UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Title of Each Class		Name of Each Exchange on Which Registered
Ordinary Shares		The NASDAQ Stock Market LLC

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

     Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP þ		International Financial Reporting Standards as issued by the International Accounting Standards Board o		Other o

     If “Other” has been checked in response to the previous question, indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o           Accelerated filer þ           Non-accelerated filer o

     Indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 þ Item 18

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

TABLE OF CONTENTS

						Page
PART I							2
		ITEM 1.		IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			2
		ITEM 2.		OFFER STATISTICS AND EXPECTED TIMETABLE			2
		ITEM 3.		KEY INFORMATION			2
		ITEM 4.		INFORMATION ON THE COMPANY			18
		ITEM 4A.		UNRESOLVED STAFF COMMENTS			45
		ITEM 5.		OPERATING AND FINANCIAL REVIEW AND PROSPECTS			45
		ITEM 6.		DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			70
		ITEM 7.		MAJOR SHAREHOLDERS AND RELATED-PARTY TRANSACTIONS			76
		ITEM 8.		FINANCIAL INFORMATION			77
		ITEM 9.		THE OFFER AND LISTING			79
		ITEM 10.		ADDITIONAL INFORMATION			80
		ITEM 11.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			94
		ITEM 12.		DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			94
PART II							94
		ITEM 13.		DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			94
		ITEM 14.		MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			95
		ITEM 15.		CONTROLS AND PROCEDURES			95
		ITEM 16.		[Reserved]			96
		ITEM 16 A.		AUDIT COMMITTEE FINANCIAL EXPERT			96
		ITEM 16 B.		CODE OF ETHICS			96
		ITEM 16 C.		PRINCIPAL ACCOUNTANT FEES AND SERVICES			96
		ITEM 16 D.		EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES			97
		ITEM 16 E.		PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS			97
PART III							97
		ITEM 17.		FINANCIAL STATEMENTS			97
		ITEM 18.		FINANCIAL STATEMENTS			97
		ITEM 19.		EXHIBITS			98
EX-4.55 EXCLUSIVE BUSINESS CONSULTANCY SERVICE AGREEMENT DATED NOVEMBER 15, 2006
EX-4.56 SUPPLEMENTAL AGREEMENT TO EXCLUSIVE BUSINESS CONSULTANCY SERVICE AGREEMENT DATED APRIL 1, 2007
EX-4.57 EXCLUSIVE TECHNICAL SERVICE AND CONSULTANCY AGREEMENT DATED NOVEMBER 15, 2006
EX-4.58 SUPPLEMENTAL AGREEMENT TO EXCLUSIVE TECHNICAL SERVICE AND CONSULTANCY AGREEMENT DATED APRIL 1, 2007
EX-4.59 AGREEMENT FOR PLEDGE OF SHARES DATED FEBRUARY 9, 2007
EX-4.60 EXCLUSIVE CALL OPTION AGREEMENT DATED FEBRUARY 9, 2007
EX-4.61 PROXY VOTING AGREEMENT DATED FEBRUARY 9, 2007
EX-4.62 EXCLUSIVE BUSINESS CONSULTANCY SERVICE AGREEMENT DATED NOVEMBER 15, 2006
EX-4.63 SUPPLEMENTAL AGREEMENT TO EXCLUSIVE BUSINESS CONSULTANCY SERVICE AGREEMENT DATED JANUARY 1, 2007
EX-4.64 AGREEMENT FOR PLEDGE OF SHARES DATED MARCH 20, 2008
EX-4.65 EXCLUSIVE CALL OPTION AGREEMENT DATED MARCH 20, 2008
EX-4.66 PROXY VOTING AGREEMENT DATED MARCH 20, 2008
EX-4.67 SHARE PURCHASE AGREEMENT DATED JUNE 3, 2007
EX-4.68 SHARE PURCHASE AGREEMENT DATED JUNE 6, 2007
EX-4.69 SHARE PURCHASE AGREEMENT DATED JUNE 10, 2007
EX-4.70 SHARE PURCHASE AGREEMENT DATED JULY 5, 2007
EX-4.71 SHARE PURCHASE AGREEMENT DATED JULY 6, 2007
EX-4.72 SHARE PURCHASE AGREEMENT DATED JULY 6, 2007
EX-4.73 SHARE PURCHASE AGREEMENT DATED MAY 26, 2008
EX-12.1 CERTIFICATION BY CEO
EX-12.2 CERTIFICATION BY CFO
EX-13.1 CERTIFICATION BY CEO
EX-13.2 CERTIFICATION BY CFO
EX-15.1 CONSENT OF GHP HORWATH, P.C.

USE OF CERTAIN TERMS

          In this annual report, all references to (i) “we,” “us,” “our,” “our Company” or “GigaMedia” are to GigaMedia Limited and, unless the context requires otherwise, its subsidiaries; (ii) “Shares” are to ordinary shares of our Company; (iii) “CESL” are to Cambridge Entertainment Software Limited (previously known as Grand Virtual International Limited), a company incorporated under the laws of the British Virgin Islands; (iv) “Hoshin GigaMedia” are to Hoshin GigaMedia Center Inc., a company incorporated under the laws of Taiwan, Republic of China, (“R.O.C.”); (v) “FunTown” are to our online games business operated through Hoshin GigaMedia and FunTown World Limited, a company incorporated under the laws of the British Virgin Islands; (vi) “T2CN” are to T2CN Holding Limited, a company incorporated under the laws of the British Virgin Islands; (vii) “online games business” are to online game and service business operated through FunTown and T2CN; and (viii) “Internet access service business” are to Internet access and service business operated through Hoshin GigMedia and its wholly-owned subsidiary, Koos Broadband Telecom Co., Ltd. (“KBT”). All references in this annual report to “U.S. dollar,” “$” and “US$” are to United States dollars and all references to “NT dollar” and “NT$” are to New Taiwan dollars.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

          This annual report contains forward-looking statements that involve risks and uncertainties. These statements include projections and business trends that are “forward-looking” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are generally indicated by the use of forward-looking terminology such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “project,” “may,” “will” or other similar words. The forward-looking statements included in this annual report relate to, among others:

	•		our business plan and strategies;
	•		our future business development and potential financial condition, results of operations and other projected financial information;
	•		our ability to manage current and potential future growth;
	•		expected continued acceptance of our revenue model;
	•		our plans for strategic partnerships, licenses and alliances;
	•		our acquisition and strategic investment strategy, and ability to successfully integrate any past, current, or future acquisitions into our operations;
	•		our ability to protect our intellectual property rights and the security of our customers’ information;
	•		expected continued acceptance of our online games and gaming software, including expected growth of the online games and online gaming industry, and consumer preferences for our products and services;
	•		the development of new online game and gaming software products in-house, our plans to license additional games from third parties, and the launch of these new games or gaming software systems, including the timing of any such development, licenses or launches;
	•		potential entry of new competitors in any of our business lines;
	•		changes in PRC laws and governmental regulation, and future enforcement of those laws and regulations, including laws and regulations relating to Internet usage, advertising over the Internet, Internet content providers, foreign investors in online business and distribution of dividends;
	•		expected growth in the number of Internet, online games, and gaming software users in the PRC and other areas of operation;
	•		changes or stability in certain regulatory environments in our places of operation, including our licensees’ operations or gaming licenses;
	•		the outcome of ongoing, or any future, litigation or arbitration; and

•

our corporate classification by various governmental entities.

          These forward-looking statements are based on our own information and on information from other sources we believe to be reliable. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of risk factors and other factors noted throughout this annual report, including those described under Item 3, “Key Information — D. Risk Factors” and those detailed from time to time in other filings with the U.S. Securities and Exchange Commission (the “Commission”). We undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. Given this level of uncertainty, you are advised not to place undue reliance on such forward-looking statements.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

          Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

          Not applicable.

ITEM 3. KEY INFORMATION

Exchange Rates

          Our consolidated financial statements were historically reported in New Taiwan dollars. Effective January 1, 2004, we adopted the U.S. dollar as our reporting currency because operations denominated in U.S. dollars represented an increasing portion of our business following the acquisition of our gaming software and service business. Comparative financial information has been recast as if the U.S. dollar had been used as our reporting currency as of and for the year ended December 31, 2003.

          Assets and liabilities on our balance sheet denominated in non-U.S. dollars are translated into U.S. dollars using year-end exchange rates. Income and expense items in our statement of operations denominated in non-U.S. dollars are translated into U.S. dollars using the weighted-average exchange rates. Certain other operating financial information denominated in non-U.S. dollars, not included in our consolidated financial statements and provided in this annual report, are translated using weighted-average exchange rates. For convenience, transactions in 2008 denominated in non-U.S. dollars are translated into U.S. dollars using the year-end exchange rate for 2007. We make no representation that the non-U.S. dollars could be converted to U.S. dollars at such rate or any particular rates.

A. Selected Financial Data

          The selected consolidated balance sheet data as of December 31, 2006 and 2007 and the selected consolidated statement of operations data for the years ended December 31, 2005, 2006 and 2007 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated balance sheet data as of December 31, 2003, 2004 and 2005, and the selected consolidated statement of operations data for the years ended December 31, 2003 and 2004 have been derived from our audited consolidated financial statements for the years ended December 31, 2003, 2004 and 2005, which are not included in this annual report. The consolidated financial statements have been prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The selected consolidated financial data set forth below should be read in conjunction with Item 5, “Operating and Financial Review and Prospects” and the consolidated financial statements and the notes to those statements included elsewhere in this annual report. The statements of operations for the years ended December 31, 2003, and 2004 have been restated to reflect the results of our music distribution business, which was sold in September 2005, as discontinued operations. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or shareholders’ equity as previously reported.

For the Years Ended December 31,
(in thousands except for earnings/loss per share amounts)

		2003				2004				2005				2006				2007
		US$				US$				US$				US$				US$
STATEMENT OF OPERATIONS DATA:
OPERATING REVENUES
Gaming software and service revenues			0				11,434				22,511				55,019				118,950
Online game and service revenues			0				0				0				18,692				32,764
Internet access and service revenues			19,396				21,303				21,589				20,537				15,147
Other revenues			117				107				87				44				17
Total operating revenues			19,513				32,844				44,187				94,292				166,878
OPERATING COSTS
Cost of gaming software and service revenues			0				(1,592	)			(3,327	)			(7,824	)			(16,201	)
Cost of online game and service revenues			0				0				0				(3,667	)			(9,118	)
Cost of Internet access and service revenues			(15,093	)			(13,873	)			(13,568	)			(11,449	)			(10,002	)
Cost of other revenues			(1,022	)			(644	)			(488	)			(391	)			(223	)
Total operating costs			(16,115	)			(16,109	)			(17,383	)			(23,331	)			(35,544	)
GROSS PROFIT			3,398				16,735				26,804				70,961				131,334
OPERATING EXPENSES
Product development and engineering expenses			(1,211	)			(2,513	)			(3,562	)			(5,738	)			(7,911	)
Selling and marketing expenses			(2,432	)			(6,310	)			(10,777	)			(30,123	)			(62,349	)
General and administrative expenses			(5,162	)			(5,657	)			(7,892	)			(12,421	)			(22,240	)
Bad debt expenses			(128	)			220				(207	)			(715	)			(743	)
Impairment loss on property, plant and equipment			(1,557	)			0				0				0				0
			(10,490	)			(14,260	)			(22,438	)			(48,997	)			(93,243	)
Income (loss) from operations			(7,092	)			2,475				4,366				21,964				38,091
Income (loss) from continuing operations			(9,799	)			1,253				6,490				30,784				38,890
Income (loss) from discontinued operations			(4,296	)			429				(154	)			0				0
Net income (loss)			(14,095	)			1,682				6,336				30,784				38,890
Earnings (loss) per share (in dollars)
Basic:
Income (loss) from continuing operations			(0.20	)			0.02				0.13				0.60				0.74
Income (loss) from discontinued operations			(0.08	)			0.01				0				0				0
Net income (loss)			(0.28	)			0.03				0.13				0.60				0.74
Diluted:
Income (loss) from continuing operations			(0.20	)			0.02				0.12				0.51				0.65
Income (loss) from discontinued operations			(0.08	)			0.01				0				0				0
Net income (loss)			(0.28	)			0.03				0.12				0.51				0.65

As of December 31,
(US dollars in thousands except for number of issued shares)

		2003				2004				2005				2006				2007
		US$				US$				US$				US$				US$
BALANCE SHEET DATA:
Total current assets			77,709				67,726				70,204				64,176				115,417
Property, plant and equipment-net			15,636				15,056				10,747				10,098				13,008
Goodwill			—				29,607				29,243				55,817				85,149
Intangible assets-net			6,199				8,372				2,704				23,067				26,060
Total assets			119,792				125,977				113,519				182,619				283,865
Total shareholders’ equity			90,363				95,971				100,648				134,087				180,665
Common shares, no par value, and additional paid-in capital			239,004				287,657				287,920				289,495				296,793

		2003				2004				2005				2006				2007
		US$				US$				US$				US$				US$
Number of issued shares (in thousands)			50,154				50,154				50,344				51,495				53,700
Dividend declared per share (in dollars)			0				0				0				0				0

Presentation of financial information for the financial years ended December 31, 2003 through December 31, 2006 has been reclassified to conform with the presentation for the year ended December 31, 2007.

B. Capitalization and Indebtedness

          Not applicable.

C.

Reasons for the Offer and Use of Proceeds

          Not applicable.

D. Risk Factors

Risks Related to Our Business

          Our limited operating history as a gaming software and services provider and an online games operator, and the unproven long-term potential of those business models make evaluating our business and prospects difficult

          We acquired our gaming software and service business, CESL, in April 2004 and our online games business, comprised of the game platforms of FunTown and T2CN, in January 2006 and June 2007, respectively. We launched new poker software products in 2004, which generated approximately 18 percent, 56 percent and 75 percent of our total gaming software and service revenues in 2005, 2006 and 2007, respectively. In addition, the senior management teams of our different businesses and our employees have worked together at our Company for only a relatively short period of time.

          As a result, we have a limited relevant operating history as a gaming software and services developer and an online games operator for you to evaluate. It is also difficult to evaluate our prospective business, because we may not have sufficient experience to address the risks frequently encountered by companies using new and unproven business models and entering new and rapidly evolving markets, including the online gaming and online games markets. These risks may include our potential failure to:

	•		retain existing customers or attract new customers;
	•		license, develop, or acquire additional online games that are appealing to consumers;
	•		anticipate and adapt to changing consumer preferences;
	•		adapt to competitive market conditions;
	•		adapt to regulatory changes;
	•		respond to technological changes or resolve unexpected service interruptions in a timely manner;
	•		adequately and efficiently operate, upgrade and develop our transaction and service platforms; or

•

maintain adequate control of our expenses.

If we are unsuccessful in addressing any of the risks listed above, our business and financial condition will be adversely affected.

          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 additional competition from potential competitors, including those with:

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

Competition in the gaming software and service business

          The Internet gaming software industry is characterized by rapid technological change, and we face significant and intense competition from online gaming software design houses and application service providers. Given the relatively low barriers to entry into the software industry and the increasing popularity of Internet-based businesses, we face a large number of potential competitors from many different segments of the software and Internet industries. Traditional entertainment service providers, many of which have financial resources significantly greater than ours, might elect to provide Internet-based entertainment services. Such Internet service providers and other entertainment service providers could also develop and offer the underlying software solutions and tools to others in direct competition with us.

          We are also exposed to competition faced in the Internet gaming industry by our licensees, such as Ultra Internet Media, S.A. (“UIM”), as license fees with respect to gaming software provided by us typically include a variable fee based on revenues earned by such licensees from the operation of the licensed software. Our major licensee is UIM, a provider of Internet gaming services. Although we do not have any equity ownership interest in UIM, in accordance with FIN 46(R) we consolidate its assets, liabilities and results of operations in our financial statements and are entitled to fees from UIM based upon its revenues. For additional information, see Item 5, “Operating and Financial Review and Prospects — A. Operating Results — Certain Significant Events Affecting Our Results of Operations for 2005, 2006 and 2007 — Consolidation of UIM, T2 Entertainment and T2 Advertisement under FIN 46(R).” Our licensees (including UIM), face strong competition in the online gaming industry.

          Furthermore, some of our competitors and competitors of our licensees (including UIM) are more established, enjoy greater market recognition, are substantially larger and have substantially greater resources and distribution capabilities than we do. There is no assurance that we or our licensees (including UIM) will be able to compete successfully with existing and future competitors, which could have a material adverse effect on our business, financial condition or results of operations. See Item 4, “Information on the Company — B. Business Overview — Gaming Software and Service Business — Competition” for additional information.

          Finally, as a result of the Unlawful Internet Gambling Enforcement Act (the “UIGEA”) and subsequent closing of the online gaming market in the United States, we and our licensees (including UIM) face increasing competition from entertainment service providers in our markets in Continental Europe, which are also increasingly subject to regulation from governmental authorities. There is no assurance that we or our licensees (including UIM) will be able to compete successfully with existing and future competitors, which could have a material adverse effect on our business, financial condition or results of operations. See Item 4, “Information on the Company — B. Business Overview — Gaming Software and Service Business — Competition” for additional information.

Competition in the online games business

          Our main competitors in the online games business are online game operators in Taiwan, Hong Kong, the People’s Republic of China (“PRC”) and Macau, or Greater China, including Shanda Interactive Entertainment Ltd. (“Shanda”), Giant Interactive Group, Inc., The9 Limited, Nineyou (Shanghai Everstar Online Entertainment Co., Ltd.), Tencent Holdings Limited, Ourgames.com (Beijing Globalink Computer Technology Co., Ltd.) and Chinagames.net in China, and online game operators in Taiwan, including Gamania Digital Entertainment Co., Ltd. (“Gamania”) and Soft-World International Corporation.

          We expect more companies to enter the online games industry in Greater China and a wider range of online games to be introduced to the Greater China market. Our competitors vary in size and many have significant financial, marketing and game development resources as well as name recognition. We may not be able to devote the same degree of resources to designing, developing or acquiring new games, undertaking extensive marketing campaigns, adopting aggressive pricing policies, paying high compensation to game developers or compensating independent game developers as a number of our competitors may be able to do. We cannot assure you that we will be able to compete successfully against any new or existing competitors.

          As a result of the above, the increased competition we anticipate in the online games industry may reduce the number of our users or the growth rate of our user base, reduce the average number of hours played by our users, or cause us to reduce usage fees. All of these competitive factors could have a material adverse effect on our business, financial condition and results of operations.

Competition in the Internet access service business

          Our main competitors in the retail broadband Internet service provider (“ISP”) business are fixed-line service providers and other ISPs in Taiwan that offer asymmetrical digital subscriber line (“ADSL”) broadband services, including Chunghwa Telecom’s HiNet, the overwhelmingly dominant provider of broadband services; Taiwan Fixed Network, a fixed-line service provider; and Seednet, SoNet and Asia Pacific Online, which are all ISPs. Our competitors also include cable-based Internet access companies that have developed their own cable-based services and market those services to cable operators, 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, NCIC’s Sparq and Asia Pacific Online. The primary basis of competition in the Internet 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. All of these competitive factors could have a material adverse effect on our business, financial condition or results of operations. In recent years, we have experienced a reduction in the number of our new consumer subscribers and total consumer subscribers, in line with our ongoing strategy to shift resources away from this legacy business. Consistent with our focus on online entertainment, we have retained financial advisors to explore the sale of this legacy business.

          Our business could suffer if we do not successfully manage current growth and potential future growth

          We are pursuing a number of growth strategies, including leveraging our customer base to develop additional sources of revenues and exploring opportunities to expand into new gaming software and service business segments. Some of these strategies relate to new services or products for which there are no established markets, or relate to services, products or markets in which we lack experience and expertise. We are also expanding our online poker software business into new European markets such as Greece, Poland, Finland and Hungary. We cannot assure you that we will be able to deliver new products or services on a commercially viable basis or in a timely manner, or at all.

          Our growth to date has placed, and our anticipated further expansion of our operations, including a significant expansion of our headcount, will continue to place, a significant strain on our management, systems and resources. In addition to training and managing our workforce, we will need to continue to develop and improve our financial and management controls and our reporting systems and procedures, including those of acquired businesses. We cannot assure you that we will be able to efficiently or effectively manage the growth of our operations, and any failure to do so may limit our future growth and materially and adversely affect our business, financial condition and results of operations.

          We expect the marketing costs for our gaming software and service business to continue to increase, which could have an adverse effect on our business

          Our selling and marketing costs have been increasing rapidly, primarily due to increasing competition in our core markets, the lack of available new markets and the high level of advertising by our competitors in Europe. These costs increased by 126 percent, from

US$22.1 million in 2006 to US$50.0 million in 2007. We expect that we will need to continue to significantly increase our marketing expenses for our gaming software and service business, which could have an adverse effect on our business and financial results.

          Our business strategy, which contemplates growth through acquisitions and strategic investments, exposes us to significant risks

          As a component of our growth strategy, we intend to continue to enhance our business development, including our game content offerings, by acquiring other businesses that complement our current online businesses, or which represent related but new lines of business that we believe to be appropriate areas of expansion, or that we believe may benefit us in terms of user base, product or content offering. We also intend to make selective strategic investments. We will continue to examine the merits, risks and feasibility of potential transactions, and expect to search for additional acquisition opportunities in the future.

          Such search and examination efforts, and any related discussions with third parties, may or may not lead to future acquisitions and investments. Our reported financial results may be affected by any such acquisitions and/or investments, including any acquisitions or dispositions undertaken by us in anticipation of or in connection with any such acquisitions and/or investments. Our ability to grow through such acquisitions and investments will depend on the availability of suitable acquisition candidates at an acceptable cost, our ability to reach agreement with acquisition candidates or investee companies on commercially reasonable terms, the availability of financing to complete larger acquisitions or investments and our ability to obtain any required governmental approvals. In addition, the benefits of an acquisition or investment transaction may take considerable time to develop and we cannot assure you that any particular acquisition or investment will produce the intended benefits.

          Furthermore, the identification and completion of any acquisition or investment may require us to expend significant management and other resources, and may require that we expend a significant portion of our cash reserves and/or issue a substantial amount of new equity, which could adversely affect our financial condition and liquidity and result in significant dilution of our shareholders’ interests. The impact of dilution may restrict our ability to consummate further acquisitions. We may also incur debt and losses related to the impairment of goodwill and other intangible assets upon or following the acquisition of another business, which could negatively impact our results of operations. As of December 31, 2007, we carried US$85.1 million of goodwill, including the goodwill recorded in connection with our acquisition of T2CN. Any write-off of goodwill in the future may have a negative impact on our financial results.

          Additional risks associated with acquisitions include, but are not limited to, the following:

	•		It may be difficult to assimilate the operations and personnel of an acquired business into our organization;
	•		Management, information, and accounting systems of an acquired business may be different from our current systems and need to be successfully integrated;
	•		Our management must devote its attention to assimilating acquired businesses, which diverts attention from other business concerns;
	•		Suppliers, vendors and/or distributors may renegotiate or cancel contracts with us following the acquisition of a business;
	•		We may enter markets in which we have limited prior experience. For example, in December 2006, we entered into a strategic alliance with Infocomm Asia Holdings Pte Ltd (“Infocomm Asia”), an online gaming operator and distributor operating primarily in the Southeast Asia region. In addition, in June 2007, we also acquired control of a majority of the voting rights over the shares of T2CN, an online casual sports game operator in China, a market in which we had limited prior experience; and
	•		We could lose some of our key employees or key employees of an acquired business.

          Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business

          We regard our copyrights, service marks, trademarks, trade secrets, patents and other intellectual property as critical to our success. Unauthorized use of the intellectual property, whether owned by us or licensed to us, could adversely affect our business and reputation.

          We rely on trademark, patent and copyright law, trade secret protection and confidentiality agreements with our employees, customers, business partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use the intellectual property used in our business without authorization.

          The validity, enforceability and scope of protection of intellectual property in Internet-related industries are uncertain and evolving. In particular, the laws and enforcement procedures of Taiwan, Hong Kong, the PRC and certain other countries are uncertain or do not protect intellectual property rights to the same extent as do the laws and enforcement procedures of the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our resources, which could disrupt our business and could have a material adverse effect on our business, financial condition and results of operations.

          Our results of operations are subject to significant fluctuations

          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 businesses include, but are not limited to:

	•		Gaming software and service business: availability of Internet infrastructure, competition from existing and new competitors, the revenues, expenses and results of operations of our customer and major licensee, UIM, and the regulatory restrictions applicable to the Internet gaming industry.
	•		Online games business: existing and new competitors, the pace of rollout of new games and price competition in the industry, regulatory and other risks arising in connection with our China operations.
	•		Internet access service business: price competition in the Internet access business, the rate at which new customers subscribe to our services, subscriber turnover rates and the pace of rollout of our services.

          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.

          The markets for our principal businesses are characterized by rapid technological change, and failure to respond quickly and sufficiently to new Internet technologies or standards may have a material adverse effect on our business

          The markets for our gaming software and service business, online games business and Internet access service business are characterized by rapid technological advances, evolving industry standards, changes in user requirements and frequent new service introductions and enhancements.

          The online gaming and online games industries, in particular, are subject to rapid technological change. We need to anticipate the emergence of new technologies and games, assess their acceptance and make appropriate investments accordingly. If we are unable to do so, new technologies in online gaming and online games programming or operations could render our gaming software and online games obsolete or unattractive.

          We use internally developed software systems that support nearly all aspects of our billing and payment transactions in our online games business. All of our businesses may be adversely affected if we are unable to upgrade our systems quickly enough to accommodate future traffic levels, to avoid obsolescence or to successfully integrate any newly developed or acquired technology with our existing systems. Capacity constraints could cause unanticipated system disruptions and slower response times, affecting data transmission and game play. These factors could, among other things, cause us to lose existing or potential customers and existing or potential game development partners.

          Our revenues from our Internet access and service business declined from approximately US$20.6 million in 2006 to US$15.2 million in 2007, mainly due to a decrease in the number of consumer subscribers and a corresponding decrease in revenues from such customers. 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 technologies or standards, we may not be able to attract new customers and our business and financial results may be materially and adversely affected.

          Our gaming software and service business, online games business, and Internet access and service business 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. For example, in February 2007, an earthquake off the coast of Taiwan damaged several undersea optic-fiber cables linking countries such as Malaysia, Singapore, Australia, Japan, South Korea, China, the United States and Europe, causing disruptions in Internet traffic worldwide. 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 system 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 possible system failures.

          While we have implemented industry-standard security measures, our network may still be vulnerable to unauthorized access, computer viruses, denial of service attacks and other disruptive problems. A party that is able to circumvent security measures could misappropriate proprietary information and, perhaps, most importantly, cause interruptions in our operations. Internet and online service providers have, in the past, 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 adoption of new laws or changes to or the application of existing laws relating to Internet commerce may affect the growth of our gaming software and services and online games businesses

          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 Internet and electronic commerce. New laws and regulations that address issues such as user privacy, pricing, online content, taxation, advertising, intellectual property, information security, and the characteristics and quality of online products and services may be enacted. For example, in order to counter alleged Internet addiction, in March 2007, the PRC government prohibited the opening of any new Internet cafés for the rest of 2007, and in April 2007, it issued regulations to discourage online game-players who are minors from spending excessive amounts of time playing online games. Pursuant to these regulations, Internet game operators have been ordered to install anti-addiction software features on games offered in the PRC, which will (among other features) limit the number of points and other benefits which can be awarded to game players after they have been online in excess of specified periods of time. Internet game operators will also be required to adopt real-name registration, which will require online game players to register their real identity information before they will be allowed to play online games.

          Current laws, which predate or are incompatible with Internet commerce, may also be enforced in a manner that restricts the electronic commerce market. In addition, the application of such pre-existing laws regulating communications or commerce in the context of the Internet and electronic commerce is uncertain.

          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 the cost of conducting our business or could otherwise have a material adverse effect on our business, revenues, operating results and financial condition.

          The worldwide legal and regulatory environment in which our gaming software and service business operates is characterized by uncertainties that could adversely affect our business and operating results

          Our gaming software and service business includes software development and the provision of application services for Internet gaming. We license our gaming software to operators of online gaming businesses and to UIM, which also sub-licenses our software products to third parties. Fees earned by us are based on the revenues earned from the operation of the licensed software. Each of these businesses is subject to applicable laws and regulations relating to online gaming and electronic commerce in various jurisdictions throughout the world, and it is in many cases uncertain which governments have authority to legislate or regulate different aspects of

these industries. Moreover, the Internet gaming industry is still in an early stage of development and the worldwide legal and regulatory environment in which the businesses operate remains highly fluid and subject to change. While most foreign jurisdictions have some form of legal framework applicable to games of chance, few provide clear guidance on how this framework applies to Internet gaming. Issues such as determining the physical location of a gaming event and significant differences among the gaming laws and “Cyberlaws” of various countries all make traditional concepts of jurisdiction and conflicts of 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 gaming software business operates and the potential for aggressive legal steps by certain governments to protect online gaming business in their jurisdictions, we cannot assure you that our operations as an application service provider to the gaming industry, or the Internet gaming services provided by our licensees (including UIM), are in compliance with all laws and regulations of the jurisdictions where our gaming software products are used, or that changes in such laws and regulations, or in their interpretation, will not adversely affect our business and operating results. UIM, our major licensee, currently holds a gaming license issued by the Kahnawake Gaming Commission in Canada. However, certain jurisdictions in which UIM operates may require local licensing in the future, and there can be no assurance that it will be successful in its efforts to obtain a gaming license from these jurisdictions, and that as a result UIM would not face the potential loss of key partners and service providers. Also, the substantial uncertainties in the global regulatory environment relating to online gaming expose us to the risk that regulatory authorities in various jurisdictions will determine that our Company provides online gaming services (rather than only providing software and application services to our licensees) and thus subject our Company to gaming laws and regulations in such jurisdictions.

          In Europe, several countries, led by the United Kingdom, have adopted a regulated online gaming approach. Italy has proposed more liberal online gaming regulations and is currently seeking approval by the European Union (“EU”) before becoming enforceable. However, opposing views are present in Europe. Some European countries, where there are state-owned gaming monopolies, primarily related to lotteries and online sports betting, have taken action or introduced legislation aimed at banning foreign online gaming operators, which could have a material adverse effect on our licensees and consequently on our Company. For example, the French governmental authorities have passed legislation effective from March 2007, prohibiting operators other than certain specified state-owned enterprises from operating Internet gaming sites in France. Additionally, the German Interstate Gambling Treaty came into force on January 1, 2008 which seeks a prohibition on the use of the Internet for all gambling services (except horserace betting). Both the French and German legislation call for various forms of ISP blocking or warning pages to be placed on gaming sites, financial transaction blocking and advertising restrictions. As of June 1, 2008, regulations and other necessary actions required to implement these laws and the banking restrictions have not been adopted.

          Such actions have generally been declared in violation of EU law which governs the EU and its 27 member nations. According to rulings by both the EU Commissioner of Internal Markets and the European Court of Justice, such actions by member nations are illegal violations of the freedom to provide services and of establishment as protected by the Treaty of the European Union.

          There can be no assurance, however, that the rulings of the European Commission or the European Court of Justice will be enforced in a timely manner without disruption to the business of our licensees (including UIM).

          Our business is international and therefore faces associated risks

          There are certain difficulties and inherent risks faced by our licensees (including UIM), 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, in jurisdictions in which we or our licensees operate, and in which our licensees’ customers are located could have a material adverse effect on our business, revenues, operating results and financial condition.

          Our gaming software and service business is dependent on one master licensee, and any adverse effect on its business could have an adverse effect on our revenues, operating results and financial condition

          All of our revenues from our gaming software and service business have historically been derived from UIM, our master licensee which sub-licenses our software products to third parties. UIM’s revenues are derived principally from online poker. Although we do not have any ownership interest in UIM, we consolidate its assets, liabilities and results of operations in our financial statements and are entitled to fees from UIM based upon its revenues. We do not control its management and hence have no control over its business decisions. In addition, there is significant competition in the online poker industry. There can be no assurance that online poker will continue to be popular among our users. These factors may have an adverse effect on UIM’s business, operating results or financial performance, which could have an adverse effect on our business, operating results and financial performance. In December 2006, we agreed to license certain of our gaming software for use on Web sites to be launched and operated by Laptop Finance Group Ltd.

          Online gaming is a relatively new industry and therefore, we do not know if the market will continue to grow

          Both the Internet entertainment and online gaming industries are relatively new industries that continue to 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 gaming software and service business will depend on the widespread adoption of the Internet for commercial transactions. There can be no assurance that entertainment on the Internet and online gaming will become widespread.

          All of the revenues from our gaming software and service business to date have been derived from the licensing of our online gaming software and support of our associated services. Our continued success will depend largely upon the success of our online gaming 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 infrastructure and related services provided by third parties

          Our electronic commerce product for handling transactions over the Internet relies on ISPs to allow the customers of licensees 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 out our business. For example, in February 2007, an earthquake off the coast of Taiwan damaged several undersea optic-fiber cables linking countries such as Malaysia, Singapore, Australia, Japan, South Korea, China, the United States and Europe, causing disruptions in Internet traffic worldwide.

          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 licensees of our gaming software depend on credit card transactions for a substantial portion of the deposits or payments by their customers

          Our gaming software and service business has historically derived all of its revenues from its major licensee, UIM. A substantial portion of the deposits or payments to UIM 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 gaming software and service business could be materially and adversely affected.

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

          Undetected programming errors or defects in our software, services and games and the proliferation of cheating programs could materially and adversely affect our gaming software and services and online games businesses, financial condition and results of operations

          Our software, services and games may contain undetected programming errors or other defects. These errors or other defects could result in losses to our licensees (in the case of our gaming software and service business), end-users and to us, and claims resulting from losses to end users could damage our reputation and subject us to liability.

          In addition, parties unrelated to us may develop Internet cheating programs that enable our users to acquire superior features for their game characters that they would not have otherwise. Furthermore, certain cheating programs could cause the loss of a character’s superior features acquired by a user. The occurrence of undetected errors or defects in our games, and our failure to discover and disable cheating programs affecting the fairness of our game environment, could disrupt our operations, damage our reputation and detract from the game experience of our users. As a result, such errors, defects and cheating programs could materially and adversely affect our business, financial condition and results of operations.

          We could be liable for breaches of security on our Web sites and fraudulent transactions by users of our Web sites

          A portion of our transactions are conducted through our Web sites and Web sites of our licensees. In such transactions, secured transmission of confidential information (such as customers’ credit card numbers and expiration dates, personal information and billing addresses) over public networks is essential to maintain consumer confidence. Our current security measures may not be adequate. In addition, we and our licensees may face internal fraud, including potential unauthorized usage of customer credit card information by our employees and those of our licensees. While we have taken steps to prevent this, including the implementation of payment card industry data security standards, these measures may not be adequate. Security breaches could expose us to litigation and possible liability for failing to secure confidential customer information and could harm our or our licensees’ reputation and ability to attract customers.

          We face the risks of changing consumer preferences and uncertainty of market acceptance of our new products in our online games business

          The level of demand and market acceptance of our online games is subject to a high degree of uncertainty. Our future operating results will depend on numerous factors beyond our control. These factors include:

	•		the popularity of existing and new online games operated by us;
	•		the introduction of new online games, competing with or replacing our existing online games;
	•		general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending;
	•		changes in customer tastes and preferences;
	•		the availability of other forms of entertainment; and
	•		critical reviews and public tastes and preferences, all of which change rapidly and cannot be predicted.

          Our ability to plan for product development and distribution and promotional activities will be significantly affected by how well we anticipate and adapt to relatively rapid changes in consumer tastes and preferences. Currently, a substantial portion of our online games revenue comprises revenues from our Freestyle and MahJong games offered by T2CN and FunTown, respectively. However, there is no assurance that these games will continue to be popular in Greater China. A decline in the popularity of online games in general or, in particular, the online MahJong and basketball games that we operate, is likely to adversely affect our business, financial condition and results of operations. We are also generally required to continuously invest in the enhancement, improvement, expansion or upgrading of our games with new features. If we fail to do so, revenues generated from these games may decline.

          In addition, we expect that as we introduce new online games, a portion of our existing customers will switch to the new games. If this transfer of players from our existing games exceeds our expectations, we may have to adjust our marketing, pricing and other business plans and, as a result, our growth and profitability could be materially and adversely affected.

          In order for our business strategy to succeed over time, we will need to license, acquire or develop new online games that are attractive to our users to replace our existing online games as they reach the end of their commercial lifespan. To achieve this, we will need to identify games that will appeal to our users, compete effectively to attract the licensors of such games, and obtain government approvals required for the licensing and operation of such games. Also, in order to maintain the lifespan of our online games, we need to continue to develop and release upgrades to our online games. We cannot assure you that we will be able to identify appropriate games or enter into arrangements with those game developers to offer these games. If we are not able to license, develop or acquire additional online games that appeals to our users, our future revenues and profitability will decline. Due to increased competition among online game operators in Taiwan and China, license fees for online games have increased and most licensors are demanding guaranteed minimum royalty payments. We may be unable to fully recover upfront and minimum royalty licensing costs if a licensed game is not popular among our users.

          We cannot be certain that the games we license from third parties or internally develop will be attractive to our users, will be considered by the regulatory authorities as complying with the relevant applicable restrictions, will be launched as scheduled or will be

able to compete with games operated by our competitors. If we are not able to consistently license or develop online games that appeal to our users, our future profitability and growth prospects will decline.

          Our future results of operations or the growth of our business may suffer if we are unable to maintain a satisfactory relationship with the licensors of our online games

          We need to maintain stable and satisfactory working relationships with our licensors in order to ensure the continued smooth operation of our licensed online games and our continued access to new online game licenses. We depend on our licensors to provide the necessary technical support for the operation of the licensed games as well as expansion packs and upgrades that sustain continuing interest in the games. Our ability to maintain satisfactory working relationships with our licensors may also influence our ability to license new online games developed by the same or other licensors. If we are unable to maintain satisfactory relationships with our licensors, our financial condition, results of operations, future profitability and growth prospects may be materially and adversely affected.

          PRC laws and regulations restrict foreign ownership of the Internet content provision, Internet culture operation and Internet publishing licenses, and substantial uncertainties exist with respect to the application and implementation of PRC laws and regulations

          We are classified as a foreign enterprise under PRC laws and various regulations in the PRC currently restrict foreign or foreign-owned enterprises from holding certain licenses required to provide online games over the Internet in the PRC, including Internet content provision, or ICP, Internet culture operation and Internet publishing licenses. In order to comply with foreign ownership restrictions, we operate our online games business in the PRC through contractual arrangements with Shanghai T2 Entertainment Co., Ltd. (“T2 Entertainment”) and Shanghai T2 Advertisement Co., Ltd. (“T2 Advertisement”). T2 Entertainment holds the Internet content provision and Internet cultural operation licenses that are required to operate our online games business in the PRC, and T2 Advertisement holds advertising license that is require to sell advertisements on our Web sites in the PRC. Beginning in June 2007, the results of T2 Entertainment and T2 Advertisement have been included in our consolidated financial statements.

          In July 2006, the Ministry of Information Industry, or MII, issued a notice (the “New MII Notice”), which prohibits ICP license holders from leasing, transferring or selling a telecommunications business operating license to any foreign investors in any form, or providing any resource, sites or facilities to any foreign investors for their illegal operation of telecommunications business in the PRC. The notice also requires that ICP license holders and their shareholders directly own the domain names and trademarks used by such ICP license holders in their daily operations. The notice further requires each ICP license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunication service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Local authorities in the various regions were required to ensure that existing ICP license holders conducted self-assessments of their compliance with the New MII Notice and submitted their status reports to the MII prior to November 1, 2006. T2 Entertainment has conducted its self-assessment and believes that it is in compliance with the requirements of the New MII Notice.

          We believe that the ownership structure and business operation models of our PRC subsidiaries comply with all existing PRC laws, rules and regulations, and no consent, approval or license is required under any of the existing laws and regulations of the PRC for their ownership structure, businesses and operations, except those which we have already obtained or which would not have a material adverse effect on our business or operations as a whole. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, we cannot assure you that PRC government authorities will ultimately take a view that is consistent with our view. If we or any of our PRC operating companies are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations and could impose significant penalties and sanctions or other regulatory or enforcement actions, including levying fines, that could be harmful to our business. Any of these actions could cause our business, financial condition and results of operations to suffer.

          We could also face material and adverse tax consequences if the PRC tax authorities determine that our contractual arrangements with T2 Entertainment and T2 Advertisement were not made on reasonable commercial terms. In such an event, they could adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment which could result in an increase in our PRC subsidiaries’ tax liability or limit our PRC subsidiaries’ ability to maintain preferential tax treatments and other financial incentives.

          We depend on certain operating licenses for the operation of our online games business in the PRC. Our business could be disrupted and our results of operations may be materially and adversely affected if either T2 Entertainment or T2 Advertisement violates their contractual arrangements with us

          Due to restrictions in the PRC on foreign equity ownership of companies providing Internet content services and other licensing restrictions, our online games business in the PRC is operated in the PRC through T2 Entertainment and T2 Advertisement, which hold the licenses required for the operation of our online games business. We have entered into a series of contractual arrangements which are intended to give us effective control over these entities, but which are not as effective as compared to having direct ownership and control over these companies. For example, T2 Entertainment and T2 Advertisement could violate their contractual arrangements with us, go bankrupt, suffer from problems in their businesses or otherwise become unable to perform their contracts with us. As a result, we could lose the licenses required for our online game operations and our reputation and business could be harmed.

          In addition, the enforcement of these contractual arrangements in the PRC is subject to uncertainties. Uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. While we believe that the ownership structure and the business and operation models of T2CN with respect to its contractual arrangements with the respective PRC entities mentioned above comply with all existing PRC laws, rules and regulations and no consent, approval or license is required under any of the existing laws and regulations of the PRC for the respective ownership structures, businesses and operations of T2CN, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, we cannot assure you that the PRC regulatory authorities will not ultimately take a view contrary to the above. If we, T2CN, or any of our subsidiaries with operations in the PRC are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion to deal with such violations, including the revocation of the business and operating licenses of T2CN or those of the PRC entities which are licensed to operate online games in the PRC, discontinuing or restricting our, T2CN’s operations, requiring T2CN to restructure its respective ownership structures or operations or taking other regulatory or enforcement actions, including the levying of fines, that could be harmful to our business.

          The principal shareholders of T2 Entertainment and T2 Advertisement have potential conflicts of interest with us, which may adversely affect our business

          While pursuant to contractual arrangements we have the ability to effectively control our two principal T2CN VIEs, T2 Entertainment and T2 Advertisement, the principal shareholders of T2 Entertainment and T2 Advertisement are executive officers of T2CN and have no substantial shareholdings in our Company. Thus, conflicts of interest between their duties to our Company and T2 Entertainment and T2 Advertisement, respectively, may arise. We cannot assure you that when conflicts of interest arise, these persons will act completely in our interests or that conflicts of interests will be resolved in our favor. In any such event, we would have to rely on the PRC legal system to enforce the contractual arrangements. Any legal proceeding could result in the disruption of our business, diversion of our resources and the incurring of substantial costs.

          The laws and regulations governing the online games industry in the PRC are evolving and new regulations may adversely affect our business

          Our provision of online games and online game-related content on our Web sites in the PRC is subject to various Chinese laws and regulations relating to the telecommunications industry and Internet and online games, and is regulated by various government and regulatory authorities, including the MII, the Ministry of Culture, the General Administration of Press and Publication, the State Administration of Radio, Film and Television, the Ministry of Public Security and the State Administration for Industry and Commerce. The principal PRC regulations governing the provision of Internet content and online gaming services include (among others) the Telecommunications Regulations (2000), the Administrative Rules for Foreign Investments in Telecommunications Enterprises (2001), the Administrative Measures for Telecommunications Business Operating Licenses (2001), the Tentative Measures for Administration of Internet Culture (2003), the Tentative Measures for the Administration of Internet Publications (2002), the Opinions on the Development and Management of Online Games (2005) and the Anti-Internet Addiction Regulations (2007).

          We may be affected by these regulations, which (among other things) seek to regulate the content of online games and discourage online game players from spending excessive amounts of time playing online games. This may (among other things) reduce the number of our users, the growth rate of our user base, the general online games market in the PRC or the average number of hours played by online game players, or cause us to reduce usage fees or other charges in connection with our online games business. In addition, such regulations may require us to incur substantial costs of compliance in modifying or adapting our game software to comply with the regulatory requirements. This may adversely affect our business, financial condition and results of operations.

          There are no clear laws or regulations governing virtual asset property rights, in particular, in Greater China, and therefore, it is not clear what liabilities, if any, online game operators may have in respect of virtual assets

          In the course of playing online games, some virtual assets, such as special equipment, player experience grades and other features of our users’ game characters, are acquired and accumulated. Such virtual assets can be important to online game players. In practice, virtual assets can be lost for various reasons, often through unauthorized use of users’ IDs by other users and occasionally through data loss caused by delay of network service or by a network crash. Currently there are no clear laws or regulations governing virtual asset property rights, in particular, in Greater China, where we operate our online games business. In the case of a loss of virtual assets, we may be sued by online game players and could be held liable for damages, which may negatively affect our business, financial condition and results of operations.

          Our business may be adversely affected by government policies and regulation of online games and Internet cafés in the PRC

          In April 2007, various relevant governmental authorities in the PRC jointly issued a circular that mandated the implementation of an “anti-addiction system” in online games to protect the physical and psychological well-being of minors. This circular requires that all online games incorporate an “anti-addiction system” and an identification verification system, both of which may limit the amount of time that a minor or other user may continuously spend playing an online game. The relevant authorities have also tightened its regulations of Internet cafés including through limiting the number of new operating licenses issued and reducing the operating hours of such cafés. The implementation of these systems, or enactment by the PRC government of any additional laws to further regulate Internet activities and online games or its supervision of Internet cafés, may result in fewer customers or less time spent by customers playing our online games, which may materially and adversely affect our business results and prospects for future growth.

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

          Effective internal controls are necessary for us to provide reasonable assurance with respect to its financial reports and to effectively prevent fraud. If our company cannot provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our company’s operating results could be affected. We are subject to reporting requirements under the U.S. securities laws. The Commission, as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management on such company’s internal control over financial reporting in its annual report, which must contain an assessment by management of the effectiveness of such company’s internal control over financial reporting. In addition, an independent registered public accounting firm must express an opinion on the effectiveness of the company’s internal control over financial reporting.

          Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2007. In addition, the report of our independent registered public accounting firm includes an opinion regarding the effectiveness of our internal control over financial reporting. We have successfully completed our Section 404 assessment under the Sarbanes-Oxley Act and received our auditors’ attestation as of December 31, 2007. However, internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

          Our failure to maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of Shares. Furthermore, we may incur additional costs and use significant management and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act going forward.

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

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

	•		fund our operations;
	•		enhance and expand the range of products and services we offer; and
	•		respond to competitive pressures and perceived opportunities, such as investment, acquisition and international expansion activities.

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

          We depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services

          Our future success is heavily dependent upon the continued service of our key executives and other key employees. In particular, we rely on the expertise, experience and leadership ability of our chief executive officer, Arthur Wang, and our president and chief operating officer, Thomas Hui, in our business operations, and rely on their personal relationships with our employees, the relevant regulatory authorities, and our game and service suppliers. We also rely on a number of key technology officers and staff for the development and operation of our online games. In addition, as we expect to focus increasingly on our online games business, we will need to continue attracting and retaining skilled and experienced professionals to maintain our competitiveness.

          If one or more of our key personnel are unable or unwilling to continue in their present positions, we may not be able to easily replace them and may incur additional expenses to recruit and train new personnel. As a result, our business could be severely disrupted, and our financial condition and results of operations could be materially and adversely affected. Furthermore, since our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to attract and retain key personnel in the future. We cannot assure you that we will be able to attract or retain the key personnel that we will need to achieve our business objectives.

          We may be classified as a passive foreign investment company for U.S. federal income tax purposes. As a result, you may be subject to materially adverse tax consequences with respect to Shares

          Although we do not believe we should be classified as a passive foreign investment company for the 2008 taxable year, no assurances may be given that we will not be classified as a passive foreign investment company in the current or any future taxable year. For a discussion of the factors that will affect whether or not we are classified as a passive foreign investment company, see Item 10, “Additional Information — E. Taxation — U.S. Federal Income Tax Considerations for U.S. Holders — Passive Foreign Investment Company Rules.” If you are a U.S. person holding Shares, (or have held 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 are classified as a passive foreign investment company and you do not determine to make a 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 — U.S. Federal Income Tax Considerations for U.S. Holders — Passive Foreign Investment Company Rules.”

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

          Since January 1, 2004, we have reported our financial results in U.S. currency, which is subject to fluctuations with respect to the currencies of the countries in which we operate. The operations of UIM, our major licensee, are conducted in U.S. dollars, Canadian Dollars and Euros. The operations of our online games business are conducted in NT dollars, Hong Kong dollars and Renminbi. Our Internet access and service business is conducted mainly in NT dollars. Accordingly, fluctuations in the exchange rates of world currencies could have a positive or negative effect on our reported results. 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.

          We are controlled by the Koo family, which has significant influence in determining the outcome of any corporate transaction or other matters submitted to our shareholders for approval, and their interests may conflict with your interests

          As of June 16, 2008, members of the Koo family beneficially owned approximately 19.98 percent of our outstanding shares. Accordingly, the members of the Koo family have significant influence in determining the outcome of any corporate transaction or other matters submitted to our shareholders for approval, including mergers, consolidations, the sale of all or substantially all of our assets and 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. See Item 7, “Major Shareholders and Related-Party Transactions.”

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

          Our operating results and financial condition, particularly in relation to our gaming software and service business and our online games 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 and the PRC, 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 and have 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 cash flows, profitability or financial condition.

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

          Our principal executive offices, a major portion of our online games business and our Internet access service business are located in Taiwan and substantially all of our net revenues with respect to these businesses are derived from customers in Taiwan. Taiwan, as part of the Republic of China, has a unique international political status. The PRC asserts sovereignty over mainland China and Taiwan and does not recognize the legitimacy of the Taiwan government. Relations between Taiwan and the PRC and other factors affecting the political or economic conditions of Taiwan could also affect our online games and Internet access service businesses.

          The ability of our subsidiaries to distribute dividends to us may be subject to restrictions under the laws of Taiwan and the PRC

          We are a holding company, and some of our assets constitute our ownership interests in our subsidiaries in Taiwan, including Hoshin GigaMedia, which owns the Taiwan-based operations of our online games business and our Internet access service business. Accordingly, part of our primary internal source of funds to meet our cash needs is our share of the dividends, if any, paid by our subsidiaries, including those in Taiwan. The distribution of dividends to us from these subsidiaries in Taiwan is subject to restrictions imposed by the applicable corporate and tax regulations in these countries, which are more fully described in Item 5, “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Dividends from Our Subsidiaries.” 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.

          In June 2007, we acquired control over a majority of the voting rights over the shares of T2CN, an online games operator and distributor which operates its business primarily in the PRC. Accordingly, we are subject to further restrictions imposed by PRC corporate, tax and exchange control regulations which are applicable to T2CN and its business. Current PRC regulations only permit our subsidiaries in the PRC to pay dividends out of their respective accumulated profits, if any, determined in accordance with PRC accounting standards and regulations and these entities are required to allocate at least 10 percent of their respective accumulated profits each year, if any, to fund certain capital reserves until the cumulative total of the allocated reserves reaches 50 percent of registered capital. These reserves are not distributable as cash dividends. In addition, failure to comply with relevant State Administration of Foreign Exchange (“SAFE”), regulations may also restrict the ability of our subsidiaries to make dividend payments to us. These restrictions on dividends or other payments from PRC subsidiaries may adversely affect our ability to make cash or other distributions to the holders of our Shares. Moreover, recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders or us to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital, distribute profits to us, or otherwise adversely affect us.

          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.

          Anti-takeover provisions under the Singapore Securities and Futures Act (Chapter 289) and the Singapore Code on Take-overs and Mergers may delay, deter or prevent a future takeover or change of control of our Company, which could adversely affect the price of Shares

          There are provisions under the Singapore Securities and Futures Act (Chapter 289) and the Singapore Code on Take-overs and Mergers (the “Code”) 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 percent or more of our voting shares must extend a takeover offer for the remaining voting shares in accordance with the provisions of the Code. A person holding between 30 percent and 50 percent of our voting shares, either on his own or together with parties acting in concert with him, must also make a takeover offer in accordance with the provisions of the Code if that person together with parties acting in concert with him acquires additional voting shares in excess of one percent of the total number of voting shares in any six-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 an acquisition bid may allow you to sell your Shares at a price above the prevailing market price.

          Our shareholders 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 gaming software and service and online games businesses. 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 our business and results of operations.

Risks Related to Shares

          The price of Shares has been volatile historically and may continue to be volatile, which may make it difficult for holders to resell the Shares when desired or at attractive prices

          The trading price of Shares has been and may continue to be subject to wide fluctuations. In 2007, the closing prices of Shares on the NASDAQ Global Market have ranged from US$9.28 to US$24.61 per share, and the last reported sale price on June 16, 2008 was US$15.56. Our Share price may fluctuate in response to a number of events and factors. In addition, the financial markets in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of Shares, regardless of our operating performance.

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 8th Floor, 207 Tiding Boulevard, Section 2, Taipei 114, Taiwan, and our telephone number is 886-2-2656-8000. Our Web site address is: http://www.gigamedia.com.tw.

          Prior to September 2002, all our operations were conducted primarily through our wholly-owned subsidiary, Hoshin GigaMedia. Hoshin GigaMedia was incorporated in October 1998 in Taiwan. Hoshin GigaMedia, as an unlisted Taiwanese company, could not directly offer its shares to investors outside of Taiwan. To enable it to offer its shares to international investors, GigaMedia was incorporated in Singapore in September 1999 and acquired 99.99 percent of Hoshin GigaMedia in November 1999. In October 2002, GigaMedia acquired the remaining 0.01 percent of Hoshin GigaMedia.

          We completed the initial public offering of Shares on February 18, 2000. Shares trade on the NASDAQ Global Market under the symbol “GIGM.” We were the first Internet company based in Taiwan to list on the NASDAQ Global Market.

          In September 2002, we acquired Rose Records (formerly known as Point Records Co., Ltd.) and Tachung Records (formerly known as Music King Co., Ltd.), two of the largest music store chains in Taiwan, with a view to expanding our business to retail entertainment services.

          Under new management in 2004, we began to restructure our Company to achieve profitability, generate growth and enhance shareholder value.

          In April 2004, we acquired the business and operations of Grand Virtual, Inc. and related affiliates, a privately-held gaming software developer and application service provider, through CESL, our wholly-owned subsidiary, with a view to enhancing our diversified entertainment products portfolio.

          In September 2005, we sold all of our ownership interest in the Rose Records and Tachung Records music store chains with a view to eliminating our non-core operations.

          In order to enhance our position in the online entertainment market, in January 2006, we acquired FunTown, an Asian online games business.

          Between April 2006 and June 2007, we acquired voting control over the shares of T2CN, one of the leading online sports game operators in the PRC. As of June 16, 2008, we hold approximately 65.68 percent of the total outstanding voting rights of T2CN. Due to restrictions in the PRC on foreign equity ownership of companies providing Internet content services and certain other licensing restrictions, we operate our online games business in the PRC through T2 Entertainment and T2 Advertisement, which hold the licenses required for the operation of our online games business. We have entered into a series of contractual arrangements which are intended to give us effective control over these entities. See Item 4, “Information on the Company — B. Business Overview — Online Games Business — T2CN.”

          In May 2006, we disposed of our ADSL business, which formed a part of our Internet access service business.

          See Notes 4 and 5 of our consolidated financial statements for additional information.

          In December 2006, we entered into a strategic alliance with Infocomm Asia, an operator and distributor of online games in Southeast Asia, in connection with which we acquired preferred shares convertible into an interest of approximately 32.26 percent of the issued ordinary shares of Infocomm Asia, which was subsequently diluted in February, 2007 due to Infocomm Asia securing additional equity investors. As of June 16, 2008, convertible preferred shares held by us in Infocomm Asia are convertible into a post-dilution interest of approximately 28.43 percent in the ordinary shares of Infocomm Asia. Upon conversion of the convertible securities held by us, we expect that we will become the largest shareholder of Infocomm Asia.

          Between October and January 2008, we also entered into strategic alliances with Neostorm Holdings Limited (“Neostorm”), XLGames Inc. (“XL Games”) and Access China Holding Limited (“Access China”). Neostorm was formed by the merger of four previously independent game development studios, creating one of the largest independent game development companies in South Korea. Neostorm focuses on medium-core casual game titles. We acquired preferred shares convertible into an approximately 33 percent holding in Neostorm’s common shares. XL Games was founded by the creator of one of the most popular online game franchises in history and focuses on MMORPGs, with studios in Seoul, South Korea and Austin, Texas. We acquired preferred shares convertible into an approximately 15 percent holding in XL Games’ common shares. Access China is an online game software developer in the PRC and we acquired preferred shares convertible into an approximately 30 percent holding in Access China’s common shares.

          On May 15, 2008, we entered into certain agreements with SuperCup Entertainment (Holdings) Limited (“SuperCup”) and its affiliates, pursuant to which we purchased convertible preferred shares representing approximately 45 percent of the issued share capital of SuperCup, and obtained worldwide exclusive rights to cooperate with SuperCup in MahJong and the Asian card games business. As part of the investment, we agreed to provide a loan in the amount of up to US$1.0 million to SuperCup at market terms.

          For a description of the important events in the development of our business since the beginning of our last three financial years to the date of this annual report, see Item 5, “Operating and Financial Review and Prospects — A. Operating Results.” A description of our principal capital expenditures and divestitures, since the beginning of our last three financial years to the date of this annual report is set forth in Item 5, “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources.” Information concerning the principal capital expenditures and divestitures currently in progress is also described in Item 5 — “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources.”

B. Business Overview

          We are a holding company and, through several subsidiaries, develop and license online gaming software and provide application services, own and operate an online games business, and provide broadband Internet access and services. Our gaming software and service business is operated through our subsidiary, CESL. Our online games business in the PRC is operated through our majority-controlled subsidiary, T2CN, and our online games business in Greater China (excluding the PRC) is operated through FunTown. Our Taiwan Internet access and service business is operated through our subsidiary, Hoshin GigaMedia, which focuses on retail users, and Hoshin GigaMedia’s subsidiary, KBT, which focuses on corporate users.

          Prior to 2002, our primary business was the provision of broadband Internet access and services in Taiwan. Since disposing of our music distribution business in 2005 and acquiring a gaming software provider in 2004 and the online games business in 2006, we have become a major provider of gaming software and online gaming services and online games.

          We acquired our gaming software and service 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, excluding related transaction costs. Since the acquisition, we have restructured the business and currently operate our gaming software and service business through our subsidiary CESL, which develops and provides software solutions through its wholly-owned subsidiary Cambridge Interactive Development Corporation (“CIDC”), in Cambridge, MA and in Montreal, Canada, and application services through its wholly-owned subsidiary Internet Media Licensing Limited (“IMLL”), for clients operating in the expanding Internet-based entertainment markets worldwide, including UIM whose financial results we consolidate into our consolidated financial statements. For additional information, see Item 5, “Operating and Financial Review and Prospects — A. Operating Results — Certain Significant Events Affecting Our Results of Operations for 2005, 2006 and 2007 — Consolidation of UIM, T2 Entertainment and T2 Advertisement under FIN 46(R).” Our gaming software and service business generated revenues of approximately US$119.0 million and operating income of approximately US$37.7 million for the year ended December 31, 2007.

          We acquired FunTown, an online games business, in January 2006 to strengthen our online entertainment business. Founded in 1998, FunTown is one of the leading casual games platforms in Asia, with approximately 11.6 million registered users and an offering of more than 40 casual games and services in Greater China as of May 31, 2008. FunTown generates revenues through access fees and also through the sales of various in-game items. FunTown’s games can be played on personal computers, mobile phones and airplane entertainment consoles and are expected to be available on the Xbox 360 in Taiwan in the second half of 2008. FunTown has strong research and development capabilities and has developed over 90 percent of its online casual games in-house. Going forward, we expect to offer a mix of both internally-developed and externally-developed and licensed product offerings. We expect our licensed games to be made available on our platforms by the end of 2008. We also provide value-added services, such as tournaments, personal contact lists and social networking to help build a strong player community. As of June 16, 2008, we hold approximately 65.68 percent of the total outstanding voting rights of T2CN, an online sports game operator operating mainly in the PRC. T2CN is one of the leading online sports and casual game operators in the PRC and operates FreeStyle Basketball, an online sports game in the PRC. T2CN is currently led by a management team with a strong track record in the PRC online games industry and has marketing arrangements with international brands such as Coca-Cola, Nike and Nokia. We have consolidated the financial results of T2CN in our financial results from June 1, 2007. Our online games and service business generated revenues of approximately US$32.8 million and operating income of approximately US$6.8 million for the year ended December 31, 2007.

          We operate our legacy Internet access and service business through our subsidiary Hoshin GigaMedia, which provides Internet access and services. In addition, another of our subsidiaries, KBT, provides broadband services to corporate customers. On May 15, 2006, we entered into an asset purchase and sale agreement and a service agreement with Webs-TV Inc. (“Webs-TV”), previously

known as Webs-TV Digital International Corporation, to sell our ADSL business and provide certain telecom and consulting services on a transitional basis. Our Internet access and service business generated revenues of approximately US$15.2 million and operating income of approximately US$671 thousand in 2007. We have retained financial advisers to explore the sale of this legacy business.

          For a further description of financial information for our business activities over the past three financial years, see Item 5, “Operating and Financial Review and Prospects — A. Operating Results.” Information concerning revenue and income by geographic area is set forth in Note 26 of our consolidated financial statements.

Our Business Strategy

          We seek to continue to expand our market in the gaming software and service business and the online games business and maximize our overall performance by employing the following strategies:

Focus on our core business of product and service offerings in gaming software and online games

          We plan to continue to grow our core business areas: our gaming software and service business and online games business. Increasingly, we have focused on expanding our online poker and casino software business and developing new online games and gaming software products in-house. We also plan to continue to seek licenses to access new online games. As part of our focus on these businesses, we have placed less emphasis on our legacy Internet access and service business in recent years. We believe that our strategic focus has enabled us to grow more quickly and expand our business internationally.

Diversify our operations through strategic investments to expand into selected new markets

          Subject to changes in economic conditions, we intend to continue to enhance our business development, including our game content offerings, by acquiring other businesses that complement our current online businesses, or which represent related but new lines of business that we believe to be appropriate areas of expansion, or that we believe may benefit us in terms of user base, product or content offering. We also intend to make selective strategic investments and expand into new geographic markets. We believe our acquisition of a controlling interest in T2CN has given us a strong presence in the PRC upon which we can build through offering quality game products and effective marketing. As part of our growth strategy, we will continue to seek to minimize our capital commitments and maximize our return on capital. See Item 3, “Key Information — D. Risk Factors — Our business strategy, which contemplates growth through acquisitions and strategic investments, exposes us to significant risks.”

Focus on attracting and developing an experienced and motivated management and design and marketing teams

          We will continue to focus on recruiting and retaining motivated and knowledgeable experienced professional managers. Retaining experienced managers will enable us to manage our growth effectively and evaluate new areas for expansion and product development. We also intend to continue to attract skilled game and software system developers and build our marketing team to maintain our competitive advantage in our core business areas.

Gaming Software and Service Business

     Overview

          We operate our gaming software and service business through our subsidiary, CESL, and through its wholly-owned subsidiaries, CIDC and IMLL. CESL develops and licenses software solutions and application services in the expanding Internet-based, online gaming markets. CESL offers a wide array of products and services, including online poker and casino software and services. CESL’s software solutions and services also offer great expansion capabilities. CESL can help existing and potential 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 also helps existing and potential clients who license our software and services to 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 modern Internet technologies 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 user interfaces and localization in 16 major languages including English, French, German, Italian, Spanish, Portuguese, Norwegian, Swedish, Danish, Dutch, Greek, Finnish, Polish, Hungarian, Simplified Chinese and Japanese.

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

          Online Gaming Management — these are tools that enable our existing and potential clients to offer online gaming 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 Gaming Modules — these are customizable gaming modules that run on Microsoft Windows 2000/ME/XP/VISTA and feature a realistic 3-D environment, selectable background music, and local language interface. In 2004, we developed and launched a new suite of software that enables players to compete against each other in real time.

      Our Services

          In addition to licensing our software products to our licensees, including UIM, we offer a variety of application services and consulting services for backend operations. These services include:

Infrastructure Design Services —

	•		Infrastructure Design: Architecture design of servers, routers, firewalls, network software and management tools required for an Internet property.
	•		Site Creation: Creation and branding of our client’s Internet property, customized to match our licensees’ unique identities and creative themes.

Transaction Processing Design Services —

	•		Payment: Consultation for the design of timely collection and distribution of payments through a variety of channels and merchants.
	•		Billing: Consultation for the design of real-time and out-of-band transaction processing and order management.
	•		Risk Management: Consultation for design of tools and processes for fraud detection, prevention, and management.

Customer Support Services —

	•		Infrastructure Consultation Support: Complete round-the-clock consultation support to help clients resolve infrastructure issues.
	•		Platform Technical Support: Consultation during periodic maintenance to update, patch, and fine-tune the system performance of our software solutions.

Custom Gaming Software Development Services —

•

Design and development of custom entertainment modules and interfaces for our platform meeting client-specific requests.

     Our Technology and Infrastructure

          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 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 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.

          We have developed expertise as well as necessary infrastructure to make our products suitable for the local markets in which our licensees operate, including non-English speaking markets. We also employ in-house teams of native language experts to ensure cultural fidelity in everything from content to graphics to interfaces and controls.

      UIM

          Our gaming software and service business is dependent upon our major licensee, UIM. The following is a brief description of UIM’s business. Since we have no equity interest in UIM and do not exercise any control over it, the information below has been obtained from publicly available sources, and in part was provided to us by officers of UIM. Though we have no reason to believe the information below is inaccurate, we could not independently verify the accuracy thereof.

          UIM is an online entertainment operator that provides online gaming services, including online casinos and virtual poker rooms. By utilizing our software, UIM offers these services through several Web sites, including Everest Casino (www.everestcasino.com) and Everest Poker (www.everestpoker.com), which was named the Poker Operation of the Year in 2007 by e-Gaming Review, a poker industry journal. UIM markets its Web sites, in part, through Affiliated Web Attractions’ “United Partner Program” (www.affiliatedweb.com), and through its newly launched Web site Everest Affiliates (www.everestaffiliates.com), which also utilizes our software. Under these programs, private and commercial owners of Web sites are invited to place on their Web sites banners containing links to UIM’s Web sites, in return for fees based on the number of qualified new players signing up, or from revenues generated by users that have been directed to UIM’s Web site from such banners. Our software package also includes the platform to operate this aspect of the business. UIM intends to phase out its marketing program through the “United Partner Program” replacing it with launching its Website Everest Affiliates program in 2008.

          In March 2008, UIM secured a key multi-year promotional agreement with the World Series of Poker, a premier world poker event with over 50,000 participants from around the world competing for a prize pool of over US$150 million, with a broadcast audience of over 350 million households worldwide over approximately 2,700 broadcast hours. Pursuant to the terms of this agreement, Everest Poker will be the sole poker-related table sponsor of the World Series of Poker and will enjoy a prominent logo position on the “felt” of every table used in the competition, as well as exclusive brand positioning on the “inner-rung” of the championship table. Everest Poker will also be given other prominent on-site visibility during the events, including hanging banners and barricade logos.

          UIM is located in and 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 applicable licensing requirements. See Item 4, “Information on the Company — B. Business Overview — Regulation — Regulation Relating to Online Gaming.” In addition to licensing our software, we provide UIM with application services and consulting 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.

          Although we do not have any equity ownership interest in UIM, we consolidated UIM’s assets, liabilities and results of operations for the years ended December 31, 2005, 2006 and 2007 in our consolidated financial statements in accordance with the requirements under FIN 46(R). We are entitled to fees from UIM based upon its revenues. See Item 5, “Operating and Financial Review and Prospects — A. Operating Results — Certain Significant Events Affecting Our Results of Operations for 2005, 2006 and 2007 — Consolidation of UIM , T2 Entertainment and T2 Advertisement under FIN 46(R)” for additional information.

      Competition

          The Internet gaming software industry is characterized by rapid technological change. Our success depends, in part, upon our ability to enhance our products and services to keep pace with technological developments, respond to evolving customer requirements and achieve continued market acceptance.

          Online gaming software design houses and application service providers are our primary competitors. However, given the low barriers to entry in the 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 and online gaming software design/development, in addition to 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. Traditional Internet service providers and other entities, many of which have significant financial resources and name brand recognition, may provide online gaming services in the future. Such Internet service providers and gaming service providers may also develop and offer underlying software solutions and tools to others in direct competition with us.

          We are also exposed to competition in the Internet gaming industry through our licensees, such as UIM, as license fees with respect to gaming software provided by us typically include a variable fee based on revenues earned by such licensees from the operation of the licensed software. Our licensees (including UIM), face tough competition in the online gaming industry, which is also characterized by low barriers to entry, rapid technological change and ever-changing consumer preferences. New entrants to the online gaming sector, market consolidation and aggressive marketing and pricing by competitors may lead to a significant decline in the customer base, revenues and margins of our licensees. Any future liberalization of licensing or regulation of online gaming in countries where our competitors generate significant revenues is likely to lead to increased competition, including competition from companies that do not currently offer online gaming services. For example, as a result of the UIGEA and the subsequent closing of the online gaming market in the United States, we and our licensees (including UIM) face increasing competition from entertainment service providers in our markets in Continental Europe, which are also increasingly subject to regulation from governmental authorities.

          Furthermore, some of our competitors and competitors of our licensees (including UIM) are more established, enjoy greater market recognition, are substantially larger and have substantially greater resources and distribution capabilities than we do.

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

Online Games Business

     Overview

          Our online games business in the PRC is operated through our majority-controlled subsidiary, T2CN, and our online games business in Greater China (excluding the PRC) is operated through FunTown.

FunTown

          FunTown offers a broad range of online games and services, which we develop in-house or license from third parties. The online games offered by FunTown include casual games such as MahJong and numerous varieties of card, chess, and table games, most of which cater specifically to Asian audiences, as well as advanced casual games.

          Our online games allow users access to a broad continuum of online entertainment, from traditional Asian games that are instantly recognizable and easy to learn and play, to more advanced online games that allow users to interact with each other in virtual worlds by assuming characters they may customize. We believe that the traditional appeal, and interactive and group-oriented nature of these games, combined with our brand, our community-focused services and the large size of our user base, contributes to retaining our current users and attracting new users.

          We had originally planned to launch certain MMORPGs by the end of 2007; however, due to delays in the release or launch dates of such games by the developers from which we licensed these games, we were unable to launch any MMORPGs in 2007. Based on estimated launch dates provided by the game developers from which we have licensed such games, we expect to launch our first MMORPG in the second half of 2008.

          In March 2007, we secured an exclusive license from the Sega Corporation to operate Phantasy Star Universe, an online and offline action role-playing game where players customize their size and appearance, vehicles, weapons and helper robots to create their own unique characters.

          In September 2007, we secured an exclusive license from Mgame Corporation, a Korean game developer, to offer and operate Holic Online, a 3D MMORPG game featuring cartoon-like characters, which is expected to be launched in the second half of 2008 in Taiwan, Hong Kong, Macau, and the PRC.

          In October 2007, we secured an exclusive license from Electronic Arts Asia Pacific Pte. Ltd. to offer and operate NBA Street Online, an online basketball game emulating the NBA basketball series, in Taiwan, Hong Kong and Macau. NBA Street Online is currently expected to be launched in the second half of 2008.

          In January 2008, we secured exclusive licenses from Electronic Arts Asia Pacific Pte. Ltd. to offer and operate Warhammer® Online: Age of Reckoning™ in Taiwan, Hong Kong and Macau. Warhammer® Online: Age of Reckoning™ is expected to launch in 2009.

          FunTown also provides services, such as game clubs for players, tournaments related to FunTown’s online games, and social networking, all of which are intended to help build a strong player community. As of May 31, 2008, FunTown had approximately 11.6 million registered members, and for the month of May 2008, approximately 107,000 monthly paying users, approximately 42,000 peak concurrent users and 21,000 average concurrent users. The majority of FunTown’s online game players are 25 to 35 years old, and consist of approximately 55 percent male and 45 percent female players.

          Our operating platform includes our technological infrastructure, distribution and payment system, customer service center, game content management and marketing platform. Our technological infrastructure consists of a server network throughout Greater China, the architecture of which is easily scalable to accommodate business growth and increased future user demand. Our distribution and payment network in Taiwan includes approximately 13,000 physical distribution points. Additionally, in 2007, we processed approximately 956,000 online transactions for virtual point cards. Our customer service system includes a 24-hour call center and a walk-in customer service center. In addition, our most popular online games have separate game content management teams that manage the operation of the games and the online community for the games.

          Currently, our games and services are primarily accessed through personal computers. Our games are also available on mobile phones, the Intel Viiv platform and on certain airlines. We expect FunTown’s games to be offered on Microsoft’s Xbox 360 in Taiwan in the second half of 2008.

          In March 2006, we entered into a cooperation agreement with Wretch Co., Ltd. (“Wretch”) pursuant to which we entered into a strategic alliance with Wretch for the development of an online entertainment community. In 2006, Yahoo! Taiwan agreed to acquire Wretch, which acquisition was completed in May 2007. In connection with this transaction, we agreed to terminate our right to subscribe for an equity interest in Wretch, in consideration for a cash payment of US$0.6 million and a strategic partnership with Yahoo! Taiwan to develop a co-branded Web site with co-marketing of FunTown’s games on key Yahoo! Taiwan properties.

T2CN

          T2CN, one of China’s leading online sports game operators, was incorporated in the British Virgin Islands on May 7, 2004 as a limited liability company by founders, including the CEO of T2CN. Between April 2006 and June 2007, we acquired voting control over the shares of T2CN, and as of June 16, 2008, we hold approximately 65.68 percent of the total outstanding voting rights of T2CN.

          Due to restrictions in the PRC on foreign equity ownership of companies providing Internet content services and certain other licensing restrictions, we operate our online games business in the PRC through T2 Entertainment and T2 Advertisement, which hold the licenses required for the operation of our online games business, and which are owned by PRC nationals. Incorporated on October 8, 2004, T2 Entertainment is owned by Jim Ji Wang, the CEO of T2CN and a shareholder of T2CN, and Ning Lu, a PRC citizen. T2 Advertisement was incorporated on September 18, 2006 and is owned by Gerry Min Ji, the Vice President of Finance of T2CN, and Neil Tao Zhang, the Chief Technology Officer of T2CN.

          We have entered into a series of contractual arrangements which are intended to give us effective control over these entities:

	•		Shareholder Voting Rights and Proxy Agreements. T2CN Information Technology (Shanghai) Co., Ltd. (“T2 Technology”), a wholly-owned subsidiary of T2CN incorporated in Shanghai, entered into shareholder voting rights and proxy agreements with the shareholders of T2 Entertainment and T2 Advertisement, pursuant to which each of these shareholders have irrevocably granted T2 Technology the power to exercise all of the voting rights of T2 Entertainment and T2 Advertisement.
	•		Exclusive Equity Transfer Call Agreements. T2 Technology entered into exclusive equity transfer call agreements with each of the shareholders of T2 Entertainment and T2 Advertisement, pursuant to which each of these shareholders has granted T2 Technology an irrevocable option to acquire all or part of the equity interests held by them in T2 Entertainment and T2 Advertisement, to the extent permitted by then-effective laws and regulations in the PRC.
	•		Exclusive Technical Service and Consultancy Agreements. T2 Technology entered into certain exclusive technical service and consultancy agreements with each of T2 Entertainment and T2 Advertisement, pursuant to which T2 Technology provides technical consulting and related information services for an initial term of eighteen years. Service fees paid to T2 Technology by T2 Entertainment and T2 Advertisement are eliminated in the consolidated financial statements.
	•		Equity Pledge Agreements. Each of the shareholders of T2 Entertainment and T2 Advertisement have pledged all of their respective equity interests in these companies as security for the full performance of their respective obligations under each of the agreements described above.

          As of May 31, 2008, T2CN had approximately 72.5 million registered players, and for the month of May 2008, approximately 446,000 paying players, approximately 140,000 peak concurrent users and approximately 46,000 average concurrent users. The majority of T2CN’s online game players are 18 to 28 years old, and consist of approximately 90 percent male and 10 percent female players.

          To strengthen the game pipeline, T2CN secured the exclusive operating rights of several online games in the PRC through licensing, joint-development, or self-development. T2CN licensed a MMORPG game, Holic from a Korea developer in September 2007, and a casual flying game, Sky-Romance from a PRC developer in December 2007. T2CN also began a game development initiative to create one MMORPG game and a few sports casual games, such as tennis and snowboarding. T2CN also acquired the game, The House of Flying Dagger from a PRC developer in November 2007, with the aim to bring this game to the market in the second half of 2008.

      Our Products

          Our online games business in the PRC is operated through our majority-controlled subsidiary, T2CN, and our online games business in Greater China (excluding the PRC) is operated through FunTown.

          FunTown offers more than 40 online multi-player casual games in the following categories: MahJong, Chinese poker, Chinese chess, table games, social games, puzzle-style games, advanced casual games and chance-based games, and intends to launch certain MMORPGs in late 2008. These games are real-time and multi-player capable.

          T2CN game offering in the PRC includes Freestyle Basketball, a casual sports game, and NeoSteam, a MMORPG. T2CN also has entered into agreements securing the right to operate several other online games through licensing, joint-development and internal-development.

          In general, online casual games are games with simple rules that are easy to learn and play, and which can be completed in short sessions. MMORPGs are more complex, require much greater time to learn and often involve large groups of players competing simultaneously online.

MahJong

          MahJong is a traditional and highly popular Chinese social game, often played on holidays, at social gatherings and during special occasions such as weddings. It is widely played in Japan, Korea, Greater China and other parts of Asia. Similar to poker, MahJong is a multi-player game consisting of four players per game. FunTown offers different local versions of MahJong for players in Hong Kong and Taiwan. Players select a table, based on either skill or stakes, and can then invite friends to play on the same table online. Players can compete with anyone throughout FunTown’s Greater China network. Virtual currency is purchased in order to play these games, and may be used to play other FunTown games or to purchase virtual items, but may not be redeemed for cash.

          Special offline events are held from time to time to stimulate interest and foster group solidarity among the many MahJong guilds that players can join online. FunTown organizes a large annual MahJong tournament in Taipei which is open to anyone belonging to one of FunTown’s MahJong guilds. In May 2007, approximately 400 guilds and 20,000 players participated in the event and attended the tournament. In December 2006, we also obtained the exclusive right to co-host the MahJong World Championship together with the World MahJong Organization. In conjunction with the World MahJong Organization, we held or co-hosted a series of MahJong tournaments in Taiwan, Japan and Europe in 2007. On May 15, 2008, we entered into certain agreements with SuperCup and its affiliates, pursuant to which we purchased convertible preferred shares representing approximately 45 percent of the total voting rights of SuperCup. We also obtained worldwide exclusive cooperation rights in conjunction with MahJong and other Asian card games offered by SuperCup.

Advanced Casual Games

          In the PRC, T2CN offers a leading online casual sports game, Freestyle Basketball, a peer-to-peer online street basketball game, in which players can form teams to compete against other teams and customize in-game character appearances and skills through the purchase of virtual items. T2CN is also intending to launch several sports casual games, such as tennis and snowboarding, and a casual flying game.

          FunTown offers a multi-player obstacle running game called Tales Runner which was launched in June 2006. FunTown also secured licenses to operate Nanaimo, an online action role-playing game, from the Topping Corporation, a Korean game developer. Nanaimo was launched in Hong Kong in late 2007 and is expected to launch in Taiwan in the second half of 2008. In October 2007, FunTown secured an exclusive license from Electronic Arts Asia Pacific Pte. Ltd. to offer and operate NBA Street Online, an online basketball game emulating the NBA basketball series, in Taiwan, Hong Kong and Macau. NBA Street Online is currently expected to be launched in the second half of 2008.

          In March 2007, we secured an exclusive license from the Sega Corporation to operate Phantasy Star Universe, an online and offline action role-playing game where players customize their size and appearance, vehicles, weapons and helper robots to create their own unique characters.

Chinese Poker, Chinese Chess, Puzzle-Style Games and Chance-Based Games

          FunTown offers many different Chinese poker games popular in various regions of Greater China. As with MahJong, there are several varieties of poker played in different regions of Greater China. FunTown’s players can select their desired poker table based on the level of skill or stakes. Virtual currency is purchased in order to play these games, and may be used to play other FunTown games or to purchase virtual items, but may not be redeemed for cash. FunTown also offers various popular Chinese chess games. Players can select from opponents online based on different skill levels.

          FunTown also operates a platform known as “Osuke Playground,” which offers a collection of puzzle-style games and matching games. In addition, Osuke Playground also offers some table games such as nine-ball, a contemporary variation of pocket billiards. These games are designed with online multi-player features that allow players to pit their skills against one another. In addition, like all other games offered by FunTown, the Osuke Playground games are integrated into our FunTown platform with features such as a player-to-player messaging system, virtual currency and avatars. The more popular games in Osuke Playground include “Magical Blocks,” “Happy Link,” “Zoo Match” and “Fortress 2.”

          To enhance the variety of FunTown products, FunTown also offers chance-based games for users, who purchase virtual currency in order to play the games. Virtual currency purchased may be used to play other FunTown games, which include bingo, lotto, horse racing, Sic-Bo, and various different kinds of slot games, or to purchase virtual avatar items, but may not be redeemed for cash.

MMORPGs

          Through T2CN in the PRC, we also offer NeoSteam, which is licensed from the leading Korean developer, HanbitSoft. Launched in September 2006, Neosteam is a MMORPG battle game with steam power as its main energy source.

          In December 2006, we, through our 70 percent owned subsidiary, Dragongate Enterprises, secured an exclusive license to offer and operate Hellgate: London, an online action-driven role-playing game, in the territories of Taiwan, Hong Kong and Macau. In the game, the player creates a heroic character and completes quests and battles to advance through experience levels and branching skill paths. A robust, flexible skill and spell system, highly customizable appearances and a massive variety of randomly generated equipment allow players to create their own unique heroes. Hellgate: London is a creation of Flagship Studios, an online game development studio founded in 2003 by a team of executives and developers renowned for numerous best-selling games and multiple Game-of-the-Year Awards to their credit, including the worldwide best-selling Diablo®, Starcraft® and Warcraft® games.

          In September 2007, we secured an exclusive license from Mgame Corporation, a Korean game developer, to offer and operate Holic Online, a 3D MMORPG game featuring cartoon-like characters, which is expected to be launched in the second half of 2008 in Taiwan, Hong Kong, Macau, and the PRC.

          In November 2007, we acquired the game House of Flying Daggers from a PRC developer. The game is based on the motion picture of the same name.

          In January 2008, we also managed to secure exclusive licenses from Electronic Arts Asia Pacific Pte. Ltd. to offer and operate Warhammer® Online: Age of Reckoning ™ in Taiwan, Hong Kong and Macau. Warhammer® Online: Age of Reckoning ™ is a fantasy war and combat game which is part of the Warhammer series of games. We expect to launch Warhammer® Online: Age of Reckoning ™ in 2009.

Social Games

          FunTown has a social networking and matching game called “FunTown Village,” which offers a virtual playground for players to meet other players through their online “avatars.” Players can purchase virtual items, such as clothing and accessories, to enhance the appeal of their online avatars. We plan to introduce more virtual items within FunTown Village to address the strong social interests of our players and to help increase FunTown’s overall appeal as a distinct game community and brand.

      Our Services — FunTown

          FunTown provides many online game services to its players to enhance their playing experiences and support the development of a strong player community.

Player Clubs

          We offer player clubs in which FunTown players can form their own club, invite players with similar interests or skill levels to join, and organize online and offline events for club members. Player clubs complement the strong social qualities of online games by helping to build and maintain an online game community.

Tournaments

          Tournaments are one of the most important services provided by FunTown. Players can organize and participate in clubs and compete in weekly online club tournaments. On an annual basis, FunTown also sponsors large-scale, real-person tournaments where players attend the tournament in person and compete online via computers provided on the tournament premises.

Friends and Family

          The FunTown platform has a unique personal contact feature, similar to the contact list of instant message programs, which enables players to see when their personal network of friends and family are online. This enables players to invite people in their network to play online games together.

Social Networking

          FunTown’s platform is designed to be an attractive forum in which to make friends and have fun, as well as compete and win prizes. The platform has a virtual town hall, in which players may interact, meet new people or even get married. FunTown’s social networking features help build an important online community.

Avatars

          To help players customize their persona online and increase their overall entertainment experience, FunTown also offers many in-game items which may be purchased by players for their online personas, or avatars, in order to create their own unique look while participating in the online community. The items for sale for avatars include facial expressions, clothes and accessories. These items are particularly popular with younger players, who like to customize their avatars to express themselves and establish unique identities and distinct fashions in the online community.

Customer Services

          FunTown provides support and services to its customers through its 24-hour call center in Taipei, its walk-in customer service centers in its offices in Taipei and Hong Kong and through e-mails and online bulletin boards where users can pose questions and receive responses from other users.

      Our Services — T2CN

          Online games offered by T2CN are offered free-of-charge to all players. Players download and install client software from T2CN’s Web sites and play the games. In order to enhance their online game playing experience, players may purchase virtual items that enhance their characters’ performance or other virtual items which may improve the look and feel of their characters or the game playing experience.

Membership Management

          T2CN-Passport is an integrated membership management and payment system, which allows T2CN to maintain a single customer database containing each customer’s profile and payment history. T2CN-Passport is an integrated platform providing one-stop service to customers, distributors and developers. Customers may log in, pay and use any of the fee-based products and services T2CN

offers through T2CN-Passport, which also allows our distributors to sell our online points to Internet cafés, and enables Internet cafés to check their point-balances and pay on their customers’ behalf.

Social Networking

          T2CN’s integrated system also incorporates a variety of community-building features, such as bulletin boards which allow registered users to post notes or inquiries and respond to other users’ notes or inquiries. We believe these features encourage user congregation on our site and facilitate player interaction for the games we offer.

Customer Services

          T2CN focuses on providing excellent customer service in order to retain its existing customers as well as attract new customers. T2CN’s customers can access its customer service centers via phone or e-mail at any time.

          T2CN also provides in-game game masters dedicated to the games. Game masters are responsible for organizing in-game events, troubleshooting and actively and continuously monitoring the online game environment. Game masters are available to respond to players’ inquiries, initiate bug-reporting and removal process, as well as to identify, record and deal with inappropriate player behavior such as cheating and fighting. We believe that our provision of game masters to monitor the gaming environment is an important element in both maintaining our customer loyalty and efficiently addressing technical problems as they arise.

      Our Pricing, Distribution and Payment

          Our principal sources of revenue for online games are access fees for FunTown and fees for sale of in-game items for FunTown and T2CN. We offer flexible pricing to suit different players’ playing habits. We have both hourly and monthly access fee pricing schemes to cater to light-usage and heavy-usage players, respectively.

          We also charge players fees for the purchase of various in-game items, mainly virtual coins and customized avatars.

          T2CN and FunTown have both physical and virtual distribution channels for its games:

	•		Physical distribution channels. Physical distribution channels include convenience chain stores, such as 7-11, and Internet cafés. At these locations, users may purchase pre-paid cards with varying amounts of credits to play FunTown’s and T2CN’s casual games. In addition, players may purchase game packs to play specific games on FunTown’s and T2CN’s platforms.
	•		Virtual distribution channels. Virtual distribution channels consist of various Web sites, including FunTown and T2CN’s official Web sites. Users of FunTown may also purchase game credits through online sites with their credit card, bill charges through their telecom carrier or web ATM.

          To use our fee-based online games, a customer must register an account in our system. Once registered, the customer may log onto our network, select and activate the games the customer wishes to play, and then charge his or her account using a prepaid card or prepaid online points. Customers only need to maintain one account, which provides information regarding the customer’s available prepaid game credits and payment history.

      Our Marketing

          Our marketing strategy is to capitalize on our established brand and utilize our large existing user base and distribution network to retain our existing users and attract new users. We employ a variety of traditional and online marketing programs and promotional activities to promote our games, which include:

•

In-Game Events and Marketing. We organize in-game events for our users, which we believe encourages the development of virtual communities among our users and increases user interest in our games. Examples of in-game

events include special challenges or features introduced to the game environments for a scheduled period. In addition, we use in-game events to introduce users to new features of our games. We may also post announcements in the game environment to promote new features, other improvements to the games, and in-game events. We may conduct in-game marketing programs from time to time, including online contests for prizes.

	•		Cross-Marketing. We have cross-marketing relationships with popular consumer brands, technology companies and major telecom carriers. We believe that our cross-marketing relationships with certain well-known companies, including Coca-Cola, 7-11 and Microsoft Corporation (“Microsoft”), will increase the recognition of our online game brands.
	•		Open Beta Testing. Our open beta testing system tests both the operation of new games under open market conditions and introduces new games to users. During open beta testing, we do not charge users to play the new game. Open beta testing provides an initial user base and creates initial interest and word-of-mouth publicity to support the commercial launch of the game.
	•		Offline Events/Promotions. From time to time we distribute free game-related posters, promotional prepaid cards for beginners and game-related souvenirs at trade shows, selected Internet cafés and other locations. We may conduct events at popular venues to stage exhibitions, distribute software and game content-related merchandise, and interact directly with our user base. Furthermore, we may sponsor select media events, such as industry-related awards shows and TV shows, to promote our brand names and our games.
	•		TV Commercials. We use TV commercials to attract potential customers and to promote our games and brand.
	•		Marketing Research. We use various qualitative and quantitative market research methods to analyze our target market and to differentiate our product offerings from those of our competitors.
	•		Game Magazine Advertisements. We also advertise certain games in various game magazines. From time to time, we also collaborate with these magazines in various promotions, including giving away copies of certain games free of charge with each magazine sold.
	•		Direct Marketing. We use telemarketing and email correspondence to inform our users of new products, promotions and other product related services.

      Our Players

          As of May 31, 2008, we had over 84.1 million registered players of our online games, and we recorded over 553,000 paying players, approximately 182,000 peak concurrent users and 67,000 average concurrent users, all in the month of May 2008.

      Our Sources of Products and Services

          Historically, FunTown developed its games and services in-house to have better control of the game features and allow for seamless integration with our games platform while T2CN licensed games from leading developers. Occasionally, we outsource game development to game studios to expedite the development process and time to market. As of May 31, 2008, we hold licenses for the operation of eight games in various territories: Tales Runner, Hellgate: London, Phantasy Star Universe, Nanaimo, NBA Street Online, Holic, Sky-Romance and Warhammer Online. Game licensing costs typically consist of an upfront fee and an ongoing licensing fee equal to a percentage of revenues earned from the licensed games.

          We continue to aggressively expand our product and service offerings by developing and launching new games and updating games and community features on our platform. We are currently working with Microsoft to launch FunTown’s online MahJong on the Xbox 360 in Taiwan, which is expected in the second half of 2008. In order to support FunTown’s product development capabilities and develop our proprietary online games, FunTown has a strong research and development team composed of approximately 63 employees in Taipei and Shanghai as of May 31, 2008.

          Through T2CN, we have also entered into joint-development agreements with third-party game developers and have also created an internal game-development unit, which is comprised of 26 employees. Going forward, we expect to offer a mix of both

internally-developed and outsourced, and licensed product offerings. We expect our licensed games to be made available on our platforms by the end of 2008.

      Our Technology and Infrastructure

          We have a scalable and modular platform that enables us to increase our game offerings and services. The platform consists of several key modules: authentication, billing, game management, customer service, and the basic platform operation. Since our platform was designed with scalability in mind, both FunTown and T2CN have their own unified user account system, which allows FunTown players to use a single account to access all FunTown games and T2CN players to use a single account to access all T2CN games, respectively. Our billing and game management modules are flexible enough to integrate both in-house developed and licensed games. Our customer service module enables us to assist our players both in and outside of the games.

          As technologies advance and enable people to access the Internet in new ways, we plan to expand our offerings to match these new access technologies and platforms. FunTown is currently working with Microsoft to develop some of our available games for use on the Xbox 360 platform, with Intel to make some of our games and services available on its Viiv technology for digital home media centers and with Chunghwa Telecom to offer certain of our popular game titles on its media-on-demand system. FunTown also has created games for use on other wireless mobile phone platforms. In addition to these new technologies, FunTown’s games are currently available to air travelers on certain airlines, enabling players to play with other passengers traveling on the same flight.

      Competition

          Our main competitors in the online games business are online game operators in Taiwan, Hong Kong, the People’s Republic of China (“PRC”) and Macau, or Greater China, including Shanda Interactive Entertainment Ltd. (“Shanda”), Giant Interactive Group, Inc., The9 Limited, Nineyou (Shanghai Everstar Online Entertainment Co., Ltd.), Tencent Holdings Limited, Ourgames.com (Beijing Globalink Computer Technology Co., Ltd.) and Chinagames.net in China, and online game operators in Taiwan, including Gamania Digital Entertainment Co., Ltd. (“Gamania”) and Soft-World International Corporation.

          We expect more companies to enter the online games industry in Greater China and a wider range of online games to be introduced to the Greater China market given the relatively low entry barriers to the online games industry. Our competitors vary in size and include large companies such as Shanda, many of which have significant financial, marketing and game development resources as well as name recognition. To cope with competition, we aim to develop new features and services that we think our players will pay for and enjoy. We also work on strengthening the appeal of our online games platform through building player communities, honorary titles, virtual badges and banners of honor, as well as other virtual assets.

      Intellectual Property and Proprietary Rights

          We rely on copyrights, trademarks, trade secrets and other intellectual property laws, as well as non-competition, confidentiality and license agreements with our employees, suppliers, business partners and others to protect our intellectual property rights. Our employees are generally required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assign to us any ownership rights that they may claim in those works.

          As of May 31, 2008, we were the owner of 56 software copyrights and 55 trademarks registered with various government agencies throughout Greater China. We also hold licenses for the operation of eight online games, including: Tales Runner, Hellgate: London, Phantasy Star Universe, Nanaimo, NBA Street Online, Holic, Sky-Romance and Warhammer Online. We also began our game development initiative to create one MMORPG game and a few sports casual games, such as tennis and snowboarding.

Internet Access and Service Business

     Our Services

          We provide broadband Internet access and services to consumer and corporate customers through various technologies and products including, cable modems, leased-lines, virtual private network and other value-added services. Our Internet access and service business continues to operate in a very competitive and challenging environment. The availability of similar services at competitive prices has made it difficult for us to attract and retain customers. Accordingly, we do not expect to see significant growth in our subscriber base in the future, in line with our ongoing strategy to shift resources away from this legacy business.

      Internet Access and Services Offerings

          Cable Modems. We offer our broadband Internet access and services for consumers via cable modems at transmission speeds of up to 6 Mbps. Our cable modem-based broadband access services allow subscribers to use bandwidth-intensive multimedia applications such as interactive games, high-quality audio, video and distance learning applications, and electronic commerce applications such as retailing, financial services and online software distribution more efficiently. We reached an agreement in principle in May 2004 with a number of our cable partners to whom we provide bandwidth on an exclusive basis to equally share revenues, thus providing our cable partners with increased economic incentives to promote two-way cable services through their systems. In September 2005, we started providing a number of our exclusive cable partners, cable modem services that they could sell under their own brand name. Two-way cable systems allow us to offer subscribers higher upstream transmission speeds and “always on” Internet access capabilities. Some of our agreements with cable modem partners expired in June 2008, and we are in the process of renewing these agreements. As of December 31, 2007, we had 6,906 cable modem-based broadband customers, as compared to 2006, when we had 11,447 cable modem-based broadband customers, and we had 17,600 cable modem-based broadband customers as of December 31, 2005.

          Corporate Internet Access And Services. We also offer dedicated and high-speed Internet access and services to corporate customers over optic-fiber lines. Our target customers include ISPs, Internet content providers (“ICPs”), corporations, SMEs and Internet cafés. Our corporate ISP services include leased-line services (ranging from 1 Mbps to 1 Gbps) virtual private network and other value-added services.

          ADSL. In May 2006, we sold our ADSL Internet access and service business to Webs-TV. The total transaction price of approximately US$18.1 million consisted of a cash consideration of approximately US$8.9 million related to the sale of the ADSL business, and a cash consideration of approximately US$9.2 million related to the provision of certain agreed upon services, including bandwidth, billing, and consulting services, and the right to use GigaMedia’s ADSL brand for a period of five years. Cash proceeds in 2006 and 2007 from the sale of the ADSL business, net of transaction costs and VAT, were approximately US$3.3 million and US$4.9 million, respectively.

      Markets for Internet Access and Services

          Consumer Internet Access And Services. Our two-way cable modem-based broadband service packages are offered at approximately US$36.97 per subscriber per month for premium service, approximately US$26.21 per subscriber per month for a mid-tier package, and approximately US$21.55 per subscriber per month for a 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 the split with cable partners and these discounts. In the future, our product mix may change in response to market dynamics.

          The number of subscribers of our two-way cable modem-based broadband services has declined significantly due to competition. The table below sets forth the number of our subscribers on the dates specified. We do not expect to see significant growth in our subscriber base in the future, in line with our ongoing strategy to shift resources away from this legacy business. Consistent with our focus on online entertainment, we have retained financial advisers to explore the potential sale of this legacy business.

		Number of Subscribers
Date		2005				2006				2007
31-Mar			18,645				16,417				10,155
30-Jun			17,929				15,154				8,844
30-Sep			17,386				13,185				7,521
31-Dec			16,534				11,447				6,906

          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 revenue sharing arrangements. As of May 31, 2008, we had exclusive agreements with 11 out of our 25 cable partners granting us the exclusive right to provide Internet access and services through their cable systems.

          Corporate Access Services. KBT offers and sells dedicated and high-speed Internet access to corporate customers over optic-fiber Ethernet MAN infrastructure. KBT offers various speeds of leased-line services, ranging from 1Mbps to 1Gbps, to different kinds of subscribers like ISPs, ICPs, corporations, SMEs and Internet cafés. KBT charges its customers monthly access fees and other value-added services depending on the level of bandwidth and type of services provided. As of May 31, 2008, KBT had more than 900 corporate users, and the business contributes more than 56.2 percent of the revenues from our Internet access and service business.

      Other Services

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

      Our Broadband Network — Cable and ADSL Network

          In early 2005, we completed the upgrade of 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. 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:

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

          In connection with the sale of our ADSL business, we have given Webs-TV the right to co-locate their equipment in our network operation centers.

          Network Operations Centers. We provide centralized network management through our network operations centers, which represent 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 circuit providers to optimize our 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 array of Internet connections in Taiwan. Our extensive peering arrangements have enabled us to route most of our traffic over the less congested private peering links. 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 competition in the trans-Pacific submarine cable segment provides better price economics, we are able to significantly increase our bandwidth without incurring additional cost.

      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 processing layers, we are able to 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.

          Turnkey Cable Modem Services. For cable operators that are interested in providing or improving upon their cable Internet services, we have formed a team of sales personnel, network engineers, backend software engineers and customer service specialists to provide consultancy and turnkey solutions. 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 an optical Ethernet MAN infrastructure and solution, KBT is able to provide corporate customers one-megabit increment, on-demand leased-line services. We primarily use a direct sales force to reach our potential customers.

      Customer Service

          We provide our subscribers with a comprehensive range of customer service, including assistance on cable modem installations, 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 assists 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.

      Competition

          The Internet access and 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 and service industry in Taiwan is highly competitive. The broadband Internet access and service industry in Taiwan is dominated by the main fixed-line telecommunication company, Chunghwa Telecom. As of May 31, 2008, Chunghwa Telecom’s HiNet broadband service is the broadband ISP market leader estimated to have over 80 percent of the market share, while we have only managed to capture less than 1 percent of the market share. The primary basis for competition is price. The availability of similar services at competitive prices has made it difficult for us to attract and retain customers.

          We also compete with other broadband technologies, including integrated services digital networks and wireless (and, in particular, WiMax). 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 and services include all four fixed-line operators in Taiwan.

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

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

      Intellectual Property and Proprietary Rights

          As of May 31, 2008, we held 22 trademarks and two patents registered in Taiwan.

Regulation

     Regulation Relating to Online Gaming

          Our gaming software and service business includes software development and the provision of application services for Internet gaming. We are dependent on UIM for all of the revenues from our gaming software and service business. UIM operates an online gaming business and also sub-licenses our software products to third parties. We earn fees from UIM based upon its revenues.

          We are incorporated in Singapore, and Singapore law does not prohibit us from providing software products and application services to online gaming companies.

          UIM operates exclusively in the Kahnawake territory in Canada under a gaming license issued by the Kahnawake Gaming Commission, subject to continuing satisfaction of strict licensee requirements. All of UIM’s gaming transactions take place in Kahnawake. UIM operates exclusively from computer servers in Kahnawake.

          However, the end-users of our software products, including the online gaming customers of UIM and its sub-licensees, are located around the world and it is, in many cases, uncertain which governments have authority to legislate or regulate different aspects of these industries. Moreover, the Internet gaming industry is still in an early stage of development and the worldwide legal and regulatory environment in which the businesses operate therefore remains highly fluid and subject to change. While most foreign jurisdictions have some form of legal framework applicable to games of chance, few provide clear guidance on how this framework applies to Internet gaming. Issues such as determining the physical location of a gaming event as well as significant differences in the gaming laws and “Cyberlaws” of various countries all make traditional concepts of jurisdiction and conflicts of 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. The risks and uncertainties in the worldwide legal and regulatory environment make it impossible to assess whether our status or operations as an application service provider to the online gaming industry, or the Internet gaming services provided by UIM, are in compliance with all laws and regulations of the jurisdictions where our gaming software products are used.

          In the United States, the current administration adheres to the view that Internet gambling is already prohibited by the Federal Wire Act and other federal laws, such as the Patriot Act. Under the Patriot Act, both U.S. and non-U.S. banks that process online gaming transactions for U.S. persons may face potential criminal proceedings, as U.S. jurisdiction extends to non-U.S. banks that have correspondent accounts in the United States. Internet gambling activity also constitutes illegal gambling activity in all 50 U.S. states, including those states where other forms of gambling are legal.

          In addition, the UIGEA became law in the United States in September 2006. The UIGEA prohibits the use of communication facilities and financial transactions in connection with Internet gambling by restricting the payment methods for such activities and by imposing criminal penalties on Internet gambling businesses which accept wagers or payment in violation of such restrictions. The UIGEA also criminalizes any gambling business which arises from using a communication facility to transmit bets or wagers, or to transmit information assisting in the placing of bets and wagers, to or from the United States, and prevents gambling businesses from accepting credit cards or other bank instruments in connection with illegal Internet gambling. The UIGEA also directs various federal agencies to develop regulations that would require financial institutions with electronic payment systems to establish policies and procedures to identify and block restricted transactions, and creates judicial procedures through which federal agencies could obtain injunctions directing interactive computer services to remove or disable access to online sites that violate the law.

          In November 2004, the World Trade Organization (“WTO”) found that the United States was in violation of its commitments under the General Agreement on Trade in Services (“GATS”) by not allowing operators of online gaming services licensed in Antigua and Barbuda to access U.S. markets. The decision was appealed and, in 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 obligations of the United States under the GATS, but also that the United States 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 light of existing federal legislation regarding Internet gambling on horseracing, the United States 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 United States bring its legislation into conformity with its obligations under the GATS. In March 2007, the WTO issued a report which found that the United States had failed to bring its legislation into conformity with its obligations under the GATS.

          The United States has moved to withdraw gambling from the list of U.S. service industries covered by its commitments to the 1994 GATS treaty, a move to further limit its ongoing exposure to actions taken by other nations excluded from offering gambling

services in the United States. In order to do so, the U.S. first must agree to compensatory trade concessions with the eight WTO members which claimed to be prejudiced by such a move (the EU, China, India, Canada, Australia, Costa Rica, Japan and Antigua). Once this process is concluded, the U.S. will effectively no longer be accountable to the WTO over restrictions applied to any type of gambling service, whether remote or terrestrial.

          In December 2007, WTO’s arbitration panel announced an award to Antigua and the U.S. agreed to a compensation package with the European Union. It is believed that the U.S. has already agreed to deals with Australia, Canada and Japan. Negotiations with the remaining countries continue.

          A number of states are lobbying/petitioning U.S. federal authorities to ensure they retain the ability to regulate state gaming and that this ability is not affected by the WTO decision. However, because of these recent WTO events, U.S. legislative pressure for a regulated solution has diminished and the likelihood of any additional WTO cases against the U.S. has been greatly reduced.

          Finally, substantial uncertainties in the global regulatory environment relating to online gaming expose our Company to a real risk that regulatory authorities in various jurisdictions may determine that our gaming software and service business provides online gaming services (rather than only providing software and application services to our licensees) and thus subject our Company to the gaming laws and regulations in those jurisdictions.

          In Europe, several countries, led by the United Kingdom, have adopted a regulated online gaming approach. Italy has proposed more liberal online gaming regulations and is currently seeking EU approval for the regulations to take effect. However, opposing views are present in Europe. Some European countries, where there are state-owned gaming monopolies, primarily related to lotteries and online sports betting, have taken action or introduced legislation aimed at banning foreign online gaming operators, which could have a material adverse effect on our licensees and consequently on our Company. For example, the French governmental authorities have passed legislation effective from March 2007, prohibiting operators other than certain specified state-owned enterprises from operating Internet gaming sites in France. Additionally, the German Interstate Gambling Treaty came into force on January 1, 2008, an agreement that seeks a prohibition on the use of the Internet for all gambling services (except horserace betting). Both the French and German legislation call for various forms of ISP blocking or warning pages to be placed on gaming sites, financial transaction blocking and advertising restrictions. As of June 1, 2008, regulations and other necessary actions required to implement these laws and the banking restrictions have not been adopted. Such actions by these European Union (“EU”) member states are in contrast with rulings from the European Court of Justice and have prompted the European Commission (“EC”) to look at creating new legislation that could harmonize online gaming within the EU, in line with the EU’s principles regarding the European single market. There is no indication that any such legislation will be introduced in the near term.

          For additional information on the regulatory environment relating to online gaming, see Item 3, “Key Information — D. Risk Factors — The worldwide legal and regulatory environment in which our gaming software and service business operates is characterized by uncertainties that could adversely affect our business and operating results.”

      Regulations Relating to Online Games in Taiwan

          At present, there is no specific law in Taiwan governing online game services, nor are there any specific licensing requirements imposed on Internet content providers in connection with offering online game services. The National Communications Commission (the “NCC”) was established in March 2006. In December 2006, the NCC proposed the overhaul of the regulatory framework in the communications and broadcasting sectors by amending the Telecommunications Act, the Radio and Television Act, the Cable Radio and Television Act and the Satellite Radio and Television Act. Pursuant to this proposal, the legislation at issue would be consolidated into a new legislative Act to be known as the Communications and Broadcasting Act. The proposed legislation is currently being reviewed by the Executive Yuan and will be submitted to the Legislative Yuan for approval before coming into effect.

          Rating of Internet Content. The Government Information Office, which was the agency in charge of Internet content prior to establishment of the NCC, promulgated the Regulations for the Rating of Internet Content in April 2004, as amended in October 2005. In general, Internet content shall not include any illegal or banned materials. To avoid negative impact on the physical or mental development of children or adolescents, Internet content containing any of the following materials shall be rated as restricted and shall not be viewed by those below the age of 18: (i) excessive depiction of gambling, robbery or other criminal offenses; (ii) excessive depiction of suicide; (iii) depiction involving terror, blood or cruelty which is presented in an matter acceptable to adults; or (iv) depiction of sexual acts or sexual obscenity which does not embarrass or disgust adults in general. If Internet content is in violation of the Regulations for the Rating of Internet Content, competent authorities may order the relevant Internet service providers to restrict access to children or adolescents or remove the offending content and impose an administrative fine on the offenders.

          Computer Software Ratings. The Ministry of Economic Affairs announced in July 2006 the Regulations Governing Computer Software Rating, which took effect in January 2007. Computer software includes the game software which can be installed in computers. The provider of computer software shall identify the rating of the computer software when it provides it to users. There are four ratings: (i) Mature Audience Only (not suitable for those below the age of 18); (ii) Parental Guidance Advisable (not suitable for those below the age of 12; parental guidance is advisable for those between the age of 12 to 18) (iii) Parental Guidance Strongly Suggested (not suitable for those below the age of 6; guidance from parents, teachers or adults is strongly suggested for those between the age of 6 to 12); and (iv) General Audience (suitable for all ages).

          Online Game Contract Template. The Ministry of Economic Affairs and the Consumer Protection Commission have published a model contract template which sets out permitted terms and limitations with respect to online game services offered in Taiwan, pursuant to the Consumer Protection Act. Generally, consumers should be given at least three days to review such contract. Amendments or changes to fees payable for services offered must be publicly announced at least thirty days prior to such amendment, and notification provided to consumers. Consumer game records must be maintained by each online game operator for a minimum period of thirty days and shall be open to inspection by such consumers. Suspension periods for consumers who have breached the terms of their online game contracts may not exceed a period of seven days.

      Regulations Relating to Online Games in the PRC

          Our provision of online games and online game-related content on our Web sites in the PRC is subject to various Chinese laws and regulations relating to the telecommunications industry and Internet and online games and is regulated by various government and regulatory authorities. See Item 3, “Key Information — D. Risk Factors — The laws and regulations governing the online games industry in the PRC are evolving and new regulations may adversely affect our business.”

          PRC regulations prohibit a foreign investor from owning more than 50 percent of the equity in a PRC entity which provides value-added telecommunications services. Internet content provision services are classified as value-added telecommunications businesses, and a commercial operator of such services must obtain a value-added telecommunications business operating license, or an ICP license, from the appropriate telecommunication authorities in order to carry on its operations in the PRC.

          In addition, since online games fall within the definition of “Internet culture products” under the Tentative Measures for Internet Culture Administration (2003), a commercial operator of online games must, in addition to the ICP license, obtain an Internet culture operation license from the appropriate Ministry of Culture for its operation of online games, and foreign investors are restricted from owning equity in such entities. The provision of online games is also deemed an Internet publication activity, within the meaning of the Tentative Measures for Internet Publication Administration (2002), and therefore, an online game operator must also obtain the approval of the relevant press and publication administrative authorities or cooperate with a licensed Internet publisher, as well as the appropriate licenses, in order to carry on its online games business in the PRC. Foreign investors are also restricted from owning equity in entities which provide Internet publications. Further, no online game products involving (among others) obscenity, gambling, violence, superstition or illegal money-collecting transactions are allowed to be produced and circulated in the PRC, and online games regardless of whether imported or domestic are subject to a content review and require approval or filing with the Ministry of Culture in accordance with relevant PRC law. If games are imported without such approval, the Ministry of Culture may impose penalties on the non-complying operator, which include the revocation of its Internet culture operation license. In addition, online game operators are required to develop identification verification and reorganization software for online game products, to restrain youths from playing online games and limit their playing time, and to reform gaming rules which might induce online gaming addiction (including adoption of real-name registration systems).

          In April 2007, the PRC governmental authorities, including GAPP, the MII, the Ministry of Education and the Ministry of Public Security also passed the “Anti-Internet Addiction Regulations,” with the purpose of discouraging minors from spending excessive amounts of time playing online games. Pursuant to these regulations, Internet game operators have been ordered to install anti-addiction software features on all existing online games from mid-July 2007 and include the software in all online games to be put into operation in the PRC, which will (among other features) limit the number of points and other benefits which can be awarded to game players after they have been online in excess of specified periods of time. Internet game operators will also be required to adopt real-name registration, which will require online game players to register their real identity information before they will be allowed to play online games. Failure by the online game operators to comply with these requirements may subject operators to penalties, including but not limited to suspension of operation of online games, revocation of operating licenses and approvals for operations, rejection or suspension of application for approvals, licenses, or filings for any new game, or being prohibited from operating any new game.

          On February 15, 2007, fourteen governmental authorities, including the Ministry of Culture, the Ministry of Information Industry, the State Administration for Industry and Commerce, and the People’s Bank of China (“PBOC”), jointly issued a circular entitled a Circular for Further Strengthening the Administration of Internet Café and Online Games. This circular grants the PBOC administrative authority over virtual currencies issued by online game operators for use by players in online games to avoid the potential

impact such virtual currencies may have on the real-world financial systems. The circular also restricts the volume of virtual currency that may be issued and the purchase of such virtual currencies. Virtual currency must not be used to purchase any physical products, refunded with a premium or otherwise illegally traded.

      Telecommunications Regulation in Taiwan

          The NCC was established in March 2006 to act as the regulator of the telecommunications and broadcasting industry. Prior to the establishment of the NCC, the Ministry of Transportation and Communications and the Directorate General of Telecommunications of Taiwan regulated Taiwan’s telecommunications industry primarily under the Telecommunications Act of Taiwan. The Directorate General of Telecommunications has been merged into the NCC, while the Ministry of Transportation and Communications remains responsible for industrial policy and promotion of the telecommunications industry.

          The Telecommunications Act regulates two types of telecommunications companies, Type I operators and Type II operators. Type I operators, such as Chunghwa Telecom, are enterprises that have established their own switching and transmission facilities to provide telecommunications services. These facilities-based services are similar to common carrier services or basic services in the United States. Type II operators, such as Hoshin GigaMedia and KBT, comprise all telecommunications operators other than Type I operators, including companies that generate fees from providing Internet access, online information, electronic mail and electronic commerce services.

          Regulation of Type II Operators. Type II operators typically provide telecommunications services to customers by using the telecommunications facilities of Type I operators and are not permitted to engage in the buildup of telecommunications facilities. Type II telecommunications services can be further divided into special Type II telecommunications services and general Type II telecommunications services. A special Type II telecommunications license is required for any Type II operator which provides simple voice resale, Internet telephony and other international telecommunications services by leasing international circuit(s). A general Type II telecommunications license is required for any Type II operator which provides telecommunications services other than those specified above. Hoshin GigaMedia and KBT each hold a general Type II telecommunication license.

	•		License. A Type II license is valid for ten years, and may be renewed six months before its expiration. The license is nontransferable. Hoshin GigaMedia’s license is due to expire in 2008. KBT’s license is due to expire in 2012.
	•		Tariff Regulation. Type II operators are required to announce their business regulations with respect to the terms for provision of services, including tariffs for major rates and charges. Any changes to the business regulations must be filed with the NCC before they become effective. Tariff information must include the types of services provided, terms and fee schedules for all service items, rights and obligations of customers, contract termination events and other matters affecting the right and obligations of customers, all to be included in the operator’s business plans.
	•		Change in Business. Under Taiwan’s Regulations Governing Type II Telecommunications Operators, any change of type or scope of business must be approved by the NCC. For change of the systems structure stated in the business plan, a report shall be filed with the NCC for recording within one month from the effective date of change of such system structure. In addition, Type II operators must report to the NCC and inform their customers in advance of any plan to suspend or terminate any of their businesses.
	•		Technical Standards. Special Type II operators are required to retain qualified senior telecommunications engineers to install and maintain telecommunications equipment. Any telecommunications equipment used by a Type II operator must also satisfy technical standards adopted by the NCC.

          Regulation of Type I Operators. Type I operators are more heavily regulated than Type II operators, and the government of Taiwan has broad powers to limit the number of operators and their business scope and markets. Under the Telecommunications Act, Type I operators must satisfy required levels of capital adequacy and, to ensure that they meet their facilities rollout obligations, are subject to pre-licensing merit review of their business plans and tariff rates. In addition, the Telecommunications Act prescribes that any adjustment to the tariff rates of a Type I operator is subject to a price cap set according to the annual increase rate of the consumer price index promulgated by the Directorate General of Budget, Account and Statistics under the Executive Yuan of Taiwan minus adjusted coefficient.

          Liberalization of Type I Fixed Network Licensing. The Directorate General of Telecommunications adopted the Regulations Governing Fixed Telecommunications Network Business (“Fixed Network Regulations”) in 1999 to govern the issuance of fixed

network communication licenses and the business conducts of fixed network business operators. Type I fixed network communications licenses are subdivided into comprehensive network, local network, long distance network, international network and lease-circuit licenses. These regulations have been designed to grant additional comprehensive network licenses to encourage competition with Chunghwa Telecom, which is a state-owned company and currently the dominant fixed-line network operator in Taiwan. The NCC promulgated amendments to the Fixed Network Regulations on May 21, 2007 whereby the NCC lowers the threshold for a cable TV system operator to operate a local telecommunications network within its franchise area on the one hand and allows a fixed network operator to operate a multimedia content transmission platform (to broadcast programmed channels) on the other.

          Content Liability. If content sent, transmitted or received via the Internet through an operator’s system is found to be obscene, defamatory or in violation of public order or national security, the relevant operator would be liable for the content only if it knew or should have known that the content was obscene, defamatory or in violation of public order or national security. In addition, carriers must provide telecommunications services on a fair and equal basis and may not refuse to receive or transmit telecommunications information unless the content would endanger the national security or offend against the public order of Taiwan.

      Cable Regulation in Taiwan

          Regulation on Shareholding. In 2000 and 2001, the Cable Radio and Television Act was modified. Under the modified regulations, the original regulations of “a single shareholder cannot own more than 10 percent of the total issued shares of a cable operator,” and “no shareholder and its related parties may collectively own more than 20 percent of a cable operator’s total issued shares” were eliminated. Instead, the shares of a cable operator directly or indirectly held by foreign shareholders cannot exceed 60 percent of all outstanding shares of the cable operator. Furthermore, foreign shareholders who directly hold shares of a cable operator are limited to foreign corporations, and the total shares held by them cannot exceed 20 percent of all outstanding shares of the cable operator.

          Operating Licenses. To obtain an operating license, a cable operator must first apply for a rollout permit. After receiving this permit, the cable operator generally has three years to complete the cable system rollout as set forth in its permit application. Upon the satisfactory completion of the rollout, the NCC will issue an operating license to the cable operator. If the cable operator has not received an operating license before its rollout permit expires, its right to engage in the cable television business will be terminated immediately.

          The term of an operating license is nine years. The NCC conducts a periodic review of the performance of each licensed cable operator on the basis of its business and operating plans every three years. Following a review, a licensed cable operator may be instructed by the NCC to make requested improvements in its business within a specified period. A failure to timely comply with the instruction could result in revocation of the cable operator’s license.

          Market Share Limitations. Under the Cable Radio and Television Act, the number of subscribers of all affiliated cable operators may not exceed one-third of the total number of cable television subscribers in Taiwan. In addition, the number of affiliated cable operators may not exceed one-third of the total number of all cable operators in Taiwan.

          Competition. Under the Cable Radio and Television Act, the NCC is authorized to issue additional licenses in a franchised area if it believes that the existing license holders in that area are engaging in anti-competitive or unfair competition practices. In addition, service fees charged by cable operators must be approved by local government authorities on an annual basis.

          Open Access Regulation. Under the Regulation Governing Fixed Network Business described above, cable operators must obtain leased-circuit licenses issued by the NCC in order to lease their circuits to companies that provide services through their cable systems. The Directorate General of Telecommunications (which was replaced by the NCC in March 2006) began to accept applications for these licenses from cable operators in June 1999 and most of the cable operators have been granted with leased-circuit licenses to lease out their cable capacities to Type I operators and Type II operators, including Hoshin GigaMedia and KBT. As a condition to holding these licenses, any licensed cable operator that is deemed to be a dominant operator in the fixed network business market (such as in leased-circuit business) may be required by the NCC to allow all parties to provide services, including Internet access and services, through their cable systems on substantially similar terms. Any imposition of this requirement from the NCC on the cable partners having exclusive relationships with us will eliminate the benefits associated with our exclusive rights.

C. Organizational Structure

          We are a holding company incorporated in Singapore in September 1999. Prior to 2002, our primary business was to provide broadband Internet access and services in Taiwan. After we acquired our gaming software and service business in April 2004 and our online games business in January 2006, we became a major provider of online entertainment software services. In September 2005, we sold our interest in our land-based music distribution business. The organization chart and the table below set forth our business structure and the name, year and country of incorporation for each of our principal subsidiaries and our percentage holding and principal activities as of June 16, 2008:

Organization Structure*

*Includes our principal operating subsidiaries only.

Place of

Our

Year of

Incorporation

Percentage

Entity

Incorporation

Operation

Holding

Principal Activities

Held by our Company

GigaMedia International Holdings Limited

2004

British Virgin Islands

100%

Holding company

Hoshin GigaMedia Center Inc.

1998

Taiwan

100%

Cable-based Internet access services and FunTown online games portal

Held by Hoshin GigaMedia Center Inc

Koos Broadband Telecom Co., Ltd.

2001

Taiwan

100%

Broadband Internet access services targeting business clients

Held by GigaMedia International Holdings Limited

Cambridge Entertainment Software Limited

2004

British Virgin Islands

100%

Holding company

FunTown World Limited

2005

British Virgin Islands

100%

Holding company

GigaMedia Asia Limited

2005

British Virgin Islands

100%

Holding company

GigaMedia Asia Pacific Limited

2006

British Virgin Islands

100%

Holding company

GigaMedia Finance International Limited

2000

Cayman Islands

100%

Holding company

GigaMedia Global Limited

2004

British Virgin Islands

100%

Online game company

GigaMedia (HK) Limited

2004

Hong Kong

100%

Holding company

Skyace Pacific Limited

2006

British Virgin Islands

100%

Holding company

Centermax Limited

2007

British Virgin Islands

100%

Holding company

GigaMedia Capital Limited

2007

British Virgin Islands

100%

Holding company

GigaMedia Development Limited

2007

British Virgin Islands

100%

Holding company

Giga Slam Dunk Corporation

2007

Malaysia

100%

Holding company

Giga Wartime Corporation

2007

Malaysia

100%

Online game company

Place of

Our

Year of

Incorporation

Percentage

Entity

Incorporation

Operation

Holding

Principal Activities

E-Sports International Corporation Limited

2008

Hong Kong

100%

Online game company

GigaMedia SuperCup Holdings Limited

2008

British Virgin Islands

100%

Online game company

Held by FunTown World Limited

FunTown Hong Kong Limited

1999

Hong Kong

100%

Online games portal

Held by GigaMedia Asia Limited

GigaMedia China Limited

2005

British Virgin Islands

100%

Holding company

Held by Skyace Pacific Limited

Dragongate Enterprises Limited

2006

British Virgin Islands

70%

Online game developer and operator

Held by Cambridge Entertainment Software Limited

Cambridge Interactive Development Corporation

1997

U.S.A.

100%

Software developer and application service provider

Cambridge Interactive Development Corporation (Quebec) Inc.

2005

Canada

100%

Financial and management services

Cambridge Interactive Development Co., Ltd

2008

United Kingdom

100%

Software support services

Internet Media Licensing Limited

2005

British Virgin Islands

100%

Software developer and application service provider

Held by GigaMedia China Limited

T2CN Holding Limited

2004

British Virgin Islands

65.68%

Online game developer and operator

Held by T2CN Holding Limited

J-Town Information Co., Ltd.

2005

Shanghai, PRC

100%

Online game developer and technical service provider

T2CN Information Technology (Shanghai) Co., Ltd.

2004

Shanghai, PRC

100%

Online game developer and technical service provider

Held by T2CN Information Technology (Shanghai) Co., Ltd.

Shanghai T2 Entertainment Co., Ltd.

2004

Shanghai, PRC

100% controlled

Online game developer and operator

Shanghai T2 Advertisement Co., Ltd.

2006

Shanghai, PRC

100% controlled

Advertising

D. Property, Plant and Equipment

          Our principal executive office and operating office are located at 7^th to 9^th Floor, 207 Tiding Boulevard, Section 2, Taipei 114, Taiwan, where we lease approximately 35,398 square feet of office space. We also lease office and other space, including space for our servers, in various other locations. In Hong Kong, we lease office space of approximately 5,772 square feet located at Unit 2201-3A and Unit 06, 22/F, The Centrium, 60 Wyndham Street, Central, Hong Kong.

          We operate our gaming software and service business from CESL’s headquarters at 100 Cambridge Park Drive, Cambridge, MA 02140, U.S.A., where we lease approximately 45,025 square feet, and from the offices of Cambridge Interactive Development Corporation (Quebec) Inc. at 1550 Metcalfe Street, Suite 1510, Montreal, Quebec, H3A 1X6, Canada, where we lease approximately 1,638 square feet.

          We operate our online games business from FunTown’s office in Taiwan at 8F, No. 22, Lane 407, Sec. 2, Tiding Blvd., Taipei 114, Taiwan, where we lease approximately 47,137 square feet, FunTown’s Hong Kong office at Suite 1403-1405 Sunbeam Plaza, 1155 Canton Rd. KL, Hong Kong, where we lease approximately 4,831 square feet and also approximately 1,265 square feet of warehouse space situated at the same location.

          We operate our online games business in China from T2CN’s offices located at 12F, Xinyuan Technology Plaza, 418, Gui Ping Road, Shanghai, China, where we lease approximately 28,807 square feet.

          We operate our legacy Internet service and access business from Hoshin GigaMedia’s office at 4F, No. 57, Dongxing Road, Taipei 110, Taiwan, where we lease approximately 9,272 square feet, and from KBT’s office at 6F, No. 20, Lane 478, Rueiguang Road, Neihu District, Taipei 114, Taiwan, where we lease approximately 13,092 square feet.

ITEM 4A. UNRESOLVED STAFF COMMENTS

          We do not have any unresolved Staff comments that are required to be disclosed under this item.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

          Unless stated otherwise, the discussion and analysis of our financial condition and results of operations in this section apply to our consolidated financial statements as prepared in accordance with U.S. GAAP. You should read the following discussion of our financial condition and results of operations together with the financial statements and the notes to these statements included elsewhere in this annual report.

Overview

          We are a holding company. We operate three principal businesses through our subsidiaries:

	•		Through our gaming software and service business, we develop and license online poker and casino gaming software solutions and application services, primarily targeting emerging continental European markets. As a software developer and support service provider, we offer software solutions for online gaming, which we license under software license and support service contracts.
	•		Our online game and service business operates a suite of play-for-fun online games, mainly targeting online game players in Asia.

•

Our legacy Internet access and service business, which provides Internet access and service with multiple delivery technologies to consumers and broadband services to corporate customers in Taiwan.

          In 2007, we recorded total operating revenues of approximately US$166.9 million, an increase of approximately US$72.6 million year-over-year, resulting mainly from revenue growth in our gaming software and service business, which had an increase in operating revenues of approximately US$63.9 million year-over-year, and consolidation of T2CN from June 1, 2007. Our total costs and expenses increased by approximately US$56.5 million year-over-year to US$128.8 million. We recorded net income in 2007 of approximately US$38.9 million, an increase of approximately US$8.1 million year-over-year.

          Gaming Software and Service Business. We operate our gaming software and service business through our subsidiary, CESL, and through its wholly-owned subsidiaries, CIDC and IMLL. Our gaming software and service business generated revenues of approximately US$119.0 million, gross profit of approximately US$102.7 million, and operating income of approximately US$37.7 million in 2007.

          We are dependent on our licensee, UIM, whose financial results were incorporated into our consolidated financial statements pursuant to FIN 46(R) although we do not own any equity in UIM. See “— A. Operating Results — Certain Significant Events Affecting Our Results of Operations for 2005, 2006 and 2007 — Consolidation of UIM, T2 Entertainment and T2 Advertisement under FIN 46(R).” Under the terms of the licenses granted by us to our licensees (including UIM), we are entitled to a share of the revenues of such licensees and as such, we bear certain economic risks with respect to, and derive certain economic benefits from, their operations.

          Online gaming software design houses and application service providers are our primary competitors. However, given the low barriers to entry in the software industry and the increasing popularity of Internet-based businesses, there are a large number of competitors scattered throughout many different segments of the software and Internet industries. In addition to known current competitors, traditional gaming service providers and other entities, many of which have significant financial resources and name brand recognition, may provide online gaming services in the future, and thus become our competitors.

          Faced with our known competitors, and most likely several new competitors which may be established in the near future, we will continue to focus on the principal competitive factors that we believe can differentiate our product offerings from those of our competitors, including: brand, technology, financial stability and resources, proven track record, regulatory compliance, independent oversight and transparency of business practices in our industry.

          Online Game and Service Business. We operate our online game and service business through FunTown and T2CN. FunTown is a leading casual games business with operations throughout Greater China. We acquired FunTown in January 2006 and incorporated results of the business into our consolidated financial statements starting from January 1, 2006. T2CN is a leading online sports game operator in the PRC. We consolidated and incorporated T2CN operation results into our consolidated financial statements starting from June 1, 2007. Our online game and service business generated revenues of approximately US$32.8 million, a gross profit of approximately US$23.6 million, and operating income of approximately US$6.8 million in 2007. As we did not acquire our online games business until January 2006, our historical financial results prior to fiscal year 2006 do not reflect the financial results of our online games business.

          In December 2006, we entered into a strategic alliance with Infocomm Asia, a Southeast Asia online games operator and distributor offering blockbuster titles such as Granado Espada and Hellgate: London, both under exclusive license for most of Southeast Asia. We also secured an exclusive license to offer and operate Hellgate: London in the territories of Taiwan, Hong Kong and Macau. We will operate Hellgate: London through a strategic joint venture, Dragongate Enterprises, in which we hold a 70 percent interest and Cyber Gateway Pte. Ltd. (a wholly-owned subsidiary of Infocomm Asia) holds a 30 percent interest.

          Between October and December 2007, we also entered into strategic alliances with Neostorm and XL Games. Neostorm was formed by the merger of four previously independent game development studios creating one of the largest independent game development companies in South Korea. Neostorm focuses on medium-core casual game titles. XL Games was founded by the creator of one of the most popular online game franchises in history and focuses on MMORPGs with studios in Seoul, South Korea and Austin, Texas.

          Online casual game operators in Taiwan and the PRC are currently our primary competitors. We also expect to compete in the future with online casual game and MMORPG operators throughout Greater China. Given the low barriers to entry in the online game industry and the increasing popularity of Internet-based businesses, there are a large number of potential competitors scattered throughout many different segments of the software and Internet industries. In addition to the aforementioned competitors, traditional

entertainment service providers and other entities, many of which have significant financial resources and name brand recognition, may provide online game services in the future, and thus become our competitors.

          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 differentiate our product offerings from those offered by our competitors, including: brand, technology, financial stability and resources, proven track record, independent oversight and transparency of business practices in our industry.

          Internet Access and Service Business. We operated a major broadband ISP and provided broadband Internet access and service with multiple delivery technologies in Taiwan targeting both consumer and corporate customers. Our Internet access and service business generated revenues of approximately US$15.2 million, gross profit of approximately US$4.9 million, and operating income of approximately US$671 thousand in 2007.

          Our consumer ISP business is operated through Hoshin GigaMedia and our corporate ISP business is operated through Hoshin GigaMedia’s subsidiary, KBT. In May 2006, we sold our ADSL business to Webs-TV. See Item 4, “Information on the Company — B. Business Overview.” The resulting decrease in monthly ADSL revenues were partially offset for the transition period from May 16, 2006 to December 31, 2007 by service revenues from Web-TV for the provision of certain bandwidth and consulting services on a transitional basis. 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.

          Our corporate ISP services include leased-line, virtual private networks and other value-added services. Internet access and service revenues from our corporate ISP business grew from US$6.9 million in 2006 to US$7.3 million in 2007, and accounted for approximately 48 percent of total Internet access and service revenues in 2007. Internet access and service revenues from our consumer ISP business declined 43 percent from US$13.7 million in 2006 to US$7.9 million in 2007, and accounted for approximately 52 percent of total Internet access and service revenues in 2007 as compared to 67 percent of our Internet access and service revenues in 2006.

          Our Internet access and service business continues to operate in a very competitive and challenging environment. Our principal competitor, Chunghwa Telecom is the dominant provider of broadband services in Taiwan and has significantly greater resources than us. The availability of similar services at competitive prices has made it difficult for us to attract and retain customers. We do not expect to see significant growth in our subscriber base in the future, in line with our ongoing strategy to shift resources away from this legacy business. We have retained financial advisors to explore the sale of this legacy business.

     Subsequent Events

          We entered into the following transactions after December 31, 2007.

Investment in Access China

          On January 18, 2008, we entered into share purchase and shareholders’ agreements with Access China, an online game software developer in the PRC, to acquire preferred shares convertible into an approximately 30 percent holding in Access China’s common shares.

Warhammer License and Distribution Agreement

          On January 28, 2008, we entered into a license and distribution agreement with Electronic Arts Inc. (“EA”), pursuant to which EA granted us an exclusive and non-transferable license for three years commencing from the first commercial release date to operate, host, maintain and market the multi-player online game titled Warhammer Online in Taiwan, Hong Kong and Macau. Under the agreement, we are required to pay a recoupable advance, which can be offset against future royalties. We have also agreed to provide certain external marketing resources and localization efforts for Warhammer Online in the form of online and live events, and other advertising and promotions via marketing activities.

Investment in SuperCup

          On May 15, 2008, we entered into certain agreements with SuperCup and its affiliates, pursuant to which we purchased convertible preferred shares representing approximately 45 percent of the issued share capital of SuperCup, and obtained worldwide exclusive rights to cooperate with SuperCup in MahJong and the Asian card games business. As part of the investment, we agreed to provide a loan in the amount of up to US$1.0 million to SuperCup at market terms.

Additional Investment in T2CN

          On May 26, 2008, we made an additional investment to acquire common shares of T2CN. After our additional investment, our controlling interest of the total outstanding voting rights of T2CN was increased to 65.68 percent.

Certain Significant Events Affecting Our Results of Operations for 2005, 2006 and 2007

Divestiture — Music Distribution Business

          On September 29, 2005, we sold our land-based music distribution business to Nextbase International Limited. The music distribution business has been accounted for as a discontinued operation under U.S. GAAP and, therefore, the results of operations for all periods presented have been restated to reflect the result of the music distribution business as a discontinued operation.

          See Note 1, “Business Overview, Basis of Presentation, and Summary of Significant Accounting Policies” of our consolidated financial statements for further information.

          Summary selected financial information for discontinued operations is as follows:

		2005
		(in US$ thousands)
Revenues		$	37,907
Loss before tax and minority interest income		$	(1,861	)
Income tax benefit		$	(1	)
Minority interest loss		$	(796	)
Loss from discontinued operations		$	(154	)

          Major classes of assets and liabilities which comprised the music distribution business at the date of disposal, September 29, 2005, included the following:

		2005
		(in US$ thousands)
Cash (including restricted cash)		$	3,098
Accounts receivable			1,842
Inventory			6,679
Other current assets			683
Property and equipment			1,666
Intangible assets			4,689
Other assets			1,553
Total Assets		$	20,210
Accounts payable		$	11,239
Other liabilities			1,945
Total liabilities		$	13,184

Divestiture of our ADSL Business

          On May 15, 2006, we entered into an asset purchase and sale agreement and a transition service agreement with Webs-TV to sell our ADSL business and provide certain transition services. Under the agreements, Webs-TV purchased our ADSL business and agreed upon services in an all cash transaction with a total price of approximately US$18.1 million (including VAT). Approximately US$8.9 million of the price is for the ADSL business, and approximately US$0.9 million of the price is for the right to use our ADSL brand for five years. Both are payable from May 15, 2006 through July 31, 2007. Approximately US$8.3 million represents fees for bandwidth, consulting and other support services to be provided by Hoshin GigaMedia on a transitional basis through December 31, 2007, payable from May 15, 2006 through February 28, 2008. Cash proceeds received in 2006 and 2007 from the sale of the ADSL business, net of transaction costs and VAT, were approximately US$3.3 million and US$4.9 million, respectively. The transferred ADSL business includes our ADSL-related equipment, business contracts, and subscription contracts between Hoshin GigaMedia and approximately 62,000 ADSL subscribers. For further information, see Note 4 of our consolidated financial statements.

          Our results of continuing operations in 2006 included a pre-tax one-time gain from the sale of the ADSL business of US$7.7 million, which was recorded in non-operating income. The ADSL business does not qualify under FAS 144 as a component that may be reported as discontinued operations since the operations and cash flows of our ADSL business cannot be clearly distinguished operationally and for financial reporting purposes from the rest of our ISP business. Therefore, we have not reported the sale of our ADSL business as discontinued operations.

Consolidation of UIM, T2 Entertainment and T2 Advertisement under FIN 46(R)

          Our Company adopted FIN 46 in July 2003. FIN 46 requires certain VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The FASB amended FIN 46 by issuing FIN 46(R) in December 2003. FIN 46(R) is an update of FIN 46 and contains different implementation dates based on types of entities subject to the standard and based on whether a company has adopted FIN 46. Accordingly, the financial statements of the following VIEs have been consolidated into our Company’s Consolidated Financial Statements since July 1, 2003 or their respective date of establishment or acquisition, whichever is later.

          In April 2004, our Company entered into a software license and support service contract with UIM to provide Internet software support services for UIM’s online gaming operations. The contract allows for us to charge a percentage of UIM gross receipts resulting from UIM’s online gaming operations. The percentage of gross receipts varies depending upon the software and support services provided to UIM. We analyzed the provisions of FIN 46(R) as it relates to contractual relationships and determined that we were and continue to be a primary beneficiary of UIM. As a result of such determination, we have incorporated the results of UIM into our consolidated US financial statements even though we own none of UIM’s equity and recorded goodwill arising from the consolidation of UIM totaling US$209 thousand. UIM’s net assets as of December 31, 2006 and 2007 were approximately US$784 thousand and US$933 thousand, respectively. The consolidation of UIM resulted in increases in assets and liabilities of approximately US$12.8 million and US$12.1 million, respectively, in 2006, and US$32.9 million and US$31.9 million, respectively, in 2007.

          Beginning in June 2007, we consolidated T2CN. Pursuant to various agreements entered into between T2CN, T2 Entertainment, T2 Advertisement and the equity owners of T2 Entertainment and T2 Advertisement, T2CN generally has control and the risks and rewards of ownership of T2 Entertainment and T2 Advertisement and is further considered the primary beneficiary of T2 Entertainment and T2 Advertisement. T2 Entertainment and T2 Advertisement were established to hold the necessary licenses for our participation in online game and related advertisement services in the PRC. Accordingly, from the date that we consolidated T2CN, the results of T2 Entertainment and T2 Advertisement have been included in the accompanying consolidated financial statements.

          T2 Entertainment’s and T2 Advertisement’s net assets as of December 31, 2007 were approximately US$115 thousand and US$63 thousand, respectively. The consolidation of T2 Entertainment and T2 Advertisement resulted in increases in assets of approximately US$4.7 million and US$201 thousand, respectively, and in liabilities of approximately US$4.6 million and US$138 thousand, respectively, in 2007.

          See Item 3, “Key Information — D. Risk Factors — We depend on certain operating licenses for the operation of our online games business in the PRC. Our business could be disrupted and our results of operations may be materially and adversely affected if either T2 Entertainment or T2 Advertisement violate their contractual arrangements with us.”

Acquisitions

          FunTown

          On December 19, 2005, we entered into a definitive agreement with TWP to acquire FunTown. In January 2006, we completed the acquisition of FunTown and purchased certain assets and assumed certain liabilities of FunTown for a total consideration of approximately US$43.0 million, which included cash payments of approximately US$27.2 million and zero coupon convertible notes in the aggregate principal amount of approximately US$15.0 million with a valuation premium on the convertible notes of approximately US$756 thousand. In 2007, we made an additional incentive payment of approximately US$4.8 million, net of VAT, an amount determined based on the adjusted pre-tax income of FunTown in 2006 as opposed to 2005.

          T2CN

          Beginning in June 2007, we consolidated T2CN. T2CN is a leading operator and provider of online sport games in the PRC. We acquired T2CN in order to enhance our position in the online game market in Asia. This primary factor, among others, contributed to a purchase price in excess of the fair market value of the net tangible assets and intangible assets acquired. As of May 31, 2008, we owned 43,113,681 common shares of T2CN, which represents a controlling interest of 65.68 percent of the total outstanding voting rights of T2CN.

          The following summarizes the key stages in our acquisition of T2CN:

2006

          In April 2006, our Company entered into a strategic investment agreement with T2CN, pursuant to which we made an investment of US$15.0 million to acquire 7,500,000 voting preferred shares convertible into 7,500,000 common shares, or an approximately 19.02 percent interest in T2CN.

2007

          In February 2007, we made an additional investment of US$19.3 million to acquire 18,118,926 common shares of T2CN, representing a 39.87 percent holding in T2CN’s common shares. The investment in T2CN was accounted for under the equity method. The first payment was paid on February 12, 2007, which consisted of approximately US$9.4 million, including related costs, in cash and 173,814 shares of common stock of GigaMedia, valued at approximately US$2.1 million. The value of the 173,814 common shares issued was determined based on the market price of GigaMedia’s common shares at the time the terms of acquisition were agreed to and the number of shares became fixed. The remaining purchase price of US$7.8 million was paid in cash on August 15, 2007.

          In May 2007, we acquired an additional 7,500,000 convertible preferred shares of T2CN for all-cash consideration of US$75 thousand, pursuant to our exercise of the rights stated in a shareholder agreement which we entered into with T2CN and certain of its shareholders in April 2006, which was amended and restated in November 2006. We were granted rights to subscribe for additional convertible preferred shares of T2CN based on the financial performance of T2CN during each of the twelve-month periods ending March 31, 2007 and December 31, 2007.

          In June 2007, we entered into a voting trust agreement with a shareholder of T2CN, pursuant to which we obtained voting rights over an additional 1.28 percent of the outstanding voting rights of T2CN. This voting trust agreement expired August 31, 2007.

          In July 2007, we converted our 15,000,000 convertible voting preferred shares of T2CN into 15,000,000 common shares. We also acquired an additional 5,494,755 common shares of T2CN for approximately US$3.7 million in cash and 52,571 shares of common stock of GigaMedia, valued at approximately US$656 thousand. The value of the 52,571 common shares issued was determined based on the market price of GigaMedia’s common shares at the time the terms of acquisition were agreed to and the number of shares became fixed.

          In connections with the acquisition, we recorded goodwill of US$29.4 million. Such goodwill amount is non-deductible for tax purposes. Since June 1, 2007, results of T2CN’s operations have been included on our consolidated financial statements under the online game and service business. The identified intangible assets are being amortized on a straight-line basis over their useful lives of 3.5 years.

2008

          On May 26, 2008, we acquired 4,500,000 ordinary shares of T2CN for an all-cash consideration of approximately US$3.4 million. The purchase price allocation for this acquisition is not considered final as of the date of this annual report and our Company is still reviewing all the assumptions and calculations used in the allocation.

          In the absence of a quoted market price for these businesses, the acquisition prices of these businesses were determined based on management’s estimates for the fair value of the acquired net assets, including goodwill and intangibles. We determined the purchase price allocation based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed at the date of acquisition. These estimates were conducted according to recognized valuation techniques with management’s assessment based on industry knowledge and experience. Any excess of cost over the net amounts of the fair value assigned to the assets acquired and liabilities assumed is recorded as goodwill. The actual fair value of such acquired net assets may differ significantly from management’s estimates.

Critical Accounting Policies

          The discussion and analysis of our financial condition and results of operations are derived from our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S., or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities as of the date of the consolidated financial statements. We continually evaluate our estimates and assumptions, which are based on historical experience and other various factors that we believe are reasonable under the circumstances. The results of these estimates and assumptions form the basis for making judgments about the carrying values of certain assets and liabilities. Our actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussions address the most critical accounting policies applicable to our Company, which are those that are most important to the portrayal of the financial condition and results of operations of our Company, and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Acquisitions

          Our Company accounts for acquisitions using the purchase method as required by FAS No. 141, “Business Combinations,” (“FAS 141”). Under FAS 141, the acquiring company allocates the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition, including intangible assets that can be identified. The purchase price in excess of the fair value of the net assets and liabilities identified is recorded as goodwill, for which the provisions of FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”) apply.

Revenue Recognition

          Our Company recognizes revenues when persuasive evidence of an arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable, and collectability is reasonably assured. We present the sales taxes assessed by governmental authorities on our revenue transactions on a net basis in our consolidated financial statements.

          Our Company enters into multiple-element revenue arrangements, which may include any combination of services, software, and/or products. To the extent that a deliverable in a multiple-element arrangement is subject to specific guidance, whether and/or how to separate multiple deliverable arrangements into separate units of accounting (separability) and how to allocate the arrangement consideration among those separate units of accounting (allocation) for that deliverable is accounted for in accordance with such specific guidance. All other deliverables in multiple-element arrangements are accounted for in accordance with Emerging Issues Task Force (“EITF “) 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”).

          In addition to the aforementioned general policies, the following are the specific revenue recognition policies for each major category of revenue.

Gaming Software and Service Revenues

          Gaming software and service revenues are related to software developed by us as well as license and support services we provide for online real-money gaming solutions and applications.

          Under the provisions of FIN 46(R), the results of UIM have been incorporated into our consolidated financial statements. UIM and GigaMedia are separately owned. (See Note 3 of our consolidated financial statements for additional information.) Our software licensing and support service revenues are based upon a percentage of gross receipts generated by UIM’s online gaming operations and are recognized monthly. Software licensing and support service revenues we receive from providing such services to UIM have been eliminated in consolidation.

          UIM generates revenue by providing and promoting online games of skill and chance that are available on its free download gaming software. Multiple-element revenue arrangements involving UIM’s provision of software and software-related elements to customers are accounted for in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP 97-2”). UIM’s online gaming service is inseparable from the software element involved and UIM does not sell each element separately. UIM’s online gaming service does not involve significant production, modification, or customization of the gaming software. Revenues derived from UIM’s online gaming software platform, which are included on our consolidated financial statements in accordance with FIN 46(R), are recognized at the time games are played and are net of player winnings. Transaction fee revenues derived from UIM’s online multi-player poker platform are recognized as services are provided. Commissions and other related expenses are charged to expenses as incurred.

Online Game and Service Revenues

          Online game and service revenues are related to our online game and service business that operates play-for-fun games online in Asia.

          Online game revenues are collected through the sale of online game points, pre-paid cards, and game packs. Virtual online game points are sold directly to end-users who can make the payments through credit cards, Internet ATMs or telecommunication service operators. Physical pre-paid cards and game packs are sold through distributors and convenience stores. Proceeds from sales of physical cards and game packs, net of sales discounts, and online game points are deferred (i) when received and revenue is recognized upon the actual usage of the playing time or in-game virtual items by the end-users, (ii) over the estimated useful life of virtual items, or (iii) when the sold game points expire and are no longer eligible to access the online games or products in accordance with our published game points expiration policy.

          In accordance with EITF 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” we report sales of virtual online game points on a gross basis. In the sales of virtual online game points, we act as principal and we have latitude in establishing price. Fixed percentage fees retained by service providers for payment processing related to our online game services are recognized as cost of online game revenues.

          Online game and service revenues also include revenues derived from online advertising arrangements, sponsorship arrangements, or a combination of both. These service arrangements allow advertisers to place advertisements on particular areas of our Company’s Web site and online games platforms over a stated period of time. Service revenues from online advertising arrangements are recognized ratably over the displayed period of the contract when the collectability is reasonably assured.

Internet Access and Service Revenues

          Internet access and service revenues include revenues derived from provision of cable modem Internet access and services, Internet access and services to corporate customers, IP bandwidth services to cable operators that enable them to offer their own cable modem services, certain Internet access-related services including non-refundable activation fees, billing and consulting services and other value-added services, and an ADSL Internet access and services business, which we sold in May 2006 (see Note 4 of our consolidated financial statements for additional information).

          Cable modem, ADSL, and corporate revenues are recorded net of discounts, and in the case of our cable modem and corporate services, net of fees paid to our cable partners in accordance with revenue sharing agreements in effect between our Company and our cable partners. Customers have a choice of paying either monthly or in advance for a certain period of time, for which they receive corresponding discounts. We record any advanced payment receipts deterred revenues included in other current liabilities on our consolidated financial statements and amortize such revenues over the subscription period. Revenues related to provision of bandwidth to cable operators are calculated in accordance with revenue generated by cable operators, or subscriber numbers, or the level of bandwidth usage. Non-refundable activation fees are combined with our Company’s Internet access revenues as a single unit of accounting. Since activation fees are not in exchange for services performed that represent the culmination of a separate earnings process, such fees are deferred in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition.” As part of our Internet access-related services, our Company also provides a variety of value-added services to corporate customers including billing, consulting, co-location, and VPN services, and premium mail, Web storage space, and online photo albums, to retail customers. The value-added services are not bundled together as a group of services within one contract, nor are they bundled with any of our Company’s broadband access services. They are billed separately.

          All the Internet access and service revenues are recognized on a straight-line basis over the subscription period or for the period in which the service is performed if no significant Company obligations remain and collection of the receivables is reasonably assured.

          Our Company also provides cable modem equipment and Internet access-related equipment solutions to our customers on an operating lease basis. The rental service is bundled with the access service contract. Pursuant to EITF 00-21 and Statement of Financial Accounting Standards (“FAS”) No.13, “Accounting for Leases” (“FAS 13”), the contract considerations are allocated among/between the FAS 13 deliverable and non-FAS 13 deliverable(s) based on their relative fair values. For the leased cable modem, the amounts attributable to the rental elements are negligible and rental revenue is recognized over the same period as the access service is rendered. Our Company therefore does not allocate the FAS 13 deliverable separately from the total contract considerations. For leased Internet access-related equipment solutions, the FAS 13 element is separated from the contract considerations and reported under the caption, “Other Revenues.”

Other Revenues

          Other revenues consist of sales of other Internet access-related products and rental income from the lease of Internet access-related equipment to subscribers of our Company’s Internet access and service business, and are recognized when products are delivered or services are provided.

Discontinued Operations

          For 2005, a portion of our Company’s revenues was generated from retail sales of music merchandise comprised of pre-recorded music (including compact discs and audio cassettes), video (including DVD and pre-recorded video cassettes), video games and other complementary products (including electronics, accessories, blank tapes and CD-Rs). Revenues from these retail sales were recognized at the point of sale to the consumer, at which time payment was tendered. Our Company’s policy was to not accept sales refunds or exchanges.

          We disposed of our music distribution business in September 2005 and as a result have classified the income from these revenue-generating activities as part of discontinued operations. (See Note 4 of our consolidated financial statements for additional information.)

Player Account Balances

          Player account balances are related to player deposits from our gaming software and service business. Player account balances are presented as current liabilities, which are first accrued for in full upon the receipt of player deposits, and increased or decreased based on player activities, including player wins or losses, withdrawals or refunds.

Deferred Revenues

          Deferred revenues are included in other current liabilities and consist of the prepaid income related to our online game and services business and the advance payment receipts related to Internet access and service business.

Operating Costs

          Operating costs consist primarily of gaming software and online game processing costs, online game royalties, production costs for prepaid game cards and game packs, amortization of intangible assets, customer service department costs for our online game and Internet access businesses, Internet access engineering costs, Internet access bandwidth costs, and depreciation, maintenance and other overhead expenses directly attributable to the provision of gaming software and services, online game and service revenues, and Internet access and service revenues.

Prepaid Licensing and Royalty Fees

          Our Company, through our subsidiaries and VIE subsidiaries, entered into several license agreements with licensors to acquire licenses for the usage, marketing, distribution, selling and publishing of multi-player online games.

          Prepaid licensing fees paid to licensors are capitalized when technological feasibility is achieved and amortized on a straight-line basis over the shorter of the useful economic life of the relevant online game or license period, which is usually two to five years. The annual amortization shall be modified if the ratio of current gross revenues for a game license and the total of current and anticipated future gross revenues for that game license is greater than the amount computed using the straight-line method.

          Prepaid royalty fees and related costs are recognized in the period in which the related online game revenue is recognized.

Allowance for Doubtful Accounts

          An allowance for doubtful accounts is provided based on an evaluation of collectibility of notes receivable, accounts receivable and other receivables. An allowance for doubtful accounts is also provided, when considered necessary, to loans receivable. We review loans receivable individually and the evaluation primarily consists of an analysis based upon current information available about the borrowers.

          For those accounts in which a loss is probable, we record a specific reserve. Receivable losses are charged against the allowance when the Company believes the uncollectability of the receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Marketable Securities

          All of our Company’s investments in marketable securities are classified as available-for-sale. Available-for-sale marketable securities are accounted for in accordance with FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“FAS 115”). These marketable securities are stated at fair value with any unrealized gains or losses recorded in accumulated other comprehensive income (loss) in shareholders’ equity until realized.

          Other-than-temporary declines in market value from original cost, if any, are included on the Consolidated Statements of Operations. In determining whether an other-than-temporary decline in market value has occurred, our Company considers the period of time that, and extent to which, fair value of the investment is below its cost. Realized gains and losses also are included in non-operating income and expense on the Consolidated Statements of Operations.

          We had approximately US$13.8 million and US$11.4 million of investments classified as current marketable securities as of December 31, 2006 and 2007, respectively. As of December 31, 2006 and 2007, the balances of unrealized gains from these securities

were approximately US$0.6 million and US$0.7 million, respectively. There is no unrealized loss for current marketable securities as of December 31, 2007. See Note 9 of our financial statements for additional information.

          We had approximately US$25.0 million and US$21.0 million of investments classified as non-current marketable securities as of December 31, 2006 and 2007, respectively. As of December 31, 2007, our non-current marketable securities consisted primarily of our investments in Infocomm Asia, XL Games and Neostorm.

          All of our Company’s marketable securities noncurrent are invested in convertible preferred shares. The convertible preferred shares were carried at estimated fair value, with no unrealized gain or loss as of December 31, 2006 and 2007.

          The preferred shares are convertible into common shares on a 1:1 basis, subject to certain adjustments, and shall be automatically converted upon certain conditions outlined in the agreements. The convertible preferred shares are all redeemable at certain agreed-upon conditions.

          The embedded conversion options of the convertible preferred shares do not meet the definition of derivative instruments under FAS 133, “Accounting for Derivatives Instruments and Hedging Activities,” (“FAS 133”) and are not bifurcated from the preferred share investment.

          We have considered the guidance provided in EITF 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investment Other Than Common Stock” (“EITF 02-14”), to determine whether our investments in preferred share are in-substance common shares, which should be accounted for under the equity method. Given that our convertible preferred shares have substantive redemption rights, we have accounted for them as debt securities under FAS 115. We assessed the estimated fair values and potential impairment of our investments and concluded that the estimated fair values are approximately represented by their carrying costs.

Investments

          We apply Accounting Principles Board Opinion (“APB”) No. 18, “The Equity Method of Accounting for Investments in Common Stock” in accounting for our investments.

          Equity investments in non-publicly traded securities, over which our Company has no ability to exercise significant influence are accounted for under the cost method. The equity investments accounted for under the cost method as of December 31, 2006 and 2007 were US$0 thousand and US$1,850 thousand, respectively.

          Equity investments in companies over which our Company has the ability to exercise significant influence but does not hold a controlling interest are accounted for under the equity method, and our Company’s proportionate share of income or losses is recorded in non-operating income or expenses. The difference between the cost of the acquisition and the Company’s share of fair value of the net identifiable assets is recognized as goodwill and is included in the carrying amount of the investment. The equity investments accounted for under the equity method as of December 31, 2006 and 2007 were US$0 thousand and US$2,762 thousand, respectively.

          Unrealized losses that are considered other-than-temporary, if any, are included on the consolidated statements of operations. Realized gains and losses, measured against carrying amount, are also included on the Consolidated Statements of Operations. There was no other-than-temporary loss in 2007.

          As of December 31, 2007, our investments consisted primarily of CJIT2 Holding Limited (“CJIT2”), Softstar Entertainment Inc. (“Softstar”), and Rock Mobile (Cayman) Corporation (“RMC”). Equity investments in CJIT2 are accounted for under the equity method. Other investments are accounted for using the cost method.

Impairment of Intangible Assets, Goodwill and Long-Lived Assets

          We have significant amortizable intangible assets arising from the acquisition of CESL, FunTown and T2CN, and the capitalization of software development costs in our gaming software and service business and online game and service business. Our

Company’s intangible assets with definite lives are being amortized by the straight-line method over their estimated useful lives, ranging from three to ten years. As of December 31, 2007, the balance of amortizable intangible assets was US$15.2 million. Intangible assets with an indefinite useful life of approximately US$10.9 million were not amortized.

          Goodwill represents the adjusted amount of the cost of acquisitions in excess of the fair value of net assets acquired in purchase transactions. Effective January 1, 2002, we adopted FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). Under the provisions of FAS 142, goodwill is no longer subject to amortization.

          Potential impairment of goodwill and intangible assets with indefinite useful lives has been evaluated using the specific guidance provided by FAS 142. This impairment analysis is performed at the reporting unit level at least annually, or whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable from its related future undiscounted cash flows. Impairment is measured as the difference between the carrying amounts and the fair value of the assets and is recognized as a loss from operations.

          Potential impairment of long-lived assets other than goodwill and intangible assets not being amortized has been evaluated using the guidance provided by FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”). This impairment analysis is performed at least annually, or whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable from its related future undiscounted cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The estimate of fair value is generally based on quoted market prices or on the best available information, including prices for similar assets and the results of using other valuation techniques. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value.

          We performed an impairment analysis of our goodwill, intangible assets and long-lived assets as of December 31, 2007 and recorded no impairment loss for 2007. However, as the value of goodwill, intangible assets and long-lived assets and its impairment are determined based on a number of assumptions and management’s estimates, a change in assumptions and circumstances in the future may have a significant impact on our results of operations in the period when a change occurs.

Income Taxes

          Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We recognize the tax benefit from investment credits and certain equity investments using the flow-through method. Loss carryforwards and investment credits are measured using the enacted tax rate and laws that will be in effect in different jurisdictions in which we operate when the differences are expected to reverse. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the tax rate’s enactment date. Deferred tax assets are subject to valuation allowances based upon the management’s estimate of realization. Due to slow market growth and the strong competition we face in our Internet access and service business and certain subsidiaries and VIE subsidiaries of our online game and services business that will not be able to utilize their operating loss carryforwards, we made a substantial allowance for all of the aggregate net deferred tax assets as of December 31, 2007. Actual results may differ significantly from management’s estimate.

          Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Under FIN 48, our Company recognizes the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that has greater than a fifty percent likelihood of being realized upon ultimate settlement. The interest and penalties are reflected as income tax benefits (expenses) on our consolidated financial statements. The current portion of FIN 48 tax liabilities is included in income tax liability and the non-current portion of tax liabilities is included in other liabilities on the Consolidated Balance Sheets. See Note 22 of our consolidated financial statements for additional information.

Minority Interest

          Minority interest includes 100 percent of the common stock of UIM held by third-party shareholders. UIM was deemed a VIE as defined by FIN 46(R), and our Company was considered the primary beneficiary of UIM. Under the provisions of FIN 46(R), we have incorporated the results of UIM into our 2005, 2006 and 2007 consolidated financial statements, even though we own none of UIM’s equity. (See Note 3 of our financial statements, “Variable-Interest Entities,” for more information.)

          Beginning in December 2006, minority interest also includes 30 percent of the common stock of Dragongate Enterprises Limited (“Dragongate Enterprises”), which is held by Cyber Gateway Pte Ltd (“Cyber Gateway”), which is 100 percent owned by Infocomm Asia Holdings Pte. Ltd. (“Infocomm Asia”). We also own 500,000 voting convertible preferred shares of Infocomm Asia. (See Note 11 of our financial statements, “Marketable Securities — Noncurrent,” for additional information.)

          Beginning in June 2007, we consolidated T2CN and the results of T2CN have been incorporated on the consolidated financial statements. As of December 31, 2007, minority interest also includes 41.89 percent of the common stock of T2CN, which is held by third-party shareholders. (See Note 5 of our financial statements, “Acquisitions,” for more information.)

          Prior to the sale of our music distribution business in September 2005, minority interest also included 41.42 percent of the common stock of G-Music Limited held by third-party shareholders. Subsequent to the divestiture of G-Music Limited, related minority interest income was included in discontinued operations.

Stock-Based Compensation

          Prior to January 1, 2006, we elected to measure stock-based compensation expense using the intrinsic value method prescribed by APB No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), as interpreted, with pro-forma disclosures of net income and earnings per share, as if the fair-value method of accounting defined in FAS No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”) were used.

          Effective January 1, 2006, we adopted the fair value recognition provisions of FAS No. 123(R), “Share-Based Payment” (“FAS 123(R)”), using the modified prospective method and therefore have not restated results for prior periods. Under this transition method, stock-based compensation expense for the years ended December 31, 2006 and 2007 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested, as of January 1, 2006 based on the grant date fair value estimated in accordance with the original provision of FAS 123. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provision of FAS 123(R). FAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period. In connection with the adoption of FAS 123(R), we changed our method of attributing the value of stock-based compensation to expense from the graded-vesting method to the straight-line method. Compensation expense for all share-based payment awards granted prior to January 1, 2006 have been recognized using the graded-vesting method, while compensation expense for all share-based payment awards granted subsequent to January 1, 2006 are recognized using the straight-line method. Since our Company had not recorded any compensation cost in our Statement of Operations prior to the adoption of FAS 123(R), no cumulative effect adjustment was recorded upon adoption. We have also applied the provisions of Staff Accounting Bulletin No. 107 (“SAB 107”) in our adoption of FAS 123(R). For more information, see Note 20 of our consolidated financial statements.

          Our Company accounts for shares and stock options granted to non-employees in accordance with EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or In Conjunction with Selling Goods or Services” (EITF 96-18). Accordingly, we measure the fair value of the equity instruments granted to non-employees at the earlier of the performance commitment date or when performance is completed.

Retirement Plan and Net Periodic Pension Cost

          Under a defined benefit pension plan, net periodic pension cost, which includes service cost, interest cost, expected return on plan assets, amortization of unrecognized net transition obligation and gains or losses on plan assets, is recognized based on an actuarial valuation report. Effective December 31, 2006, our Company adopted the provisions of FAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Post-Retirement Plans — An Amendment of FASB Statements Nos. 87, 88, 106, and 132(R)” (“FAS 158”). FAS 158 requires the recognition of the funded status of pension plans and non-pension post-retirement benefit plans (retirement-

related benefit plans) as an asset or a liability on the Consolidated Balance Sheets. In addition, the pronouncement requires previously unrecognized items, such as actuarial gains and unrecognized prior service costs or credits, to be recognized on the Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss). The provisions of FAS 158 were adopted pursuant to the transition provisions therein. See Note 18 of our financial statements for additional information, including the incremental effect of the adoption on our consolidated financial statements.

          Under our defined contribution pension plan, net periodic pension cost is recognized as incurred.

Recent Accounting Pronouncements

          In September 2006, the FASB issued FAS No. 157, “Fair Value Measures” (“FAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. The statement will be effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Positions No. 157-1 and No. 157-2 which partially defer the effective date of FAS 157 for one year for certain non-financial assets and liabilities, and remove certain leasing transactions from its scope. We are in the process of determining what effect, if any, the adoption of FAS 157 will have on our consolidated financial statements.

          In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“FAS 159”). FAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date. FAS 159 will be effective for fiscal years beginning after November 15, 2007. We are in the process of determining what effect, if any, the adoption of FAS 159 will have on our consolidated financial statements.

          In June 2007, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-3”), that would require non-refundable advance payments made by the Company for future R&D activities to be deferred and capitalized and recognized as an expense as the related goods are delivered or the related services are performed by the Company. The adoption of EITF 07-3 had no material impact on our consolidated financial statements.

          In December 2007, the FASB issued FAS No. 141(R), “Business Combinations” (“FAS 141(R)”). Under FAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are in the process of determining what effect, if any, the adoption of FAS 141(R) will have on our consolidated financial statements.

          In December 2007, the FASB issued FAS No. 160, “Non-controlling Interests in consolidated financial statements — an Amendment of ARB No. 51” (“FAS 160”). FAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 will be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are in the process of determining what effect, if any, the adoption of FAS 160 will have on our consolidated financial statements.

Foreign Currency Translation

          The consolidated financial statements of our Company and our subsidiaries have been reported in U.S. dollars. Assets and liabilities denominated in non-U.S. currency are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at weighted-average rates of exchange prevailing during the year. Cumulative translation adjustments resulting from this process are charged or credited to other comprehensive income in shareholders’ equity. Gains and losses on foreign currency transactions are included in other income and expenses.

Taxation

          On December 31, 2007, we had net operating loss carryforwards for tax purposes of approximately US$3.5 million and US$1.4 million, arising from our Internet access and service business in Taiwan our online games business in the PRC, respectively. These operating loss carryforwards will expire at various times from December 2008 through December 2012. On December 31, 2007,

we had a deferred tax asset of US$3.0 million, relating principally to our net operating loss. Our ability to realize the value of our deferred tax asset depends on many factors, including (among others) an assessment of our ability to generate taxable income, overall industry outlook and the outlook for the Taiwan and PRC economies. We value our deferred income tax assets on an ongoing basis and make valuation allowances if, in our assessment, current results suggest that it is more likely than not that a portion or all of our deferred income tax assets will not be realized before their expiration. We determined that valuation allowance was required as of December 31, 2005, 2006 and 2007.

          As per the R.O.C. income tax laws, all retained earnings generated beginning January 1, 1998 by our subsidiaries under Taiwan law and not distributed to us as dividends in the following year are assessed a 10 percent retained earnings tax. This rule applies primarily to our Internet access and service business and our FunTown online games portal, whose principal operating entities are incorporated under Taiwan law.

          On January 1, 2006, the R.O.C. government enacted the AMT Act. Taxes imposed under the AMT Act are supplemental tax payable if the income tax payable pursuant to the R.O.C. Income Tax Act is below the minimum amount prescribed under the AMT Act. The AMT rate for business entities is 10 percent. The taxable income for calculating the AMT includes most income that is exempted from income tax under various legislation such as tax holidays and investment tax credits. For example, gains on disposal of marketable securities from our Taiwan-based entities were exempt from income tax based on Taiwan tax laws prior to the AMT Act. However, such gains will need to be included for the purpose of calculating the AMT.

          China-based operations derived mainly from T2CN are subject to PRC corporate income tax. T2CN’s subsidiaries in the PRC, which include T2 Technology and J-Town (Shanghai) Technology Co., Ltd. (“J-Town”), and VIE subsidiaries in the PRC, which include T2 Entertainment and T2 Advertisement, are subject to Enterprise Income Tax (“EIT”) on the taxable income as reported in their respective statutory financial statements and adjusted in accordance with the Income Tax Law of the PRC concerning Foreign Investment Enterprise and Foreign Enterprises and the Enterprise Income Tax Law (collectively the “PRC Income Tax Laws”). Pursuant to the PRC Income Tax Laws, T2CN’s subsidiaries and VIE subsidiaries in the PRC are generally subject to EIT at a statutory rate of 33 percent for the year ended December 31, 2007. However, the subsidiaries that are located in the Pudong New District of Shanghai, including T2 Technology and J-Town, as approved by related tax authorities, are subject to a 15 percent preferential EIT rate.

          In 2007, T2 Entertainment and J-Town each received approval from certain government authorities to be classified as a “Software Company.” This classification, subject to annual inspection, entitles these two entities to enjoy a two-year EIT exemption for 2006 and 2007, followed by three years of a 50 percent EIT tax reduction for 2008, 2009 and 2010, for which the related tax authorities have granted approval.

          Effective from January 1, 2008, T2CN shall determine and pay the corporate income tax in accordance with the Corporate Income Tax Law of the PRC (hereinafter “the new CIT Law”) as approved by the National People’s Congress on March 16, 2007. Under the new CIT law, the general applicable tax rate is reduced from 33 percent to 25 percent.

          The new CIT law provides that further detailed measures and regulations on the determination of taxable profit, tax incentives and grandfathering provisions will be issued by the State Council in due course. T2CN will assess the implications, if any, when the State Council announces additional regulations and guidance.

          The majority of our gaming software and service business is located outside the United States, with the exception of CIDC, an entity registered in Delaware which is subject to U.S. federal income tax, state tax and local tax. Current U.S. federal income tax rates and state and local tax rates applicable to our business for the year ended December 31, 2007 are 34.0 percent and 6.3 percent, respectively. Our operations in the United States did not have a significant tax impact on the Company’s consolidated financial statements.

Discussion of Results of Operations

Factors Affecting Our Performance

          We believe that the following are the principal factors affecting our results of operations:

          Acquisitions and disposals. We have made several significant acquisitions and dispositions of businesses during the past several years, and may enter into additional acquisition and disposition transactions in the future. Past acquisitions and dispositions have

had a significant impact on our results of operations over the past several years, and if we engage in such transactions in the future, the nature, amounts and timing of our revenues, expenses and cash flows and the nature and amounts our assets and liabilities are likely to be materially affected.

          Development of gaming software and service and online games industries. The online gaming and online games industries are in relatively early stages of development. We believe that our results of operations are likely to be affected by developments in these industries, including:

	•		the development and regulation of these industries generally;
	•		our adaptation to technological change;
	•		changing consumer preferences;
	•		legal development affecting these industries, in particular the gaming software and service industry; and
	•		general economic conditions in the markets where we or our licensees operate.

          Competition. All of our businesses are in industries that are extremely competitive. Our gaming software and online games businesses are characterized by rapid technological change and we face significant and intense competition from online gaming software design houses, application service providers and casual games operators. Our Internet access and service business has experienced a reduction in the number of new consumer subscribers and total consumer subscribers due to intense competition in the Internet access and services industry in Taiwan. The primary basis of competition in the Internet access business industry is price. Due to this intense competition, there may be a limited market opportunity for our broadband access services.

          For each of our businesses, we cannot assure you that we will be successful in adapting to technological developments and achieving widespread acceptance of our services before our competitors offer services similar to our current or prospective offerings. As a consequence, we may lose our existing customers and not expand our client base, which would have a material adverse effect on our revenues and financial condition.

          The table below presents, for the periods indicated, information regarding certain revenues and expense items for our consolidated operations. The presentation of financial information for the financial years ended December 31, 2005 and December 31, 2006 has been reclassified to conform with the current year presentation for the year ended December 31, 2007:

		For the year ended December 31,
		2005								2006								2007
						% of				Amount				% of				Amount				% of
		Amount in US$				total				in US$				total				in US$				total
		thousands				revenues				thousands				revenues				thousands				revenues
Particulars
OPERATING REVENUES
Gaming software and service revenues			22,511				50.9				55,019				58.3				118,950				71.3
Online game and service revenues			—				—				18,692				19.8				32,764				19.6
Internet access and service revenues			21,589				48.9				20,537				21.8				15,147				9.1
Other revenues			87				0.2				44				0.1				17				0.0
Total operating revenues			44,187				100.0				94,292				100.0				166,878				100.0
OPERATING COSTS
Cost of gaming software and service revenues			3,327				7.5				7,824				8.3				16,201				9.7
Cost of online game and service revenues			—				—				3,667				3.9				9,118				5.5
Cost of Internet access and service revenues			13,568				30.7				11,449				12.1				10,002				6.0
Cost of other revenues			488				1.1				391				0.4				223				0.1
Total operating costs			17,383				39.3				23,331				24.7				35,544				21.3
Gross profit			26,804				60.7				70,961				75.3				131,334				78.7

		For the year ended December 31,
		2005								2006								2007
						% of				Amount				% of				Amount				% of
		Amount in US$				total				in US$				total				in US$				total
		thousands				revenues				thousands				revenues				thousands				revenues
OPERATING EXPENSES
Product development and engineering expenses			3,562				8.1				5,738				6.1				7,911				4.7
Selling and marketing expenses			10,777				24.4				30,123				31.9				62,349				37.4
General and administrative expenses			7,892				17.9				12,421				13.2				22,240				13.3
Bad debt expense			207				0.4				715				0.8				743				0.5
Total operating expenses			22,438				50.8				48,997				52.0				93,243				55.9
Income from operations			4,366				9.9				21,964				23.3				38,091				22.8
NON-OPERATING INCOME (EXPENSES)			2,710				6.1				10,690				11.3				2,483				1.5
INCOME TAX BENEFIT (EXPENSE)			(436	)			(1.0	)			(1,549	)			(1.6	)			(403	)			(0.2	)
MINORITY INTEREST			(150	)			(0.3	)			(321	)			(0.4	)			(1,281	)			(0.8	)
INCOME FROM CONTINUING OPERATIONS			6,490				14.7				30,784				32.6				38,890				23.3
INCOME (LOSS) FROM DISCONTINUED OPERATIONS			(154	)			(0.4	)			—				—				—				—
NET INCOME			6,336				14.3				30,784				32.6				38,890				23.3