 2003, several economies in Asia, including China, Hong Kong, Singapore and Taiwan, have been affected by the outbreak of SARS, a highly contagious form of atypical pneumonia. SARS has caused damage to the trade and tourism industries as well as to the economies and financial markets of the affected countries, including Taiwan. The SARS outbreak had a significant negative impact on our retail music business and operating results. Any economic downturn as a result of any future SARS outbreak may have an adverse effect on consumer confidence, and may in turn result in a decrease in the demand for our products and services, which would adversely and materially affect our business and results of operations.

We believe that we were a passive foreign investment company for the taxable year 2003 and are likely to be treated as a passive foreign investment company for the taxable year 2004. As a result, you may be subject to materially adverse tax consequences with respect to our shares

     Based on the composition of our assets and the nature of our income, we believe that for U.S. federal income tax purposes we were a passive foreign investment company for the taxable year 2003 and are likely to be treated as a passive foreign investment company for the taxable year 2004 unless the market value of our shares increases significantly or we make substantial active investments, or both, during the taxable year 2004. We have limited control over the market value of our shares and do not currently have plans to make significant active investments. If you are a U.S. person holding our shares, because we are a passive foreign investment company, you will be subject to special U.S. federal income tax rules that may have materially adverse tax consequences and will require annual reporting. See Item 10. “Additional Information — E. Taxation — United States Federal Income Tax Considerations For U.S. Holders — Passive Foreign Investment Company Rules”.

We depend on dividends from our subsidiary in Taiwan to meet our cash needs, and ourOur subsidiary’s ability to distribute dividends to us may be subject to restrictions under Singapore and Taiwan laws

We are a holding company, and some of our primary assets constitute our ownership interests in our subsidiaries in Taiwan, including Hoshin GigaMedia, Rose Records and Tachung Records. Accordingly, our primary internal sources of funds to meet our cash needs is our share of the dividends, if any, paid by these subsidiaries in Taiwan. The distribution of dividends from these subsidiaries in Taiwan to us is subject to restrictions imposed by Taiwan and Singapore corporate and tax regulations, which are more fully described in Item 5.5— “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Dividends from Our Subsidiaries in Taiwan”. In addition, although there are currently no foreign exchange control regulations, which restrict the ability of our subsidiaries in Taiwan to distribute dividends to us, the relevant regulations may be changed and the ability of these subsidiaries to distribute dividends to us may be restricted in the future.

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We are a Singapore company, and because the rights of shareholders under Singapore law differ from those under U.S. law, you may have difficulty protecting your shareholder rights

Our corporate affairs are governed by our Memorandum and Articles of Association and by the laws governing corporations incorporated in Singapore. The rights of our shareholders and the responsibilities of members of our board of directors under Singapore law are different from those applicable to a corporation incorporated in the United States and, therefore, our shareholders may have more difficulty protecting their interests in connection with actions by the management, members of our board of directors or our controlling shareholders than they would as shareholders of a corporation incorporated in the United States.

There are anti-takeover provisions under the Singapore Securities and Futures Act (Chapter 289) and the Singapore Code on TakeoversTake-overs and Mergers that may delay, deter or prevent a future takeover or change of control of our Company, which may adversely affect the price of our shares

There are provisions under the Singapore Securities and Futures Act (Chapter 289) and the Singapore Code on Take-overs and Mergers that may delay, deter or prevent a future takeover or change of control of our Company. Anyone acquiring an interest, either on his own or together with parties acting in concert with him, in 30% or more of our voting shares must extend a takeover offer for the remaining voting shares. A person holding between 30% and 50% of our voting shares, either on his own or together with parties acting in concert with him, must also make a takeover offer if that person acquires additional voting shares in excess of 1% of the total number of voting shares in any 6-monthsix-month period. These provisions may discourage or prevent transactions that involve an actual or threatened change of control of our Company. This may harm you because a transaction of that kind may allow you to sell your shares at a price above the prevailing market price.

You may be subject to Singapore taxes

You should consult your tax advisors concerning the overall tax consequences of acquiring, owning or selling the shares. Singapore tax law may differ from the tax laws of other jurisdictions, including the United States.

We may be subject to claims of intellectual property right infringement, and our limited intellectual property protection causes us to be vulnerable to competitors infringing upon or misappropriating our proprietary rights

As a distributor of Internet content, we face the same types of risks that apply to all businesses that publish or distribute information, such as potential liability for copyright, patent or trademark infringement, defamation, indecency and other similar claims. Any imposition of liability that is not covered by insurance, is in excess of insurance coverage or for which we are not indemnified by a content provider, could have a material adverse effect on our business and results of operations.

We rely on a combination of copyright and trademark laws, trade secret protection, confidentiality and non-disclosure agreements, and other contractual provisions to protect our proprietary software, trade secrets and similar intellectual property. These are especially critical to our entertainment software business. We can offer no assurance that our efforts will prove to be sufficient or that third parties will not infringe upon or misappropriate our proprietary rights. We may have to engage in litigation to enforce and protect our trade secrets and other intellectual property rights. We may also be sued for allegedly infringing the rights of others or to determine the scope and validity of their intellectual property rights. Any litigation involving proprietary rights could be costly, require us to seek licenses from third parties and prevent us from selling our products and services, any of which could have a material adverse effect on us.

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of our Company

Our legal and commercial name is GigaMedia Limited. We were incorporated in September 1999 as a company limited by shares organized under the laws of the Republic of Singapore. Our Singapore company registration number is 199905474H. Our principal executive offices are located at 14th Floor, 122 TunHua North Road, Taipei, Taiwan, and our telephone number is country/city code 886886/2 and number 8770-7966. Our Web site address is: www.giga.net.tw.

 We are a holding company and, prior

Prior to the finalization of our acquisition of Taiwan’s two leading music store chains in February, September and December of 2002, respectively, all our operations were conducted primarily through our wholly-owned subsidiary, Hoshin GigaMedia Center Inc., or Hoshin GigaMedia. Hoshin GigaMedia commenced operations in October 1997 and was incorporated in October 1998 in Taiwan. Hoshin GigaMedia, as an unlisted Taiwanese company, could not publicly offer its shares to investors outside of Taiwan. To enable us to offer our shares to international investors, we were incorporated in Singapore in September 1999 and acquired 99.99% of Hoshin GigaMedia in November 1999. In October 2002, we acquired the 0.01% of Hoshin GigaMedia we did not own.

We completed the initial public offering of our shares on February 24, 2000. Our shares trade on the NasdaqNASDAQ National Market under the symbol “GIGM”. We arewere the first Internet company based in Taiwan to list on the NasdaqNASDAQ National Market.

In 2002, we acquired Rose Records (formerly describedknown as Point Records Co., Ltd.) and Tachung Records (formerly describedknown as Music King Co., Ltd.), Taiwan’s two largest music store chains, respectively, with a view to expanding our business to retail entertainment services.

In April 2004, we acquired the business and operations of Grand Virtual, Inc. and related affiliates, a privately-held online gamingentertainment software developer and application service provider, basedthrough CESL, our wholly-owned subsidiary incorporated in the Boston area of the U.S.,British Virgin Islands, with a view to enhancing our diversified entertainment products portfolio.

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B. Business Overview

We are a holding company and, through several subsidiaries, distribute recorded music and provide broadband Internet access services, develop and onlinelicense entertainment software and provide application services, in Taiwan.and distribute recorded music. Our core retailTaiwan broadband ISP businesses are operated through our subsidiary, Hoshin GigaMedia, which focuses on consumer users, and Hoshin GigaMedia’s subsidiary, Koos Broadband Telecom Limited, or KBT, which focuses on corporate users. Our entertainment software business is operated through our subsidiary CESL. Our music distribution business is operated through our subsidiary G-Music Limited, or G-Music, which controls Taiwan’s two largest music store chains. Our online broadband businesses are operated through our subsidiary, Hoshin GigaMedia Center Inc., and Hoshin GigaMedia’s subsidiary Koos Broadband Telecom Limited, or KBT, which are focused on consumer and corporate users, respectively.

Prior to 2002, our primary business was to providethe provisions of broadband Internet access services in Taiwan. After we acquiredSince acquiring Taiwan’s two largest music store chains, Rose Records and Tachung Records, in 2002, and our acquisition of Grand Virtualan entertainment software provider in 2004, we becamehave become a diversified provider of entertainment services and broadband Internet access services. Our online/retail business model provides us with multiple distribution channels. We believe this business model will provide us deep customer relationships and the ability to meet future market demand as technology drives new media and entertainment industry change.

We operate Taiwan’s two largest music store chains, Rose Records and Tachung Records, through our subsidiary, G-Music. As of December 31, 2003, we operated a total of 52 stores with a total floor area of approximately 124,494 square feet. Our estimated market share of the physical retail music distribution industry in Taiwan in 2003 was between 35% and 45%. While seeking to preserve our market share, we are also aiming to reduce costs and improve our management information systems with a view to operating this business more efficiently, and increasing our operating margins. Our retail music distribution business generated revenues of NT$2.6 billion (US$76.9 million) and a loss from operation of NT$243.5 million (US$7.2 million) in 2003.

     Online, we operate a broadband ISP business via our subsidiary Hoshin GigaMedia, which provides Internet access service and broadband content with multiple delivery technologies. Our access products consist of ADSL and cable modem offerings, giving us the ability to deliver broadband connections island-wide. We offer broadband Internet access at speeds of up to 100 times faster than traditional dial-up services. WithThrough our 19 cable system partners, our cable modem business passeswe have access to more than 3.1 million Taiwan households, as well as approximately 417,000 small and medium-sized businesses. We offer interactive Chinese-language multimedia Web sites through our Web destination http://www.gigigaga.com.enterprises, or SMEs. In addition, another subsidiary of our Company, Koos Broadband Telecom Limited, orsubsidiary, KBT, provides broadband serviceservices to corporate customers. Our onlinebroadband ISP business generated revenues of NT$671.3approximately US$21.4 million (US$19.8 million) and a loss from operationsoperating income of NT$188.9approximately US$1.0 million (US$5.6 million) in 2003.2004.

 In April 2004, we

We acquired Grand Virtualour entertainment software business in a private transaction from the founding shareholders of GV Enterprise Voting Trust in April 2004 with a view to enhancing our portfolio of entertainment products. In this transaction, we acquired all the outstanding and issued shares of some of the founding shareholder’s subsidiaries, Grand Virtual, Inc., Grand Virtual Limited and Grand Virtual (Alderney) Limited, for an all-cash consideration of US$32.5 million. Grand Virtual isTo help ensure a smooth transition and the continued expansion of our entertainment software developerbusiness in the future, we also retained the experienced management, engineering and operation teams of these companies. Since the acquisition, we have restructured the business and currently operate our entertainment software business through our subsidiary CESL, which develops and provides, through its wholly-owned subsidiaries, Cambridge Interactive Development Corporation, or CIDC, and Internet Media Licensing Limited, or IML, software solutions and application service provider basedservices for clients operating in the Boston areadynamic and rapidly expanding Internet-based entertainment markets worldwide. Our entertainment software business generated revenues of approximately US$11.5 million and operating income of approximately US$2.8 million during the nine months ended December 31, 2004.

We operate Taiwan’s two largest music store chains, Rose Records and Tachung Records, through our subsidiary, G-Music. As of June 15, 2005, we operated a total of 45 stores. Our estimated market share of the U.S.. Grand Virtual developsphysical music distribution industry in Taiwan in 2004 was over 30%. While seeking to preserve our market share, we have also taken steps to reduce costs and improve our management information systems and inventory management with a view to operating this business more efficiently and increasing our operating margins. Our music distribution business generated revenues of approximately US$67 million and operating income of approximately US$542 thousand in 2004.

Broadband ISP Business

Our Services

We provide broadband Internet access services to consumer and corporate customers through various technologies and products including ADSL, cable modems, leased-line, virtual private network and other value-added services.

Access ServicesOfferings

ADSL. GigaMedia’s ADSL services offer different levels of performance from 1Mbps download with 64Kbps upload to 8Mbps download with 640 Kbps upload. The high performance of our products is designed to better support file sharing, video and other broadband Internet applications. We were the first company in Taiwan to offer ADSL services with a standard fixed IP-address feature, which enables users to build their own multimedia Web sites, participate in online meetings, set up servers and utilize voice-over-IP. As at December 31, 2004, we had 73,800 ADSL subscribers, as compared to 77,837 ADSL subscribers as at December 31, 2003.

CABLE MODEMS. We also offer our broadband Internet access services via cable modems at transmission speeds of up to 6 Mbps. Our cable modem-based broadband access services allow subscribers to more efficiently use (1) bandwidth-intensive multimedia applications, such as interactive games, high-quality audio, video and distance learning applications, and (2) electronic commerce applications, such as retailing, financial services and online software distribution. We reached an agreement in principle in May 2004 with our cable partners to equally share revenues, thus providing our cable partners with additional economic incentives to promote two-way cable services through their systems. Two-way cable systems allow us to offer subscribers higher upstream transmission speeds and “always on” Internet access capabilities. As at December 31, 2004, we had 20,720 cable modem-based broadband customers, as compared to 25,103 cable modem-based broadband customers as at December 31, 2003.

CORPORATE ACCESS SERVICES. We also offer dedicated and high-speed Internet access services to corporate customers over fiber optical lines. Our target customers include ISPs, ICPs, corporations, SMEs and cyber cafes. Our corporate ISP services include leased-line services, ranging from 1Mbps to 1 Gbps, virtual private network and other value-added services.

Markets of Access Services

CONSUMER ACCESS SERVICES. Our two-way cable modem-based broadband service packages are offered at approximately US$35.90 per subscriber per month for online entertainmentpremium service; approximately US$25.50 per subscriber per month for a mid-tier package; and approximately US$12.00 per subscriber per month for basic service. We also offer selected subscribers discounts on their monthly access fees and quarterly or yearly payment options to further promote our access services. We recognize our revenues from access fees net of split with cable partners and these discounts. In the future, our product mix may change in response to market dynamics.

During 2004, we offered different tiers of ADSL service options with monthly access fees per subscriber ranging from approximately US$8.90 to approximately US$44.90 for consumer users which have from time to time been revised for promotional purposes, including providing subscribers periods of free Internet access service. Unlike our cable access fees, our ADSL access revenues are not shared.

The number of subscribers of our broadband Internet ISP services continued to decline during 2004. The table below sets forth the number of our subscribers on the dates specified. Despite the decline in the number of our subscribers in 2004, our access revenues increased by 6% for 2004 as compared to that for 2003, primarily because of an increase in revenue from turnkey cable modem services. We do not expect to see significant growth in our subscriber base in the future.

Besides directly providing cable modem-based Internet services under GigaMedia’s brand name to end users, we also provide trunk bandwidth and backend systems, which include a customer provisioning system, billing system and network management system, to cable operators that wish to operate their cable modem-based Internet service under their own brand names, or turnkey cable modem services. We receive fees from these cable systems under various revenues sharing arrangements. As of June 15, 2005, we had nine cable partners to whom we offered turnkey cable modem services.

CORPORATE ACCESS SERVICES. KBT offers and sells dedicated and high-speed Internet access to corporate customers over fiber optical Ethernet MAN infrastructure. KBT offers various speeds of leased-line services, ranging from 1Mbps to 1Gbps, to different kinds of subscribers like ISPs, ICPs, corporates, SMEs and cyber cafes. KBT charges its customers monthly fees for access services and other value-added services depending on the level of bandwidth and type of services provided.

Other Services

As part of our Internet services we provide various other value-added services including online gamingfree electronic mail, bulletin boards and social networking.photo albums.

Our Broadband Network — Cable and ADSL Network

We began upgrading our island-wide backbone network, which is based primarily on Gigabit Ethernet technologies and covers 20 major districts out of a total 25 districts in Taiwan, from early 2004 and completed the upgrade in early 2005. In addition, we built small regional data centers to host both the cable Internet and ADSL headend equipment in these 20 districts connected by our backbone network. These centers also act as service hubs for:

NETWORK OPERATIONS CENTERS. We provide centralized network management through our network operations centers, which represents the nerve center of our whole network. Our centers use advanced proprietary network management tools and systems to monitor the network infrastructure 24 hours a day, 7 days a week, enabling us to effectively address network problems before they adversely affect our subscribers.

Data Backbone

Ongoing privatization of the telecommunications market by Taiwan’s government has expanded the number of telecommunications operators. Including Chunghwa Telecom, there are currently four fixed-line telecommunications operators in Taiwan. It is our policy to continually monitor the usage pattern, adjust the network architecture, and select better leased-line circuits providers to optimize the user experience and service economics.

Private peer-to-peer relationships among ISPs (i.e., private direct cable connections as opposed to public Internet connections) have become the most effective solutions to resolve the problems of packet loss and latency resulting from the significant traffic volume through Internet networks. We have peering arrangements with most of Taiwan’s major networks and ISPs, providing us with what we believe to be the one of the most comprehensive Internet connections in Taiwan. According to Taiwan Network Information Center, or TWNIC, we had one of the best aggregate peering bandwidth among all commercial organizations in Taiwan. Our extensive peering arrangements have enabled us to route most of our traffic over the less congested private peering links, through which we passed most of our traffic. This enhances the efficiency of our network and allows us to provide better, faster access services to our subscribers.

Through our peering arrangements with several Internet service providers and networks, we currently connect to Taiwan’s Internet backbone from our network operations center. We have installed direct Internet connections at each of our regional data centers to minimize backbone traffic flow and to provide Internet connection redundancies. We currently connect to the international Internet through a direct trans-Pacific submarine cable link. As an applicationthe competition in the trans-Pacific submarine cable segment provides better price economics, we are able to significantly increase our bandwidth without incurring additional cost. In 2005, we completed the upgrade of our infrastructure from STM-1 and STM-4 connections to Gigabit Ethernet-based connections to provide faster connections.

Information System

We have established a versatile, scalable, real-time information system that integrates service provider, Grand Virtual offersprovisioning, customer management, billing, data gathering and usage tracking functions. With independent multiple processing layers, we are able to quickly respond to increases in user, subscriber or service data by expanding our information system’s capacity on demand.

Sales And Marketing

CONSUMER ACCESS SERVICES. We plan to continue utilizing bundled marketing with our strategic partners to minimize costs. We primarily use the following means to market our services:

Turnkey cable modem services. For cable operators that are interested in providing or improving upon their cable Internet services, we will form a team composed of sales personnel, network engineers, backend software engineers and customer service specialists to provide free consultancy and “turnkey” solutionssolutions. We believe that direct sales contact and site visits to existing cable partners and referrals by our existing cable partners are the most efficient methods of marketing our cable modem services.

CORPORATE ACCESS SERVICES. With the unique optical Ethernet MAN infrastructure and solution, KBT is able to provide corporate customers, one-megabit increment, on-demand leased-line service. We primarily use a direct sale force to reach our potential customers.

Customer Service and Billing

We provide our subscribers with a comprehensive range of customer service, including assistance on cable modem installations, continuous post-installation technical support and prompt responses to billing and service requests.

Our customer service department is divided into two groups: technical support and general customer service. Our customer service department operates a toll-free help desk with extended hours of operation. Our subscribers may also contact us via electronic mail or through accessing our interactive self-service Web site. Our general customer service staff assist subscribers with cable modem questions and problems, as well as basic computer and software configuration questions and billing inquiries. Our technical support group handles technical problems referred by the general customer service staff.

We typically prepare and mail the bill for gamesour services, which we send to the subscribers under our own name and logo, on a monthly basis. We offer our subscribers a wide variety of skillpayment options, including automatic credit card payments, direct debits from their bank accounts and chance,post office savings accounts, pre-payment or over-the-counter payment at post offices and convenience stores. We also seek to provide detailed information on the bills to enable our subscribers to obtain all relevant information relating to their services.

Competition

The Internet access service industry is highly competitive.

We mainly compete with broadband ISPs, which provide basic Internet access to consumer and corporate users generally through the provision of ADSL services using existing telephone networks or cable modem-based services operating over cable television networks. The Internet access service industry in Taiwan is very competitive and challenging. The broadband Internet access service industry in Taiwan is dominated by the main fixed-line telecommunication company, Chunghwa Telecom. Chunghwa Telecom’s HiNet broadband service is the current broadband ISP market leader estimated to have approximately 80% of the market share in 2005, while we have only managed to capture approximately 2% of the market share. The primary basis for competition is price. The availability of similar services at competitive prices has made it licenses predominantlydifficult for us to online gaming companies in Europeattract and Asia.retain customers.

We also compete with other broadband technologies, including integrated services digital networks and wireless and satellite data services. We believe that our acquisitionaccess services have both technological and cost advantages over these alternative broadband means. Also, we believe that our cable modem business offers a product which is to some extent differentiable from competing ADSL services, and are seeking to further develop this business by restructuring the terms of Grand Virtual will be accretiveour agreements with our cable partners. In the cable modem-based Internet access market, we believe that our close relationships with a large number of cable partners and our exclusive access to a substantial portion of Taiwan’s households and businesses provide us with a competitive advantage. Our competitors in Internet access services include all four fixed-line operators in Taiwan.

We also face competition in corporate ISP from fixed-line service providers, including Chunghwa Telecom, Taiwan Fixed Network, Sparq’s NCIC and Asia Pacific Online and other Internet access service provider in Taiwan.

Some of our major competitors, including Chunghwa Telecom, have advantages over us in terms of financial and marketing resources, established customer relationships, brand awareness, customer access and telecommunications infrastructure.

Entertainment Software Business

Overview

We operate our entertainment software business through our subsidiary, CESL, and through its wholly-owned subsidiaries, CIDC and IML. CESL develops and licenses software solutions and application services to clients operating in the dynamic and rapidly expanding Internet-based entertainment markets. CESL offers a wide array of products and services, including online entertainment and social networking. CESL’s software solutions and services also offer great expansion capabilities. CESL can help clients expand geographically through language localization for products and services. Currently, our products and services are available in 16 languages, which include mostly European languages and some Asian languages. CESL can also help clients who license our software and services expand their business through a fully-customizable multi-tiered licensing program to a great number of sub-licensees.

Our Products

Our software products are built upon cutting-edge Internet technologies and capable of providing multi-player gaming platforms, powerful transaction engines, advanced risk management tools, comprehensive online marketing tools, sophisticated data mining and reporting utilities, intuitive graphical interfaces and localization in 16 major languages including English, French, German, Italian, Spanish, Portuguese, Norwegian, Swedish, Danish, Dutch, Greek, Hebrew, Traditional Chinese, Simplified Chinese, Japanese and Korean.

Our software products are specially designed to enable our clients to manage the online entertainment properties and offer online entertainment to visitors of their online entertainment properties. We currently provide the following entertainment software products:

Online Entertainment Management — these are tools that enable our clients to offer online entertainment software, monitor end-user behavior, and potentially to monetize the traffic and patronage generated by the end users. Our integrated and comprehensive multi-lingual e-commerce system facilitates Internet-based transaction processing and can provide detailed analysis of transaction records of our diversified international end users. In addition, there are promotional tools that help build player loyalty and increase retention rates.

Online Entertainment Modules — these are customizable entertainment modules that run on Microsoft Windows 95/98/NT/2000/ME/XP and feature a realistic 3-D environment, selectable background music, and local language interface. In late 2004, we developed a multi-lingual multi-player gaming product featuring realistic 3D environments with player-selectable avatars, an exclusive automated training room, a step-by-step interactive gaming tutorial in major languages serving our clients’ key markets around the world. There are many games of chance and games of skill which end users can download freely and play on their computers.

Our Services

In addition to licensing our software products to licensee, we offer a variety of application services and consulting services for backend operation. These services include:

Infrastructure Design Services –

Transaction Processing Design Service–

Customer Support Services –

Custom Gaming Software Development– Design and development of custom entertainment modules and interfaces for our platform meeting client specific requests.

Our Technology and Infrastructure

Our Universal Gaming Platform is based on a sophisticated modular distributed transaction processing architecture that is designed to be flexible, extensible, scalable and secure. Composed of multiple fault-tolerant distributed modules, our Unix-based backend infrastructure provides the functions of gaming servers, game points management, financial stored-value management, e-commerce engines, a central database and an extensive toolset to handle fraud screening, data mining, player support and partner programs. Being comprehensive and extensible, our Universal Gaming Platform can be used as a generic common platform to support a wide range of online gaming, including skills-based gaming and multi-player gaming. Our multiple real-time gaming server software enables seamless integrated management of all end user registration, account administration, deposit and transactions. With our software, end users on various platforms can communicate securely across the global Internet through multiple real-time gaming servers. To further increase the flexibility of our platform, a transaction server layer encapsulates business logic and abstracts data and third party services, such as payment processors. This allows us to isolate the core processing module with business logic, greatly reducing the amount of development and quality assurance work required when we want to extend the system. Our comprehensive administration tools enable advanced data analysis to deliver high-quality end-user support and licensee management. Our multiple payment processor gateway capabilities provide choice and flexibility to handle the complexities of international markets.

Our long history of developing innovative software solutions specifically for the non-English speaking markets has yielded a deep expertise in localization techniques and processes, as well as a finely-honed infrastructure for building localization into products at the earliest stages of design and development. Our development methodology incorporates localization requirements as an integral part of product design. Our in-house teams of native-language experts are involved in every step of the process to ensure cultural fidelity in everything from content to graphics to interfaces and controls.

Our Licensee

We currently have one licensee, UIM, a third-party online entertainment operator to which we license our software and provide application services and consultation services for its Internet property and infrastructure, including Web site design, payment gateways, and database and operating systems, in return for a fixed percentage of UIM’s gross receipts. UIM operates exclusively from computer servers located in the Kahnawake Territory in Canada under a gaming license issued by the Kahnawake Gaming Commission, subject to continuing compliance with strict licensing requirements.

In spite of the fact that we have no equity shareholding in UIM, we incorporated UIM’s results as of and for the nine months ended December 31, 2004 into our consolidated financial statements. See Item 5 — “Operating and Financial Review and Prospects — Overview — Consolidation of UIM Under FIN 46(R)” for additional information.

Seasonality

Due to the predominantly indoor experience of online entertainment, there is a seasonality pattern observed on user traffic and patronage. Typically, summer is the lower season, while winter is the higher season for online entertainment activities. As a result, seasonality affects the revenues we receive.

Competition

Our success depends, in part, upon our ability to enhance our diversifiedproducts and services to keep pace with technological developments, respond to evolving customer requirements and achieving continued market acceptance.

Online entertainment productssoftware design houses and application service providers are our primary competitors. However, given the low barrier to entry of software industry and the increasing popularity of Internet-based businesses, there are a large number of competitors scattered throughout many different segments of software and Internet industries. We potentially compete with a number of public and private companies, which provide Internet property architecture design/development, Web design/development, online entertainment software design and development, marketing tools and solutions providers, customer support tools and solutions providers, and e-commerce tools and solutions providers. The diversity of our potential competitors makes it difficult to compile information about the nature of our competitors, their operations and their resources.

Our sole licensee, UIM, also faces tough competition in the online gaming industry. New entrants to the online gaming sector, market consolidation and aggressive marketing and pricing by competitors may lead to a significant decline in UIM’s customer base, revenues and margins. Any future liberalization, licensing or regulation of online gaming in countries where UIM generates significant revenues is likely to lead to increased competition from companies that do not currently offer online gaming services. Traditional Internet service providers and other entities, many of which have significant financial resources and name brand recognition, may provide online entertainment services in the future. Traditional entertainment service providers might expand and provide an Internet-based entertainment service and such Internet service providers and entertainment service providers may also develop and offer the underlying software solutions and tools to others, and thus directly compete with us.

Faced with our known competitors, and most likely several new competitors which may be established in the near future, we will continue to improve the principal competitive factors that we believe can create certain barriers to entry: including brand, technology, financial stability and resources, proven track record, regulatory compliance, independent oversight and transparency of business portfolio.practices in our industry.

 We are controlled by the Koos Group, a major conglomerate in Taiwan’s finance, manufacturing, telecommunications, media, and cable industries.

Retail Music Distribution ServicesBusiness

Overview

We operate a retail music distribution business through our indirect ownership of Taiwan’s two largest retail music distribution chains, Rose Records and Tachung Records. Our stores sell recorded music as well as DVDs, VCDs and ancillary equipment such as personal stereo headphones. As of December 31, 2003,June 15, 2005, we operated a total of 52 stores with a total floor area of approximately 124,494 square feet. We45 stores. According to our estimate, that in 2003 we had a market share of between 35% and 45%over 30% of Taiwan’s physical retail music distribution business.business in 2004. While seeking to preserve our market share, we arehave also aimingtaken steps to improve the operating results and financial condition of this business by reducing costs, improving our management information systems and inventory management with a view to operating this business more efficiently, and increasing our operating margins.

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We hold our retail music distribution business through G-Music Limited, our 58.58% owned subsidiary. We acquired the stores operated by Rose Records and Tachung Records in a series of transactions in February 2002, September 2002 and December 2002, and have consolidated the results of operations of the acquired businesses from the respective dates of acquisition. See Note 3 of our consolidated financial statements for additional information. Our retail music distribution business, which we refer to in our consolidated financial statements as our offline business, generated revenues of NT$2.6 billion (US$76.9 million) and a loss from operations of NT$243.5 million (US$7.2 million) in 2003.

Industry Overview

Taiwan’s retail music distribution industry is relatively fragmented. In addition to our Rose Records and Tachung Records chains, there are several other record distribution chains operating in Taiwan. Hypermarket chains, such as Carrefour and specialty entertainment chains, such as FNAC, reflect a small, but growing, segment of the market, with the balance consisting of convenience stores, individual music stores and night markets. Alternative distribution methods, such as Internet sale of physical recorded music and Internet-based music downloads have also begun to emerge in recent years as competitive distribution channels.

While no formal industry statistics are available, based on information provided to us by record companies and knowledge of our own revenues, we estimate that our market share in 2003 was between 35% and 45%2004 of the total physical retail music distribution industry.market was over 30%. This total does not include Internet-based music downloads or illegal physical or online piracy, which we believe to be significant but about which we do not have reliable information.

The retail music distribution industry in Taiwan has been undergoing significant change in recent years. The development of new technologies, such as Internet-based music downloading and changing consumer buying habits, have contributed to a significant global reduction in the size of recorded music sales during the past several years. This trend has also adversely affected the retail music distribution industry in Taiwan. In addition, Taiwan continues to experience relatively high levels of physical and online music piracy, which has further eroded the retail music distribution industry.

We believe that these changes are likely to continue to impact the retail music distribution industry going forward. Historically, purchases of popular music have constituted a significant portion of ours and our competitors’ sales. Going forward, we anticipate that an increasing proportion of these sales is likely to be effected through alternative distribution channels, particularly Internet-based downloading. Consequently, we anticipate that an increasing proportion of physical retail music distribution will comprise specialized areas of music, such as classical and jazz, whose purchasers demand the higher sound quality of physical recordings and who we believe are generally less price-sensitive than purchasers of popular music.

Taiwan’s retail music distribution industry has also been affected in recent years by relatively lower levels of new popular artists and albums than has been the case in some prior periods, which we believe has adversely affected our sales and those of our competitors.

Stores and Store Formats

As of December 31, 2003,June 15, 2005, we operated 52 stores with a total floor area of approximately 124,494 square feet.45 stores. These stores range in size from approximately 2,130500 square feet to approximately 3,5605,000 square feet. The stores typically offer a broad selection of album titles across a range of musical genres.

Our stores are located principally in Taipei, Taichung, Kaoshiung and Taiwan’s other major urban areas, although we also operate certain stores in rural areas. Historically, we have sought to locate our stores in high-traffic areas and near transportation hubs such as Mass Rapid Transit, railway and bus stations, with a view to attracting young purchasers of popular music. These areas also tend to be characterized by higher store rental costs. We currently have 22 stand-aloneAs of June 15, 2005, we had 20 music stores in the North of Taiwan, ninesix in Central Taiwan and 10six in the South of Taiwan. In addition, 1113 of our Rose records retail outlets are located in either hypermarkets or department stores throughout Taiwan.

We believe that in the future, younger purchasers of popular music are likely to turn increasingly to alternative music distribution channels, such as Internet-based downloads, and that an increasing proportion of the physical retail music distribution will comprise more specialized areas of music, such as classical and jazz.

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In light of the trends we perceive in this business, we are in the process of experimentingaltering some of our stores into combined stores format. Combined stores are stores co-located with alternativeother businesses that we believe share the same pool of customers as our customers. As of year end 2004, we have a combined store formatsarrangement with a major operator of a fitness center and locations. These include:

	•		Joint Stores— these are stores co-located with other businesses, which attract customers who we believe are likely to purchase our products. We are currently negotiating a joint store arrangement with a major operator of fitness centers in Taiwan and are exploring other similar opportunities. In addition, we may elect to operate coffee shops or similar businesses in our stores. We intend to open or convert several existing stores to joint stores in the second half of 2004.
	•		Specialized Stores— these are stores which specialize in one or more particular styles of music, such as classical or jazz. These stores will offer a broader and deeper selection of music of a particular genre and will feature more knowledgeable store personnel. The stores will be located in areas designed to attract less-price-sensitive consumers of these types of music, such as in business districts. We plan to open several specialty stores in the second half of 2004.
	•		Community Stores— these are located in rural and other areas where they serve a local community which is not otherwise served by a music store. Due to their locations, these stores generally face less direct competition and, consequently, permit more aggressive pricing strategies. As of December 31, 2003, we operated two community stores. We plan to open several additional community stores in the second half of 2004.
	•		Other Formats— we are currently developing and evaluating other possible store formats, including flagship stores which integrate our retail music distribution business with other entertainment-related businesses.

two combined stores with an arcade game provider. As of June 2005, we have already converted another seven stores which were identified as loss makers into either a combined store or share rental format.

We are also currently updating and improving our Internet Web site which will offer and sell physical CDs, DVDs and VCDs to retail purchasers through Internet Web sites which we operate. Revenuepurchasers. Revenues from our Internet store represents a small fraction of our total music distribution revenue. In the future, we may consider establishing an Internet-based music download business, although we have no current plans to do so.revenues.

Purchasing and Distribution

 Other than major record releases,which are procured by our headquarters, each

As of our retail music stores, through its store manager, currently makes its own purchasethe fourth quarter of CDs, DVDs and VCDs either directly from the major record companies or through other suppliers. Following the implementation of our Point of Sale system (which is discussed below), we plan to centralize2004, all procurement for all of our retail music storeshas been centralized at our headquarters in Taipei, which we believe will strengthen our position in negotiating terms, discounts and in-store advertising with the major record companies. From the data collected by our POS system, we will be able to identify fast-selling CDs which we should purchase more of, and be alerted when inventories of slow-moving CDs become too high.

Currently, merchandise purchased by our retail music stores is also separately distributed by the major record companies or the other suppliers, as the case may be, directly to our individual retail music stores. Following the centralization of our procurement, we expect our suppliers to continue to ship the merchandise directly to each of our retail music stores.

Consistent with retail music industry practice in Taiwan, CD purchases from major record companies are in general not returnable for full credit. The principal exception relates to major record releases, where the first batch of purchases are usually returnable for full credit. CD purchases from suppliers other than major record companies are usually returnable for full credit.

MerchandisingSales and Marketing

The primary source of revenuerevenues for our retail music stores is the sale of recorded music on CDs. Each of our stores carries a wide selection of CDs purchased from major and independent record companies, which, except for new releases and special promotions, are generally arranged in our stores according to genre and alphabetically by artist or group. Our music stores also receive marketing/sales promotional revenueand advertising revenues from store media, that is, in-store promotion by record companies. Record companies typically allocate a portion of their album marketing budgets as “marketing/sales promotional revenues”and advertising revenues to music stores in return for prominent in-

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storein-store placement of CDs and/or posters as well as record company-sponsored promotional events. In 2003,2004, we recognized a total amount of NT$54.0US$1.5 million (US$1.6 million) in promotional and advertising and promotional revenues.

     In light of the changing trends we perceive in the retail music industry, as part of our marketing strategy we plan to launch

We successfully launched a co-branded credit card during the beginning of the fourth quarter of 2004 and loyalty program.have a current total of approximately 45 thousand active cards. We believe that a co-branded credit card will help promote sales and, more importantly, build customer loyalty. We will also be able to collect valuable data regarding our customers’ music preferences, for example, jazz or classical music, which will help us to tailor the offerings of our specialty stores to meet theircustomer needs. We are currently in negotiations with a major bank in Taiwan to develop and launch a co-branded credit card and loyalty program, which we expect to launch in the fourth quarter of 2004.

Management Information System

We are in the process of implementinghave implemented our new point of sale, or POS, system for our retail music stores. This is a centralized management information system that allows tracking from purchase through to sale, providing us with real-time information on what is being sold at each of our retail music stores. The new POS system is expected to enable us to implementmanage a centralized purchasing system, perform inventory swap among our stores and monitor our inventory movement more accurately and efficiently. We expect our new POS system to greatly reduce manpower costs in terms of our purchasing and also improve our billing system. Our new POS system is currently being tested at two of our retail music stores, and we expect to begin implementing the system at all of our stores beginning in the third quarter of 2004. We also plan to conduct training programs to prepare our store staff in connection with the implementation of our new POS system. We believe that implementation of our POS system should ultimately enable us to achieve a more efficient division of labor between staff performing stock-taking and other operational functions and more knowledgeable sales staff to improve customer service.

Competition

The retail music distribution business in Taiwan is highly competitive. We believe that the principal bases of competition are store location, selection and price of CDs. We compete in the music chain store business with Asia RecordRecords and Guan Nan Record.Records. Our music stores also compete with independent operators and convenience stores. We are also facing increasing competition from hypermarkets, such as Carrefour, as well as specialized entertainment chains, such as FNAC, some of which have greater financial and other resources than our Company. We expect competition from hypermarkets to increase in the future, as this reflects the expected shift in customers from high-traffic areas like bus and train stations to areas with available and accessible parking lots, such as hypermarkets and business areas. Some of our larger competitors have exclusive distribution arrangements with music label companies and the operation of these arrangements prevent us from distributing certain popular music products. In addition, we compete with music distribution channels that employ modern technology, such as online download and streaming, which enjoy lower inventory and distribution costs. Furthermore, the prevalent practice of physical and online piracy in Taiwan presents a continuing threat to the growth of the music distribution industry in Taiwan.

Seasonality

Retail music sales in Taiwan are typically higher during the Chinese New Year and in the summer due to increased store traffic and buying by students and youths on school vacation. Rose Records and Tachung Records are similarly exposed to this trend in seasonality of sales, and rely heavily on the Chinese New Year and summer sales to achieve annual financial targets.

Online — Internet Access Services

     We provide Internet access services in the form of ADSL devices and cable modems.

Access Services Offerings

     ADSL. GigaMedia’s ADSL services offer different levels of performance from 512Kbps download with 64Kbps upload to 3Mbps download with 640 Kbps upload. The high performance of our products is designed to better support file sharing, video and other broadband Internet applications. We were the first company in Taiwan to offer ADSL services with a standard fixed IP-address feature, which enables users to build their own multimedia Web sites, participate in online meetings, set up servers and utilize Voice-over-IP. As of December 31, 2003, we had 77,837 ADSL customers, as compared to 73,573 ADSL customers as at December 31, 2002.

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     CABLE MODEMS. We also offer our cable modem-based broadband Internet access at transmission speeds of up to 6 Mbps. Our cable modem-based broadband access services allow subscribers to more efficiently use (1) bandwidth-intensive multimedia applications, such as interactive games, high-quality audio, video and distance learning, and (2) electronic commerce applications, such as retailing, financial services and online software distribution. As of December 31, 2003, we had 25,119 cable modern-based broadband customers, as compared to 35,658 cable modem-based broadband customers as at December 31, 2002.

Markets of Access Services

     RESIDENTIAL ACCESS SERVICES. We receive access fees from residential subscribers of our cable modem-based broadband Internet access services under revenue sharing arrangements with our cable partners with respect to each subscriber’s monthly access fee. We recognize our access revenues net of payments to our cable partners.

     Our 2-way cable modem-based broadband service packages are offered at NT$1,199 for premium service; NT$850 for a mid-tier package; and NT$699 for basic service. We also offer selected subscribers discounts on their monthly access fees and quarterly payment options to further promote our access services. We recognize our revenue from access fees net of split with cable partners and these discounts. In the future, our product mix may change in response to market dynamics.

     During 2003, we offered different tiers of ADSL service options with monthly access fees ranging from NT$410 to NT$1099, which from time to time have been revised for promotion purposes, including providing subscribers periods of free Internet access service. Unlike our cable access fees, our ADSL access revenues are not shared.

     The number of subscribers of our Internet access services declined during 2003. The table below sets forth the number of our subscribers on the dates specified. Despite the declines in our subscribers in 2003, our access revenues increased by 1.4% for 2003 as compared to that for 2002, primarily because more subscribers were using higher specification products. We do not expect to see significant growth in our subscriber base in the future.

     COMMERCIAL ACCESS SERVICES. KBT offers and sells dedicated and high speed Internet access to corporate customers over fiber optical lines. KBT offers various speeds of leased line services, ranging from 1Mbps to 1Gbps, to different kinds of subscribers like ISPs, ICPs, corporates, SMEs (small and medium enterprises), and cyber cafes. KBT charges its customers monthly fees for access services depending on the level of bandwidth.

     CABLE MODEM Original Equipment Manufacturers (OEM) SERVICES. Besides directly providing cable modem-based Internet services under GigaMedia’s brand name to end-users, we also provide trunk bandwidth and backend systems, which include a customer provisioning system, billing system and network management system, to independent cable operators that wish to operate their cable modem-based Internet service under their own brand names. We receive fees from these OEM cable systems under various revenue sharing arrangements. As of December 31, 2003, we had nine OEM cable partners.

Other Services

     Our Web destination offers users a wide variety of rich, multimedia Internet content in Chinese optimized for broadband access. Our Web destination allows users to personalize across multiple online content channels using only one unified log-in password, which enables the users to customize their own viewing priority and preferences. Through our network, our Web destination delivers to users textual data, near-CD-quality audio and

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high-quality digital video. In addition, our Web destination provides users with a broad range of community services and other online services. To enable our users to enjoy a comprehensive online experience, our Web destination also features extensive Web-based community services, including free electronic mail, bulletin boards, photo albums and video and text integrated chat rooms. These community services are available to all users who are registered members of our Web destination. The registration is free of charge, conducted online and used by us to establish a user database.

Our Broadband Network — Cable and ADSL Network

     Over the past years, we have built an island-wide network infrastructure which is based on Gigabit Ethernet technologies and has covered 20 major districts out of a total 25 districts in Taiwan. In these 20 districts, we have built regional data centers to host both the cable Internet and ADSL headend equipments. These centers also act as service hubs for:

	•		the provision of key community services, including electronic mail, usenet news and personal Web hosting, to subscribers;
	•		the management of network performance;
	•		the replication of content and applications; and
	•		the provision of a cost-efficient infrastructure to cache data.

     NETWORK OPERATIONS CENTERS. We provide centralized network management through our network operations centers, which represents the nerve center of our whole network. Our centers use advanced proprietary network management tools and systems to monitor the network infrastructure 24 hours a day, 7 days a week, enabling us to effectively address network problems before they adversely affect our subscribers.

Data Backbone

     Ongoing privatization of the telecommunications market by Taiwan’s government has expanded the number of telecommunications operators. Including Chunghwa Telecom, there are currently four fixed-line telecommunications operators in Taiwan. It is our policy to continually monitor the usage pattern, adjust the network architecture, and select better leased-line circuits providers to optimize the user experience and service economics.

     Private peer to peer relationships among Internet service providers (i.e., private direct cable connections as opposed to public Internet connections) have become the most effective solutions to resolve the problems of packet loss and latency resulting from the significant traffic volume through Internet networks. We have peering arrangements with most of Taiwan’s major networks and Internet service providers, providing us with what we believe to be the most comprehensive Internet connections in Taiwan. According to Taiwan Network Information Center, or TWNIC, GigaMedia had the best aggregate peering bandwidth among all commercial organizations in Taiwan as of June 20, 2003. Our extensive peering arrangements have enabled us to route most of our traffic over the less congested private peering links, through which we passed most of our traffic in 2002 and 2003. This enhances the efficiency of our network and allows us to provide better, faster access services to our subscribers.

     Through our peering arrangements with several Internet service providers and networks, we currently connect to Taiwan’s Internet backbone from our network operations center. We have installed direct Internet connections at each of our regional data centers to minimize backbone traffic flow and to provide Internet connection redundancies. We currently connect to the international Internet through a direct trans-Pacific submarine cable link. As the competition in the trans-Pacific submarine cable segment provides better price economics, we are able to significantly increase our bandwidth without incurring additional cost. In 2003, we upgraded our infrastructure from STM-4 connection to Gigabit connections to provide faster connections.

Information System

     We have established a versatile, scalable, real-time information system that integrates service provisioning, customer management, billing, data gathering and usage tracking functions. With independent multiple

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processing layers, we are able to quickly respond to increases in user, subscriber or service data by expanding our information system’s capacity on demand.

Sales And Marketing

     RESIDENTIAL ACCESS SERVICES. We plan to continue utilizing bundled marketing with our strategic partners to minimize costs. We primarily use the following means to market our services:

	•		television, magazine and newspaper advertisements;
	•		Web-based banners;
	•		Internet newsletters;
	•		inserts in cable television guides;
	•		participation in computer, technology and telecommunications tradeshows;
	•		free trial promotions through waiving monthly access fees for one or two months; and
	•		demonstration centers in computer superstores and other locations.

     COMMERCIAL ACCESS SERVICES. With the unique optical Ethernet MAN infrastructure and solution, KBT is able to provide corporate customers, one-megabit increment, on-demand leased line service. We primarily use the direct sale force to reach our potential customers.

     CABLE MODEM OEM SERVICES. For cable operators that are interested in providing or improving upon their cable Internet services, we will form a team composed of sales personnel, network engineers, backend software engineers and customer service specialists to provide free consultancy and “turnkey” solutions. We believe that direct sales contact and site visits to existing OEM partners and referrals by our existing OEM partners are the most efficient methods of marketing our cable modem OEM services.

Customer Service and Billing — Online Access Business

     We provide our subscribers with a comprehensive range of customer service, including assistance on cable modem installations, continuous post-installation technical support and prompt responses to billing and service requests.

     Our customer service department is divided into two groups: technical support and general customer service. Our customer service department operates a toll-free help desk with extended hours of operation. Our subscribers may also contact us via electronic mail or through accessing our interactive self-service Web site. Our general customer service staff assist subscribers with cable modem questions and problems, as well as basic computer and software configuration questions and billing inquiries. Our technical support group handles technical problems referred by the general customer service staff.

     We typically prepare and mail the bill for our services, which we send to the subscribers under our own name and logo, on a monthly basis. We offer our subscribers a wide variety of payment options, including automatic credit card payments, direct debits from their bank accounts and post office savings accounts, pre-payment or over-the-counter payment at post offices and convenience stores. We also seek to provide detailed information on the bills to enable our subscribers to obtain all relevant information relating to their services.

Competition

     The Internet access service industry is highly competitive.

     We mainly compete with broadband Internet service providers, which provide basic Internet access to residential and commercial users generally through the provision of ADSL services using existing telephone networks or cable modem-based services operating over cable television networks. The Internet access service industry in Taiwan is very competitive and challenging. The broadband Internet access service industry in

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