The Creative MuVo Slim was a notable addition to the flash memory MP3 line-up with a lovely slender form, a choice of 8 brilliant colors, and great usability. The MuVo2 1.0-inch microdrive MP3 digital audio player was released in 1.5GB, 4GB and 5GB capacities and saw overwhelming demand from the channels worldwide. The MuVo2 5GB is offered in a variety of 5 trendy colors. The Creative Zen Touch is the companys flagship high capacity MP3 digital audio player and was the first to be shipped with a 1.8 inch hard drive. It is a prime example of what consumers look for in a PDE device: great looks, great audio quality, ease-of-use, super-long battery life and large storage capacity. Its unique vertical scroll strip allows for fast, convenient searching of music files. The recently launched Creative Zen Portable Media Center (PMC) allows consumers to store and play back their favorite video clips, thousands of digital photos, as well as thousands of songs, and take all of them along with them wherever they go. Long battery life and an attractive display round off an impressive package. New products in the other product categories include: for audio, the flagship Sound Blaster Audigy 2 ZS Platinum Pro, which is the leading PC audio card for movies, games, and music; for speakers, Creative GigaWorks S750, the premier 7.1 speaker system offered by Creative which combines crystal-clear satellite speakers with a subwoofer offering thumping bass; and for workstation graphics, the 3Dlabs Wildcat Realizm which has set impressive new standards for professional graphics and has rocked the workstation market with its stunning image processing power. To have a comprehensive view of the breadth and beauty of the full range of Creatives new products, which includes many offerings in MP3 digital audio players, cameras, sound cards, external audio, speakers, workstation graphics, communications, keyboards and mice, I would like to invite you to visit the Creativex Showroom at our Singapore Headquarters and our www.creative.com web site. Looking ahead, we intend to continue focusing on growing revenue and gaining market share in the MP3 and PDE markets. We believe the growth we saw in the past year is just the beginning of the many new opportunities to grow our PDE revenues. There are significant further long term growth opportunities in the PDE market, driven mainly by the MP3 segment, which we believe has the potential to continue its exponential growth over the next few years. We also see significant opportunities to further build our direct-to-consumer business, and to aggressively pursue the OEM and ODM channels for our PDE products. Overall, we expect PDE to contribute more than 50% of total revenues in the current fiscal year. To support this growth, we have continued to expand our R&D resources in MP3 and PDE development to increase significantly our product offerings in this category. Our early success in this area is clearly visible in our MP3 players segment, where we expect to double the line of MP3 players from the present 8 lines to 16 lines by this year end, covering all segments of the MP3 market. I am so proud of the new lineup of MP3 players that we have for this holiday season, that I have decided to give all our valued shareholders a sneak preview of what I feel will be the hottest upcoming line of MP3 players in our arsenal the Zen Micro which you can see on the front and inside covers of this Annual Report. We will also need to significantly increase our investments in marketing. We have started an aggressive marketing campaign in Singapore, including both print and TV advertising, and it has achieved very effective results. Following the success in Singapore, we intend to scale the marketing campaign globally, starting initially with Asia, focusing on major cities. The PDE market will be very competitive and challenging. However, with the benefit of the experience we have gained from the PC market, which is marked by rapid changes in technology and market conditions, we have the ability to respond rapidly to changes in business conditions and rise to meet the competition and challenges in the PDE market. We believe we can remain quick and nimble, execute well on our plans, and be the strong leader in the PDE and MP3 digital audio player markets.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters set forth herein are forward-looking statements within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause Creatives actual results to differ materially. Such risks and uncertainties include: Creatives ability to timely develop new products that gain market acceptance and to manage frequent product transitions; competitive pressures in the marketplace; Creatives ability to successfully integrate acquisitions; potential fluctuations in quarterly results due to the seasonality of Creatives business and the difficulty of projecting such fluctuations; possible disruption in commercial activities caused by factors outside of Creatives control, such as terrorism, armed conflict and labor disputes; a reduction in demand for computer systems, peripherals and related consumer products as a result of poor economic conditions, social and political turmoil and major health concerns; the proliferation of sound functionality in new products from competitors at the application software, chip and operating system levels; the failure of cost-cutting measures to achieve anticipated cost reduction benefits; the deterioration of global equity markets; exposure to excess and obsolete inventory; Creatives reliance on sole or limited sources for many of its chips and other key components; component shortages which may impact Creatives ability to meet customer demand; Creatives ability to protect its proprietary rights; a reduction or cancellation of sales orders for Creative products; accelerated declines in the average selling prices of Creatives products; the vulnerability of certain markets to current and future currency fluctuations; the effects of restricted fuel availability and rising costs of fuel; fluctuations in the value and liquidity of Creatives investee companies; and the potential decrease in the trading volume and value of Creatives Ordinary Shares as a result of Creatives intended delisting from NASDAQ and elimination of its U.S. public reporting obligations. For further information regarding the risks and uncertainties associated with Creatives business, please refer to its filings with the SEC, including its Form 20-F for fiscal 2003 filed with the SEC. Creative undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in Creatives expectations.

VALUATION OF INVESTMENTS (Contd) In order to determine whether a decline in value is other-than-temporary, Creative evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook for the company, including key operational and cash flow metrics, current market conditions and future trends in the companys industry, and the companys relative competitive position within the industry; and Creatives intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS Creative uses the purchase method of accounting for business combinations, in line with Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standard (SFAS) No. 141 Business Combinations. The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price paid to the fair value of the net tangible and intangible assets acquired, including in-process technology. The allocation of the purchase price was based on independent appraisals. The amounts and useful lives assigned to intangible assets could impact future amortization; the amount assigned to in-process technology is expensed immediately. If the assumptions and estimates used to allocate the purchase price are not correct, purchase price adjustments or future asset impairment charges could be required. Creative reviews for impairment of goodwill on an annual basis. Reviews for impairment of goodwill and other intangible assets are also conducted whenever events indicate that the carrying amount might not be recoverable. Factors that Creative may consider important which could trigger an impairment review include the followings: significant under performance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for Creatives overall business; significant negative industry or economic trends; significant decline in Creatives stock price for a sustained period; and Creatives market capitalization relative to net book value.
When the existence of one or more of the above factors indicate that the carrying value of goodwill and other intangibles assets may be impaired, Creative measures the amount of impairment based on a projected discounted cash flow method using a discount rate determined by the management to be commensurate with the risk inherent in Creatives current business model.

ASSESSMENT OF THE PROBABILITY OF THE OUTCOME OF CURRENT LITIGATION Creative records accruals for loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
ACCOUNTING FOR INCOME TAXES In preparation of the financial statements, Creative estimates its income taxes for each of the jurisdictions in which it operates. This involves estimating the actual current tax exposure and assessing temporary differences resulting from differing treatment of items, such as reserves and accruals for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within Creatives consolidated balance sheet. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and future taxable income for purposes of assessing the ability to realize any future benefit from its deferred tax assets. Valuation allowance is provided for Creatives deferred tax assets as management believes substantial uncertainty exists regarding the realizability of these assets.
RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected statement of operations data as a percentage of sales:
Years ended June Sales, net Cost of goods sold Gross profit 100 % % % 67 33
Operating expenses: Selling, general and administrative Research and development Other charges Operating income Gross (Loss) from investments, net Interest income and other, net Income (loss) before income taxes and minority interest Provision for income taxes Minority interest in (income) loss Net income (loss) % 4 (1) (1) 3 % (6) 1 (1) (1) (2) %
Creatives net sales, by product category, for the past three fiscal years were as follows:
Percentage of Net Sales for fiscal years ended June Audio Speakers Personal Digital Entertainment Graphics & Video Communication Others 25 % 23 % 33 % 8% 4% 7% % 23 % 18 % 12 % 6% 8% % 21 % 9% 6% 9% 11 %
YEAR ENDED JUNE 30, 2004 COMPARED TO YEAR ENDED JUNE 30, 2003
Net sales Net sales for the year ended June 30, 2004 increased by 16% compared to the year ended June 30, 2003. The revenue increase was mainly attributable to Creatives strategy of focusing on audio products, speakers and personal digital entertainment (PDE) products outside the personal computer (PC) box. Audio product sales (Sound Blaster audio cards and chipsets) declined by 14% compared to fiscal year 2003, and as a percentage of sales, represented 25% of sales in fiscal 2004 compared to 33% in fiscal 2003. Sales for high-end retail audio products such as the Audigy line of products were higher in fiscal 2004 compared to fiscal 2003. Overall audio sales in fiscal 2004 were lower compared to fiscal 2003 primarily due to a drop in sales through original equipment manufacturers (OEM), particularly sales of low-end audio products. Sales of speakers increased by 16% in fiscal 2004 compared to fiscal 2003 mainly due to strong demand for new models of highend GigaWorks speakers, I-Trigue speakers and portable TravelSound speakers. As a percentage of sales, speakers remained at 23% of sales in fiscal 2004 compared to fiscal 2003. Sales of PDE products, which include digital audio players and digital cameras, increased by 115% compared to fiscal 2003 and comprised 33% of sales compared to 18% in fiscal 2003. In fiscal 2004, Creative launched a number of new digital audio players and expanded its existing MuVo family of flash players and Zen family of hard drive players which helped the company to strengthen its market share in digital audio players. The significant increase in PDE sales in fiscal 2004 was driven by strong demand for MuVo flash players, MuVo2 hard drive players and the Jukebox Zen. Sales of graphics products in fiscal 2004 decreased by 21% compared to fiscal 2003, and as a percentage of sales, decreased from 12% in fiscal 2003 to 8% in fiscal 2004. Sales of communication products decreased by 32% in fiscal 2004 compared to fiscal 2003, and as a percentage of sales, decreased from 6% in fiscal 2003 to 4% in fiscal 2004. Sales of communication products were higher in fiscal 2003 due to a major deal to supply broadband modems to a customer between March 2002 and September 2002. Sales of other products, which include mouse and keyboard products, music products, accessories and other miscellaneous items, increased by 17% in fiscal 2004 compared to fiscal 2003 but, as a percentage of sales decreased from 8% in fiscal 2003 to 7% in fiscal 2004.

Gross profit Gross profit in fiscal 2004 was 34.5% of sales compared to 35.5% in fiscal 2003. The decrease in gross profit was primarily attributable to the mix of products sold in fiscal 2004 with a higher percentage of sales coming from PDE products and a lower percentage of sales coming from audio products. However, Creative was able to maintain a relatively high level of gross margin primarily due to its focus on products outside the PC box.
Operating expenses Selling, general and administrative (SG&A) expenses in fiscal 2004 increased marginally by 3% compared to fiscal 2003. The increase in SG&A expenses was mainly attributable to an increase in sales and marketing expenses which were in line with the increase in net sales, and an increase in expenses related to the companys European operations due to the strengthening of the Euro compared to the U.S. dollar during fiscal 2004. As a percentage of sales, SG&A expenses were 21% of sales compared to 23% of sales in fiscal 2003. Research and development (R&D) expenses increased by 18% primarily due to an increase in resources to develop new products. As a percentage of sales, R&D expenses remained at 8% of sales in fiscal 2004 compared to fiscal 2003.
Net investment gain (loss) Net investment gain of $72.6 million in fiscal 2004 comprised a $52.9 million gain from sales of investments and a $23.1 million non-cash gain on a deemed disposal of interests in an associated company, SigmaTel, Inc (SigmaTel), offset by $3.4 million in permanent write-downs of unquoted investments. The deemed disposal of interests in SigmaTel resulted from SigmaTels initial public offering common stock in the United States. As a result of SigmaTels initial public offering, Creatives ownership percentage in the company was reduced even though Creative did not dispose any of its shareholdings
during the initial public offering. This reduction was treated in accordance with U.S. GAAP as a deemed disposal, which represents the net increase in Creatives share of the net assets of SigmaTel, as a result of the initial public offering. Net gain of $52.9 million from sales of investments includes a $38.1 million net gain from the sale of interests in SigmaTel (see Note 15 of Notes to Consolidated Financial Statements). Net investment loss of $6.0 million in fiscal 2003 included permanent write-downs of quoted and unquoted investments by $13.6 million offset partially by net gains from sale of quoted investments of $7.6 million.

Net interest and other income Net interest and other income increased from $4.9 million in fiscal 2003 to $9.3 million in fiscal 2004. The increase was mainly due to higher net interest income, which increased from $1.1 million in fiscal 2003 to $3.6 million in fiscal 2004, and an increase in share of associated profits by $2.5 million to $0.3 million in fiscal 2004, compared to share of losses of $2.2 million in fiscal 2003. Exchange gain was reduced by $0.9 million to $4.5 million in fiscal 2004 compared to $5.4 million in fiscal 2003.
Provision for income taxes Creative was granted a new Pioneer Certificate under the International Headquarters Award that will expire in March 2010. Under the new Pioneer certificate, profits arising from qualifying activities will be exempted from income tax in Singapore, subject to certain conditions. As a result of obtaining the new Pioneer Certificate, fiscal 2004 tax write-back includes a $12.3 million reversal of income taxes. The reversal was related to corporate taxes provided for in full for profits arising from qualifying activities from the commencement date of the new Pioneer Certificate until the second quarter of fiscal 2004, based on the standard tax rates of 24.5% for fiscal 2001, 22% for fiscal 2002 and 2003, and 20% for fiscal 2004. These standard corporate income tax rates continue to be applicable to profits arising from activities excluded from the new Pioneer Certificate. Excluding the $12.3 million reversal of income taxes, Creatives provision for income taxes for fiscal 2004 as a percentage of operating income was 8% compared to 10% in the prior fiscal year. The lower tax provision in fiscal 2004 was primarily due to changes in the mix of taxable income arising from various geographical regions and the new Pioneer Certificate granted to Creative. YEAR ENDED JUNE 30, 2003 COMPARED TO YEAR ENDED JUNE 30, 2002
Net sales Net sales for the year ended June 30, 2003 decreased by 12.9% compared to the year ended June 30, 2002. The lower net sales was mainly attributed to the difficult global economic climate where several major U.S. retailers have encountered slowing sales. Audio product sales for fiscal year 2003 decreased by 34% compared to fiscal year 2002, and as a percentage of total sales, decreased from 44% in fiscal 2002 to 33% in fiscal 2003. The decrease in audio product sales was primarily due to the decline in sales to the system integrator market and a drop off in sales of low-end audio products. Sales of speakers in fiscal 2003 decreased marginally by 4% compared to fiscal 2002, mainly due to reduced sales of non-multimedia speakers offset by higher demand for new models of multimedia speakers. Speakers represented 23% of sales in fiscal 2003 compared with 21% of sales in fiscal 2002. Sales of PDE products increased by 71% in fiscal 2003 compared to fiscal 2002 and represented 18% of sales in fiscal 2003 as compared to 9% of sales in fiscal 2002. The significant increase was driven by strong demand for the NOMAD MuVo and the introduction of the NOMAD Jukebox Zen in fiscal 2003. Sales of graphics and video products increased by 78% in fiscal 2003 compared to fiscal 2002 and represented 12% of sales in fiscal 2003 compared with 6% of sales in fiscal 2002. The significant increase in graphic card sales was primarily due to sales of graphic cards by 3Dlabs, which was acquired by Creative in May 2002. Sales of communication products decreased by 36.1% in fiscal 2003 compared to fiscal 2002 and represented 6% of sales in fiscal 2003 compared with 9% in fiscal 2002. Sales of other products, which include mouse and keyboard products, music products, accessories and other miscellaneous items, decreased by 45% in fiscal 2003 compared to fiscal 2002 and represented 8% of sales in fiscal 2003 compared to 11% of sales in the prior fiscal year. This decrease in other product sales was primarily due to a decrease in sales of multimedia upgrade kits, which is in line with Creatives current business strategy of de-emphasizing lower margin products.

Gross profit Gross profit in fiscal 2003 increased to 35% of net sales, compared to 33% in fiscal 2002. This improvement in gross profit was primarily a result of Creatives business strategy of shifting away from low-margin and high-risk products and focusing on audio products, speakers and PDE products.
Operating expenses SG&A expenses in fiscal 2003 declined by 4% compared to fiscal 2002. As a percentage of sales, SG&A expenses were 23% of sales for fiscal 2003 and 21% for fiscal 2002. Creative has been focusing on reducing its operating expenses, but the increase in SG&A expenses as a percentage of sales was primarily due to the addition of operating expenses incurred by 3Dlabs. SG&A expenses incurred by 3Dlabs include amortization of other intangible assets of $8.0 million in fiscal 2003 and $2.5 million in fiscal 2002. R&D expenses increased from 5% of sales in fiscal 2002 to 8% of sales in fiscal 2003, mainly due to the higher R&D expenses incurred by 3Dlabs which was acquired in May 2002. Other charges of $26.1 million in fiscal 2002 relates to the write off of acquired in-process technology arising from the acquisition of 3Dlabs and represented 3% of sales in fiscal 2002. See Note 17 of Notes to Consolidated Financial Statements.
Net investment loss Net investment loss of $6.0 million in fiscal year 2003 included permanent write-downs of quoted and unquoted investments of $13.6 million offset partially by net gains from sale of quoted investments of $7.6 million. The $45.4 million net investment loss in fiscal year 2002 comprised $49.3 million in write-downs of investments, offset partially by a $3.9 million net gain from sales of investments and marketable securities.
Net interest and other income Net interest and other income decreased by $0.3 million to $4.8 million in fiscal 2003 compared to $5.1 million in the prior fiscal year. This decrease was primarily due to a reduction in interest income by $1.0 million resulting from lower interest rates, and an increase in share of associates losses by $1.0 million, offset partially by an increase in exchange gain of $1.5 million.
Provision for income taxes Creatives provision for income taxes for fiscal 2003 as a percentage of operating income was 10% compared to 20% in fiscal 2002. The higher tax provision in fiscal 2002 was primarily due to changes in the mix of taxable income arising from various geographical regions and other charges of $26.1 million in fiscal 2002 which Creative has considered it a non-tax deductible expense.
QUARTERLY RESULTS The following is a summary of Creatives unaudited quarterly results for the eight quarters ended June 30, 2004, together with the percentage of sales represented by such results. Consistent with the PC peripherals and digital entertainment market, demand for Creatives products is generally stronger in the quarter ended December 31, compared to any other quarter of the fiscal year due to consumer buying patterns. In managements opinion, the results detailed below have been prepared on a basis consistent with the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented when read in conjunction with the financial statements and notes thereto contained elsewhere herein. Creatives business is seasonal in nature and the quarterly results are not necessarily indicative of the results to be achieved in future quarters.

Current and Expected Liquidity As of June 30, 2004, in addition to cash reserves and excluding long term loans, Creative has credit facilities totaling $118.1 million for overdrafts, guarantees, letters of credit and fixed short-term loans, of which approximately $115.7 million were unutilized. Creative continually reviews and evaluates investment opportunities, including potential acquisitions of, and investments in, companies that can provide Creative with technologies, subsystems or complementary products that can be integrated into or offered with its existing product range. Creative generally satisfies its working capital needs from internally generated cash flow. Management believes that at the current level of operations, Creatives cash on hand, existing credit facilities and anticipated cash flow from operations will be sufficient to meet its projected working capital and other cash needs for at least the next twelve months. To date, inflation has not had a significant impact on Creatives operating results.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table presents the contractual obligations and commercial commitments of Creative as of June 30, 2004:
Payments Due by Period (US$000) Less than 1 to to year years years $ 3,498 3,481 8,970 88,935 6,444 $ 7,812 4,323 10,$ 6,996 3,710 $
Contractual Obligations Long Term Debt Capital Lease Obligations Operating Leases Unconditional Purchase Obligations Other Obligations $
Total 27,051 7,804 38,843 88,935 6,664
After 5 years 8,745 15,702
Total Contractual Cash Obligations

169,297

111,328

22,816

10,706

24,447

As of June 30, 2004, Creative has utilized approximately $2.4 million under guarantees and letters of credit. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Please refer to Note 1 of Notes to Consolidated Financial Statements for the discussion of recently issued accounting pronouncements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CREATIVE TECHNOLOGY LTD.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of shareholders equity present fairly, in all material respects, the financial position of Creative Technology Ltd. and its subsidiaries at June 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Creatives management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

When the existence of one or more of the above factors indicates that the carrying value of the goodwill or intangible assets may be impaired, Creative measures any impairment based on a projected discounted cash flow method using a discount rate determined by the management to commensurate with the risk inherent in Creatives current business model. Creative performed its annual assessment for goodwill impairment traditionally in the fourth quarter of the fiscal year. However, during the third quarter, management noted that the revenue for the reporting unit that was assigned the goodwill came below expectations in the first three quarters of the year, owing to a delay in the launch of new product. As this may impact the fair value of this reporting unit, the Company performed a stage 1 impairment review of the goodwill as at March 31, 2004, by comparing the fair value of the reporting unit to its book value including goodwill, in accordance with the requirements of SFAS 142 Goodwill and Other Intangible Assets. Based on the result of the review, the fair value of the reporting unit still exceeded its book value, and therefore goodwill was considered not impaired. Stage 2 of the impairment review was thus deemed unnecessary. As there were no deterioration in the business conditions of the reporting unit and the external environment it operates in between March 31 and June 30, 2004, no further impairment test of goodwill was deemed necessary. Revenue recognition Creative generally recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss transferred, delivery has occurred, price is fixed or determinable, and collectibility is probable. Allowances are provided for estimated returns, discounts and warranties, based on historical experience, current economic trends and changes in customer demand and acceptance of its products. Such allowances are adjusted periodically to reflect actual and anticipated experience. When recognizing revenue, Creative records estimated reductions to revenue for customer and distributor programs and incentive offerings, including price protection, promotions, other volume-based incentives and rebates. Research and development Research and development costs are charged to operations as incurred. Assessment of the probability of the outcome of current litigation Creative records accruals for loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Income taxes Deferred tax assets and liabilities, net of valuation allowances, are established for the expected future tax consequences of events resulting from the differences between the financial reporting and income tax bases of Creatives assets and liabilities and from tax credit carry forwards. No provision has been made for the undistributed earnings of Creatives subsidiaries outside of Singapore since it is Creatives intention to reinvest these earnings in those subsidiaries. Reinvested earnings of such subsidiaries have been immaterial to date.

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd) Concentrations of credit risk Financial instruments that potentially subject Creative to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Creative limits the amount of credit exposure to any one financial institution. Creative sells its products to original equipment manufacturers, distributors and key retailers. Creative believes that the concentration of credit risk in its trade receivables is substantially mitigated due to performance of ongoing credit evaluations of its customers financial condition, use of short collection terms, use of letters of credit in certain circumstances, procurement of credit insurance coverage and the geographical dispersion of sales. Creative establishes allowances for doubtful accounts, returns and discounts for specifically identified doubtful accounts, returns and discounts based on credit profiles of its customers, current economic trends, contractual terms and conditions and historical payment, return and discount experience. Stock-based compensation Creative accounts for stock-based employee compensation in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related Interpretations, and complies with the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, and SFAS 148, Accounting for StockBased Compensation, Transition and Disclosures. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of Creatives stock at the date of the grant over the stock option exercise price. See Note 9. Recently issued accounting pronouncements In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on recognition and measurement guidance previously discussed under EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01). The consensus clarifies the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular, investments within the scope of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and investments accounted for under the cost method. This consensus is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The Company does not believe that this consensus will have a material impact on its consolidated results of operations as its current policies are consistent with the consensus. In March 2004, the FASB issued a proposed Statement, Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95, that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using the intrinsic method that we currently use and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expense in our consolidated statement of operations. The recommended effective date of the proposed statement is currently for fiscal years beginning after December 15, 2004. Should this proposed statement be finalized in its current form, it will have an impact on our consolidated statement of operations as we will be required to expense the fair-value of our stock option grants and stock purchases under our employee stock purchase plan. In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 became effective during the quarter ended June 30, 2004, the adoption of which did not have an impact on the Companys calculation of earnings per share. NOTE 2 NET INCOME (LOSS) PER SHARE In accordance with SFAS 128, Earnings per Share, Creative reports both basic earnings per share and diluted earnings per share. Basic earnings per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of ordinary and potentially dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares are excluded from the computation if their effect is anti-dilutive. In computing the diluted

Rental expense under all operating leases was $14.1 million, $12.2 million and $10.9 million for fiscal 2004, 2003 and 2002, respectively. Future minimum lease obligations, which are secured by the underlying assets, as of June 30, 2004, under capital leases are as follows (in US$000):
Capital Leases Fiscal years ended June 30, 2009 Thereafter Total minimum lease commitments Less: Interest Total capital lease obligations $ 3,618 3,649 1,031 8,298 (494) 7,804
Capital lease liabilities amounting to $0.3 million for one of Creatives subsidiaries are secured on a bankers guarantees at June 30, 2004 (see Note 1). NOTE 6 COMPREHENSIVE INCOME The components of total comprehensive income are as follows (in US$000):
Years ended June Net income (loss) Movement in unrealized holding gains (losses) Reclassification adjustments: Losses included in net income (loss) $ 134,247 139,410 (2,446) 136,964 Total comprehensive income (loss) $ 271,211 $ $ 2003 23,377 (3,110) (3,337) (6,447) 16,930 $ $ 2002 (19,727) 15,042 (16,655) (1,613) (21,340)
NOTE 7 SHARE REPURCHASES Details of Share repurchases by Creative since the commencement date of the program on November 6, 1998 are set out below:
Number of Shares Repurchased (in millions) As of June 30, 2002 Fiscal year 2003 Fiscal year 2004 Total 26.3 26.3 Average Price (US$) $ 13 $ 13
At the Annual General Meeting (AGM) held on November 26, 2003, the shareholders approved the share repurchase mandate allowing Creative to buy up to 10% of the issued share capital of Creative as at the date of the AGM. This amounts to approximately 8.1 million shares. This authority to repurchase these shares shall continue in force unless revoked or revised by the shareholders in a general meeting, or until the date that the next AGM of Creative is held or is required to be held, whichever is the earlier. In accordance with Singapore statutes, such repurchases are recorded as a reduction in retained earnings. NOTE 8 DIVIDENDS At the Annual General Meeting held on November 26, 2003, Creatives shareholders approved an ordinary dividend of $0.25 for each outstanding ordinary share of Creative for the fiscal year ending June 30, 2004. Dividends of $20.2 million were paid on December 23, 2003 to all shareholders of record as of December 10, 2003. Creative paid an ordinary dividend of $0.25 in fiscal 2003 and 2002, amounting to $19.8 million and $18.0 million, respectively. NOTE 9 EMPLOYEE SHARE PURCHASE AND STOCK OPTION PLANS Creative Employee Share Purchase Plan As approved by the shareholders in November 1999, Creative has adopted the 1999 Employee Share Purchase Plan that permits substantially all employees to purchase ordinary shares of Creative. Participating employees may purchase ordinary shares through regular payroll deductions accumulated during each offering period at a purchase price of 85% of the lower of the fair market value on the offering date or on the purchase date. Each offering period consists of four six months purchase periods, except for the first purchase period in the first offering period, which was four months. A total of 1.0 million ordinary shares were reserved for issuance under this plan. In addition, on each July 1, the aggregate number of ordinary shares reserved for issuance under the plan shall be increased automatically by 1% of the total number of outstanding ordinary shares of Creative on the immediately preceding June 30; provided that the aggregate shares reserved under this plan shall not exceed 5.0 million shares. In fiscal 2004, 2003 and 2002, 137,900, 282,700 and 248,000 shares were issued at a weighted average exercise price of $5.71, $5.24 and $5.19 per share under Creatives Employee Share Purchase Plan respectively. Creative Employee Stock Option Plans In December 1994, Creative adopted the new Creative Technology Employees Share Option Scheme (the New Plan). Options granted under this plan were in accordance with Section 422(a) of the US Internal Revenue Code of 1986, as amended. On November 13, 1996, at a special meeting, shareholders approved certain changes to the New Plan to make it less restrictive. Under the amended New Plan, the total number of shares that could be granted was increased to an overall maximum of 15% of the issued share capital of Creative. The amended New Plan also provided for incentive stock options to be granted to employees of Creative on a quarterly basis, at the average market price established on the five days closing immediately prior to the date of grant. The options vested at the rate of 25% at the end of each anniversary of the grant date and were exercisable over a period not exceeding five years from the date of grant.

As of October 6, 1998, Creative is no longer subject to the listing rules of the Singapore Exchange but is required only to comply with the listing rules of NASDAQ, including rules governing stock option plans. Since many of Creative employees and shareholders are located in the United States of America, Creative has obtained shareholders approval on December 30, 1998 to replace the New Plan with the Creative Technology (1999) Share Option Scheme (1999 Scheme), which is more in accordance with US practice. The 1999 Scheme allows options to be granted to full-time employees as well as consultants and non-executive directors. The total number of shares that may be granted as options is 7.5 million provided that such amount shall be automatically increased on the first day (July 1) of each of the five fiscal years ending June 30, 2001, 2002, 2003, 2004 and 2005 by four percent of the issued share capital of Creative as at the last day of the immediate preceding fiscal year. The Option Committee, made up of the Board of Directors, has the discretion to decide the vesting schedule in the letter of offer. If it is not specifically stated in the letter of offer, 1/4 of the total amount of the grant vest on the first anniversary of the grant date and 1/48 of the total amount of the grant on the last day of each calendar month thereafter. The exercise price of options granted under the 1999 Scheme may be less than the fair market value of the shares as of the date of grant and the options expire after the tenth anniversary of the date of grant, except in the case of options granted to participants other than employees, options expire not later than the fifth anniversary of the date of grant. In fiscal 2002, Creative granted 7.1 million options under the 1999 Scheme at a weighted average exercise price of $4.57. Options to acquire 2.9 million shares were granted in fiscal 2002 below fair market value, resulting in a deferred share compensation of $0.8 million being amortized over the vesting period of the underlying options. The 7.1 million options that were granted in fiscal 2002 included 1.6 million Creatives options that were granted to assume 3Dlabs outstanding employee stock options (see Note 17). In fiscal 2003, Creative granted 0.4 million options at fair market value under the 1999 Scheme at a weighted average exercise price of $6.99. In fiscal 2004, Creative granted 0.15 million options at fair market value under the 1999 Scheme at a weighted average exercise price of $10.14. Creative Employee Stock Option Plans A summary of options granted to employees and non-employee directors under Creatives stock option plans is presented below:
Options Outstanding Number of Shares (000) Balance as of June 30, 2001 Granted at fair market value below fair market value pursuant to the acquisition of 3Dlabs (see Note 17) Exercised Canceled Balance as of June 30, 2002 Granted at fair market value Exercised Canceled Balance as of June 30, 2003 Granted Exercised Canceled Balance as of June 30, 2004 at fair market value 6,781 2,509 2,931 1,641 (1,070) (913) 11,(566) (1,101) 10,(1,517) (304) 8,921 Weighted Average Exercise Price ($) 9.01 4.72 4.80 3.93 6.45 9.18 6.56 6.99 4.58 7.44 6.59 10.14 5.64 6.48 6.82 31

NOTE 17 BUSINESS COMBINATION (Contd) and determinable. The assumed stock options were valued using the Black-Scholes valuation model, with a volatility rate of 60%, a riskfree interest rate of 2.20% to 4.93%, expected dividend yield of 2.5%, and an estimated vest term of 0.01 years after vest date. Of the total assumed stock options of 3Dlabs, approximately 1.3 million stock options with an intrinsic value of $7.0 million were unvested. In accordance with FIN 44, Accounting for Certain Transactions Involving Stock Compensation, these unvested options were accounted for as deferred stock-based compensation and are being recognized as compensation expense over their related vesting periods. Creative accounted for the acquisition using the purchase method of accounting and has included the results of 3Dlabs from the acquisition date of May 15, 2002. The allocation of the purchase price to in-process technology and identifiable intangible assets acquired was based on independent appraisals. The income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the existing technology, in-process technology and non-competition agreements. In estimating the fair value of the patents/core technology and trade name/trademarks, royalty savings approach was used. The following table summarizes the estimated fair values of the tangible assets acquired and the liabilities assumed at the date of acquisition (in US$000):
Cash Other current assets Property and equipment Total assets acquired Total liabilities assumed Net liabilities assumed $ $ 11,285 13,899 10,717 35,901 (56,963) (21,062)
The following table summarizes the allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed (in US$000):
Net liabilities assumed Goodwill Acquired in-process technologies Other intangible assets consisting of: Existing technology Patent/core technology Non-competition agreement Trade name/trademarks Total purchase price excluding deferred share compensation Total deferred share compensation Total purchase price including deferred share compensation $ $ 7,580 6,4,160 116,264 7,053 123,317 $ (21,062) 91,976 26,080
The intangible assets are being amortized over their respective benefit periods, which range from one to six years. In accordance with SFAS 142, Goodwill and Other Intangible Assets, Creative will assess goodwill for impairment at least annually. In accordance with the prevailing accounting standards, the amount of $26.1 million allocated to acquired in-process technology was written off as other charges in fiscal 2002.

RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected statement of operations data as a percentage of sales:
Years ended June Sales, net Cost of goods sold Gross profit Operating expenses: Selling, general and administrative Research and development Other charges Operating income Loss from investments, net Interest income and other, net Income (loss) before income taxes and minority interest Provision for income taxes Minority interest in loss (income) Net income (loss) 4 (1) (1) 3 % (6) 1 (1) (1) (2) % (12) (10) (1) (11) % 100 % % % 73 27
Creatives net sales, by product category, for the past three fiscal years were as follows:
Percentage of Net Sales for fiscal years ended June Audio products Speakers Personal Digital Entertainment Graphics & Video products Multimedia Upgrade Kits Communication / Other products 33 % 23 % 18 % 12 % 1% 13 % % 21 % 9% 6% 5% 15 % % 12 % 9% 6% 22 % 10 %
YEAR ENDED JUNE 30, 2003 COMPARED TO YEAR ENDED JUNE 30, 2002 Net sales for the year ended June 30, 2003 decreased by 12.9% compared to the year ended June 30, 2002. The lower net sales was mainly attributed to the difficult global economic climate where several major U.S. retailers have encountered slowing sales. Audio product sales, which include Sound Blaster audio cards and chipsets, for fiscal year 2003 decreased by 34% compared to fiscal year 2002, and as a percentage of total sales, decreased from 44% in fiscal 2002 to 33% in fiscal 2003. The decrease in audio product sales was primarily due to the decline in sales to the system integrator market and a drop off in sales of low-end audio products. Sales of speakers in fiscal 2003 decreased marginally by 4% compared to fiscal 2002, mainly due to reduced sales of non-multimedia speakers offset by higher demand for new models of multimedia speakers. Speakers represented 23% of sales in fiscal 2003 compared with 21% of sales in fiscal 2002. Sales of personal digital entertainment (PDE) products, which includes digital audio players and digital cameras, increased by 71% in fiscal 2003 compared to fiscal 2002 and represented 18% of sales in fiscal 2003 as compared to 9% of sales in fiscal 2002. The significant increase was driven by strong demand for the NOMAD MuVo and the introduction of the NOMAD Jukebox Zen in fiscal 2003. Sales of graphics and video products increased by 78% in fiscal 2003 compared to fiscal 2002 and represented 12% of sales in fiscal 2003 compared with 6% of sales in fiscal 2002. The significant increase in graphic card sales was primarily due to sales of graphic cards by 3Dlabs, which was acquired by Creative in May 2002. Sales of multimedia upgrade kits (MMUK), which includes data storage devices, decreased by 82% in fiscal 2003 compared to fiscal 2002 and comprised 1% of sales compared to 5% of sales in the prior fiscal year. The reduction in MMUK sales in fiscal 2003 is in line with Creatives current business strategy of de-emphasizing lower margin products. Sales of other products, which includes accessories, music products, communication products and other miscellaneous items, decreased by 27% in fiscal 2003 compared to fiscal 2002 and represented 13% of sales in fiscal 2003 compared to 15% of sales in the prior fiscal year. This decrease in other product sales was primarily due to a decrease in sales of communication products. Gross profit in fiscal 2003 increased to 35% of net sales, compared to 33% in fiscal 2002. This improvement in gross profit was primarily a result of Creatives business strategy of shifting away from low-margin and high-risk products and focusing on audio products, speakers and PDE products. Selling, general and administrative (SG&A) expenses in fiscal 2003 declined by 4% compared to fiscal 2002. As a percentage of sales, SG&A expenses were 23% of sales for fiscal 2003 and 21% for fiscal 2002. Creative has been focusing on reducing its operating expenses, but the increase in SG&A expenses as a percentage of sales was primarily due to the addition of operating expenses incurred by 3Dlabs. SG&A expenses incurred by 3Dlabs include amortization of other intangible assets of $8.0 million in fiscal 2003 and $2.5 million in fiscal 2002. Research and development (R&D) expenses increased from 5% of sales in fiscal 2002 to 8% of sales in fiscal 2003, mainly due to the higher R&D expenses incurred by 3Dlabs which was acquired in May 2002. Other charges of $26.1 million in fiscal 2002 relates to the write off of acquired in-process technology arising from the acquisition of 3Dlabs and represented 3% of sales in fiscal 2002. See Note 16 of Notes to Consolidated Financial Statements. Net investment loss of $6.0 million in fiscal year 2003 included permanent write-downs of quoted and unquoted investments by $13.6 million offset partially by net gains from sale of quoted investments of $7.6 million. The $45.4 million net investment loss in fiscal year 2002 comprised $49.3 million in write-downs of investments, offset partially by a $3.9 million net gain from sales of investments and marketable securities. Net interest and other income decreased by $0.3 million to $4.8 million in fiscal 2003 compared to $5.1 million in the prior fiscal year. This decrease was primarily due to a reduction in interest income by $1.0 million resulting from lower interest rates, increase in share of associates losses by $1.0 million, offset partially by increase in exchange gain of $1.5 million. Creatives provision for income taxes for fiscal 2003 as a percentage of operating income was 10% compared to 20% in fiscal 2002. The higher tax provision in fiscal 2002 was primarily due to changes in the mix of taxable income arising from various geographical regions and other charges of $26.1 million in fiscal 2002 which Creative has considered it a non-tax deductible expense.

YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30, 2001 Net sales for the year ended June 30, 2002 decreased by 34% compared to the year ended June 30, 2001. The substantially lower revenues in fiscal year 2002, was a result of the strategic shift by Creative to focus on its core products and to deemphasize lower margin products and the difficult global economic climate. Audio product sales for fiscal year 2002 decreased by 30% compared to fiscal year 2001, but as a percentage of total sales, increased from 41% in fiscal 2001 to 44% in fiscal 2002. Sales of speakers increased by 10% and represented 21% of sales in fiscal 2002 compared with 12% of sales in fiscal 2001. The improvement in speaker sales was primarily a result of the introduction of new models of multi-media speakers. Sales of PDE products decreased by 31% and represented 9% of sales in fiscal 2002 and fiscal 2001. Sales of MMUKs decreased by 84% in fiscal 2002 compared to fiscal 2001 and comprised 5% of sales compared to 22% of sales in the prior fiscal year. The reduction in MMUK sales in fiscal 2002 is in line with Creatives current business strategy of de-emphasizing lower margin products. Similarly, in line with this current strategy, sales of graphics and video products decreased by 36% and represented 6% of sales in both fiscal years 2002 and 2001. Sales of other products, which includes accessories, music products, communication products and other miscellaneous items, increased by 4% and represented 15% of sales in fiscal 2002 compared to 10% of sales in the prior fiscal year. This increase in other product sales was primarily due to an increase in sales of communication products. Gross profit in fiscal 2002 increased to 33% of net sales, compared to 27% in fiscal 2001. This improvement in gross profit was primarily a result of the strategic shift in business, with emphasis on Creatives core audio products, speakers and PDE products. SG&A expenses in fiscal 2002 declined by 26% due to managements cost cutting efforts to correspond to the revised revenue expectations. As a percentage of sales, SG&A expenses were 21% of sales for fiscal 2002 and 19% for fiscal 2001. R&D expenses were 5% of sales in fiscal 2002 and 4% of sales in fiscal 2001. Other charges of $26.1 million in fiscal 2002 relates to the write-off of acquired in-process technology arising from the acquisition of 3Dlabs and represented 3% of sales in fiscal 2002 compared to 2% of sales in fiscal 2001. See Note 16 of Notes to Consolidated Financial Statements. Net investment loss of $45.4 million in fiscal year 2002 comprised $49.3 million in write-downs of investments, offset partially by a $3.9 million net gain from sales of investments and marketable securities. Net investment loss of $148.5 million in fiscal 2001 included $200.3 million in write-downs of investments, offset partially by a $51.8 million net gain from sales of investments and marketable securities. Net interest and other income increased by $2.7 million to $5.1 million in fiscal 2002 compared to $2.4 million in the prior fiscal year. This increase was primarily due to an exchange gain of $3.9 million in fiscal 2002 versus an exchange loss of $3.7 million in fiscal 2001, offset partially by lower interest income resulting from lower interest rates and lower average cash balances. Creatives provision for income taxes for fiscal 2002 as a percentage of operating income was 20% compared to 34% in fiscal 2001. The higher tax provision in fiscal 2001 was primarily due to changes in the mix of taxable income arising from various geographical regions and a lower other charges in fiscal 2001 compared to fiscal 2002 which Creative has considered it a non-tax deductible expense.

QUARTERLY RESULTS The following is a summary of Creatives unaudited quarterly results for the eight quarters ended June 30, 2003, together with the percentage of sales represented by such results. Consistent with the PC peripheral market, demand for Creatives products is generally stronger in the quarter ended December 31, compared to any other quarter of the fiscal year due to consumer buying patterns. In managements opinion, the results detailed below have been prepared on a basis consistent with the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented when read in conjunction with the financial statements and notes thereto contained elsewhere herein. Creatives business is seasonal in nature and the quarterly results are not necessarily indicative of the results to be achieved in future quarters.
Unaudited data for quarters ended (in US$000 except per share data) Jun Sales, net (1) Cost of goods sold Gross profit Operating expenses: Selling, general and administrative (1) Research and development Other charges (2) Operating income (loss) Net gain (loss) from investments Interest income (expense) and other, net Income (loss) before income taxes and minority interest Provision for income taxes Minority interest in (income) loss Net income (loss) Basic earnings (loss) per share Weighted average ordinary shares outstanding (000) Diluted earnings (loss) per share Weighted average ordinary shares and equivalents outstanding (000) $ $ $ 34,266 15,583 2,1,972 37,379 14,646 4,886 49,039 13,279 19,1,199 42,155 15,(6,316) 807 42,815 10,748 26,080 (19,362) (29,845) 2,289 38,737 8,412 17,151 45,143 9,480 27,1,291 43,427 9,608 2,878 (16,425) 1,424 Mar Dec Sep Jun Mar Dec Sep 30 2001
$ 149,589 $ 160,617 $ 230,940 $ 160,623 $ 182,572 $ 193,385 $ 249,506 $ 180,442 96,788 52,801 104,365 56,252 149,169 81,771 102,630 57,993 122,291 60,281 129,209 64,176 167,353 82,153 124,529 55,913
4,934 (295) (12) 4,627 $ 0.06 79,527 0.06 $ $

5,198 (423) 73

20,824 (1,945)

(4,938) (57) 18

(46,918) (1,012) (436)
17,306 (1,703) (423) 15,180 $ 0.21 $ 72,134 0.20 $

29,549 (2,753) (489)

(12,123) (230) (495)

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table presents the contractual obligations and commercial commitments of Creative as of June 30, 2003:
Payments Due by Period (US$000) Less than 1 to to year years years $ 3,423 1,949 9,976 49,$ 6,845 8,764 1,439 14,027 $ 6,3,832 $
Contractual Obligations Long Term Debt Convertible Note Capital Lease Obligations Operating Leases Unconditional Purchase Obligations Other Obligations $
Total 29,091 8,764 3,433 40,939 49,470 522
After 5 years 11,978 13,104
Total Contractual Cash Obligations $

132,219

65,340

31,075

10,722

25,082

As of June 30, 2003, Creative has utilized approximately $4.6 million under guarantees, letters of credit, overdraft and short-term loan facilities.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Please refer to Note 1 of Notes to Consolidated Financial Statements for the discussion of recently issued accounting pronouncements.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CREATIVE TECHNOLOGY LTD.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of shareholders equity present fairly, in all material respects, the financial position of Creative Technology Ltd. and its subsidiaries at June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Creatives management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Approximate Percentage of $ Balance Denominated in: US$ Cash and cash equivalents Accounts receivable, less allowances Total current liabilities Long-term obligations S$ EURO Other Currencies

83 % 72 % 79 % 32 %

0% 0% 9% 67 %

6% 15 % 6%

11 % 13 % 6% 1%
The exchange rates for the S$ and Euro utilized in translating the balance sheet at June 30, 2003, expressed in US$ per one S$ and Euro was 0.5704 and 1.1413, respectively. Cash equivalents Cash equivalents consist of highly liquid investment instruments with original or remaining maturities of three months or less at the time of purchase. All deposits are in short term deposit and money market accounts with various banks. This diversification of risk is consistent with Creatives policy to maintain liquidity and ensure the safety of principal. Included in cash equivalents as of June 30, 2003 and 2002 are fixed rate deposits of $188.2 million and $128.0 million respectively. In fiscal 2002, a total of $4.5 million in the fixed rate deposits was held as collateral for one of the subsidiarys bank overdraft and short term loan facilities (see Note 11), but in fiscal 2003, the entire outstanding balances has been repaid and all liabilities were discharged. Marketable Securities Creative determines the appropriate classification of marketable securities at the time of acquisition and evaluates such designation at each balance sheet date. For all periods presented, Creative has classified marketable securities as trading securities, and accordingly such securities are stated at their market values based on the last transacted prices at each balance sheet date. The resulting net unrealized gains or losses on marketable securities are included in earnings in the period they are incurred.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd) Fair value of financial instruments For certain of Creatives financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The amounts shown for long term obligations also approximate fair value because current interest rates charged to Creative for debts of similar maturities are substantially the same. Inventory Inventory is stated at the lower of cost or market. Cost is determined using standard cost, appropriately adjusted at balance sheet date to approximate actual cost on a weighted average basis. In the case of finished products and work-in-progress, cost includes materials, direct labor and an appropriate proportion of production overheads. Management performs a detailed assessment of inventory at each balance sheet date to establish provisions for excess and obsolete inventories. Evaluation includes a review of, among other factors, historical sales, current economic trends, forecasted sales, demand requirements, product lifecycle and product development plans, quality issues, and current inventory levels. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the remaining facility lease term or the estimated useful lives of the improvements. No depreciation is provided on freehold land and construction in progress. Investments Creative holds equity investments in various companies pursuant to which it has acquired anywhere from less than 1% to 100% of the issuers outstanding capital stock. Investments in which Creative acquires more than 50% of the outstanding capital stock of an entity, or which are under the effective control of Creative, are treated as investments in subsidiaries, and the balance sheets and results of operations of these subsidiaries are fully consolidated after making allowance for any minority interests. Companies in which Creatives investment totals between 20% and 50% of such companys capital stock are treated as associated companies and recorded on an equity basis, whereby Creative adjusts its cost of investments to recognize its share of all post acquisition results of operations. Non quoted investments of less than 20% in an entity are carried at cost, less provisions for permanent impairment where necessary. In accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, quoted investments of less than 20% in an entity are classified as available-for-sale. Such investments are reported at fair value with the unrealized gains and losses included as a separate component of shareholders equity. Unrealized losses are charged against income when a decline in fair value is determined to be other than temporary. Realized gains and losses upon the sale or disposition of such investments are based on the average cost of the specific investments sold. The investment portfolio is monitored on a periodic basis for impairment. Creatives investments in these companies are inherently risky because the markets for the technologies or products they have under development are typically in the early stages and may never develop. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. Fair values for investments in public companies are determined using quoted market prices. Fair values for investments in privately-held companies are estimated based upon one or more of the following: pricing models using historical and forecasted financial information and current market rates, liquidation values, the values of recent rounds of financing, or quoted market prices of comparable public companies.

In order to determine whether a decline in value is other-than-temporary, Creative evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook for the company, including key operational and cash flow metrics, current market conditions and future trends in the companys industry, and the companys relative competitive position within the industry; and Creatives intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. A summary of investments is as follows (in US$000):
As of June Non quoted investments Quoted investments Total investments $ 12,944 36,224 49,168 $ 2002 15,924 50,764 66,688
Acquisitions Creative acquired 3Dlabs in fiscal 2002 (Note 16). The acquisition was accounted for under the purchase method of accounting, and accordingly, the estimated fair value of assets acquired and liabilities assumed and the results of operations were included in Creatives consolidated financial statements as of the effective date of the acquisition through the end of the period. There were no significant differences between the accounting policies of Creative and 3Dlabs. Goodwill and other intangible assets Goodwill and other intangible assets are stated at cost and relate principally to the acquisition of new subsidiaries accounted for under the purchase method. Under this method, the purchase price has been allocated to the assets acquired, liabilities assumed and in-process technology based on their estimated fair market values at the dates of acquisition. Amounts allocated to acquired in-process technology are expensed in the period in which the acquisition is consummated. The goodwill and identifiable intangible assets acquired in connection with the acquisition of 3Dlabs have been accounted for in accordance with SFAS 141 and SFAS 142, Business Combinations and Goodwill and Other Intangible Assets. Intangible assets are amortized on a straight line basis over the estimated useful lives of the assets, ranging from one to seven years. Goodwill is not subject to amortization, but will be evaluated at least annually for impairment. Creative reviews for impairment of goodwill on an annual basis. Reviews for impairment of goodwill and other intangible assets are also conducted whenever events indicate that the carrying amount might not be recoverable. Factors that Creative may consider important which could trigger an impairment review include the followings: significant under performance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for Creatives overall business; significant negative industry or economic trends; significant decline in Creatives stock price for a sustained period; and Creative market capitalization relative to net book value.

91,976 8,765 7,616

91,976 17,894 5,252
Total other non-current assets

$ 108,357

$ 115,122
As of June Other accrued liabilities: Marketing accruals Payroll accruals Royalty accruals Other accruals Total other accrued liabilities $ 20,732 18,177 6,319 34,345 79,573 $ 2002 20,764 19,188 5,092 32,787 77,831
Other accruals of $34.3 million and $32.8 million as of June 30, 2003 and 2002 includes accruals for various operating expense items that individually account for less than 5% of the total current liabilities.
NOTE 4 PRODUCT WARRANTIES The warranty period for the bulk of Creatives products typically ranges between 1 to 3 years. The product warranty accrual reflects managements best estimate of probable liability under its product warranties. Management determines the warranty provision based on known product failures (if any), historical experience, and other currently available evidence. Changes in the product warranty accrual for the fiscal year 2003 was as follows (in US$000):
June 30, 2003 Balance as of June 30, 2002 Accruals for warranties issued during the period Adjustments related to pre-existing warranties (include changes in estimates) Settlements made (in cash or in kind) during the period Balance as of June 30, 2003 $ 2,292 2,660 (94) (2,023) 2,835
NOTE 5 LEASES AND COMMITMENTS Creative leases the use of land and certain of its facilities and equipment under non-cancelable operating lease arrangements. The land and facility leases expire at various dates through 2052 and provide for fixed rental rates during the terms of the leases. Minimum future lease payments for non-cancelable leases as of June 30, 2003, are as follows (in US$000):
Operating Leases Fiscal years ended June 30, 2008 Thereafter Total minimum lease payments $ 9,976 8,101 5,926 2,580 1,252 13,104 40,939
Rental expense under all operating leases was $11.9 million, $10.7 million and $11.8 million for fiscal 2003, 2002 and 2001, respectively. Future minimum lease obligations, which are secured by the underlying assets, as of June 30, 2003, under capital leases are as follows (in US$000):
Capital Leases Fiscal years ended June 30, 2008 Thereafter Total minimum lease payments Less: Amount representing interest Total capital lease obligations 30 $ 1,999 1,49 3,526 (93) 3,433

NOTE 6 COMPREHENSIVE INCOME The components of total comprehensive income are as follows (in US$000):
Years ended June Net income (loss) Movement in unrealized holding gains (losses) Reclassification adjustments: Gains (losses) included in net income (loss) $ 23,377 (3,110) (3,337) (6,447) Total comprehensive income (loss) $ 16,930 $ $ 2002 (19,727) 15,042 (16,655) (1,613) (21,340) 2001 $ (130,373) (26,899) (124,800) (151,699) $ (282,072)
NOTE 7 SHARE REPURCHASES Details of Share repurchases by Creative during the fiscal years since the commencement of the program on November 6, 1998 are set out below:
Years ended June 30, Number of Shares Repurchased (in millions) 10.0 5.9 7.7 2.7 26.3 Average Price (US$) $ 14 $ 17 $ 12 $ $ 13 7

2003 Total

At the 2002 Annual General Meeting (AGM) held on November 20, 2002, the shareholders approved the share repurchase mandate allowing Creative to buy up to 10% of the issued share capital of Creative as at the date of the AGM. This amounts to approximately 7.9 million shares and the authority to repurchase these shares shall continue in force unless revoked or revised by the shareholders in a general meeting, or until the date that the next AGM of Creative is held or is required to be held, whichever is the earlier. In accordance with Singapore statutes, such repurchases are recorded as a reduction in retained earnings.
NOTE 8 DIVIDENDS At the Annual General Meeting held on November 20, 2002, Creatives shareholders approved an ordinary dividend of $0.25 for each outstanding ordinary share of Creative for the fiscal year ending June 30, 2003. Dividends of $19.8 million were paid on December 19, 2002 to all shareholders of record as of December 5, 2002. Creative paid an ordinary dividend of $0.25 amounting to $18.0 million in the fiscal year ended June 30, 2002 and an ordinary dividend of $0.25 and a special dividend of $0.25 amounting to $39.4 million in the fiscal year ended June 30, 2001.
NOTE 9 EMPLOYEE SHARE PURCHASE AND STOCK OPTION PLANS Creative Employee Share Purchase Plan As approved by the shareholders in November 1999, Creative has adopted the 1999 Employee Share Purchase Plan that permits substantially all employees to purchase ordinary shares of Creative. Participating employees may purchase ordinary shares through regular payroll deductions accumulated during each offering period at a purchase price of 85% of the lower of the fair market value on the offering date or on the purchase date. Each offering period consists of four six months purchase periods, except for the first purchase period in the first offering period, which was four months. A total of 1.0 million ordinary shares were reserved for issuance under this plan. In addition, on each July 1, the aggregate number of ordinary shares reserved for issuance under the plan shall be increased automatically by 1% of the total number of outstanding ordinary shares of Creative on the immediately preceding June 30; provided that the aggregate shares reserved under this plan shall not exceed 5.0 million shares. In fiscal 2003, 2002 and 2001, 282,700, 248,000 and 225,000 shares were issued at a weighted average exercise price of $5.24, $5.19 and $10.80 per share under Creatives Employee Share Purchase Plan respectively. Creative Employee Stock Option Plans In December 1994, Creative adopted the new Creative Technology Employees Share Option Scheme (the New Plan). Options granted under this plan were in accordance with Section 422(a) of the US Internal Revenue Code of 1986, as amended. On November 13, 1996, at a special meeting, shareholders approved certain changes to the New Plan to make it less restrictive. Under the amended New Plan, the total number of shares that could be granted was increased to an overall maximum of 15% of the issued share capital of Creative. The amended New Plan also provided for incentive stock options to be granted to employees of Creative on a quarterly basis, at the average market price established on the five days closing immediately prior to the date of grant. The options vested at the rate of 25% at the end of each anniversary of the grant date and were exercisable over a period not exceeding five years from the date of grant. As of October 6, 1998, Creative is no longer subject to the listing rules of the Singapore Exchange but is required only to comply with the listing rules of NASDAQ, including rules governing stock option plans. Since many of Creative employees and shareholders are located in the United States of America, Creative has obtained shareholders approval on December 30, 1998 to replace the New Plan with the Creative Technology (1999) Share Option Scheme (1999 Scheme), which is more in accordance with US practice. The 1999 Scheme allows options to be granted to full-time employees as well as consultants and non-executive directors. The total number of shares that may be granted as options is 7.5 million provided that such amount shall be automatically increased on the first day (July 1) of each of the five fiscal years ending June 30, 2001, 2002, 2003, 2004 and 2005 by four percent of the issued share capital of Creative as at the last day of the immediate preceding fiscal year. The Option Committee has the discretion to decide the vesting schedule in the letter of offer. If it is not specifically stated in the letter of offer, 1/4 of the total amount of the grant vest on the first anniversary of the grant date and 1/48 of the total amount of the grant on the last day of each calendar month thereafter. The exercise price of options granted under the 1999 Scheme may be less than the fair market value of the shares as of the date of grant and the options expire after the tenth anniversary of the date of grant, except in the case of options granted to participants other than employees, options expire not later than the fifth anniversary of the date of grant.

No options were granted under the 1999 Scheme in fiscal 2001. In fiscal 2002, Creative granted 7.1 million options under the 1999 Scheme at a weighted average exercise price of $4.57. Options to acquire 2.9 million shares were granted in fiscal 2002 below fair market value, resulting in a deferred share compensation of $0.8 million being amortized over the vesting period of the underlying options. The 7.1 million options that were granted in fiscal 2002 included 1.6 million Creatives options that were granted to assume 3Dlabs outstanding employee stock options. (See Note 16) In fiscal 2003, Creative granted 0.4 million options at fair market value under the 1999 Scheme at a weighted average exercise price of $6.99. Creative Employee Stock Option Plans A summary of options granted to employees and non-employee directors under Creatives stock option plans is presented below:
Options Outstanding Number of Shares (000) Balance as of June 30, 2000 Granted Exercised Canceled Balance as of June 30, 2001 Granted at fair market value below fair market value pursuant to the acquisition of 3Dlabs (see Note 16) Exercised Canceled Balance as of June 30, 2002 Granted at fair market value Exercised Canceled Balance as of June 30, 2003 1,641 (1,070) (913) 11,(566) (1,101) 10,592 3.93 6.45 9.18 6.56 6.99 4.58 7.44 6.59 8,894 (928) (1,185) 6,781 2,509 2,931 Weighted Average Exercise Price ($) 9.44 7.31 13.49 9.01 4.72 4.80
The total number of options exercisable at June 30, 2003, 2002 and 2001 under the New Plan and 1999 Scheme were 6,866,000, 4,031,000 and 3,843,000, respectively.
NOTE 9 EMPLOYEE SHARE PURCHASE AND STOCK OPTION PLANS (Contd) Summary of outstanding options under Creatives employee stock option plans The following table summarizes option information for Creatives employee stock option plans (New Plan and 1999 Scheme) as at June 30, 2003.
Options Outstanding Weighted Average Remaining Contractual Life (years) 7.86 8.28 7.90 5.91 6.67 7.19 Options Exercisable

Range of Exercise Prices

Number Outstanding (000) 478 4,407 1,115 4,10,592
Weighted Average Exercise Price ($) 2.86 4.46 6.18 9.10 18.40 6.59
Number Exercisable (000) 195 1,4,6,866
Weighted Average Exercise Price ($) 2.88 4.45 6.09 9.11 18.40 7.55
$1.00 to $2.99 $3.00 to $4.99 $5.00 to $7.99 $8.00 to $10.99 $11.00 to $14.99 $15.00 to $22.00
Subsidiary Stock Option Plan Effective April 2000, unvested stock options to purchase 0.2 million shares of Creatives ordinary stock granted under the New Plan and 1999 Scheme to employees of a subsidiary were canceled in exchange for the right to receive options granted by the subsidiary. The employees were allowed to retain outstanding Creative options vested on March 31, 2000 until March 31, 2001 at which time unexercised options were canceled. In May 2000, the subsidiary adopted a separate stock option plan and employees were then granted options under this plan. The total number of shares that may be granted as options under the subsidiary 2000 Stock Option Plan (2000 Plan) is 8 million shares provided that such amounts shall be automatically increased on the first day (July 1) of each of the five fiscal years ending June 30, 2001, 2002, 2003, 2004 and 2005 by the lesser of (i) three hundred thousand shares or (ii) one percent of the issued share capital of the Company as at the last day of the immediately preceding fiscal year. The exercise price of options granted under the 2000 Plan may be less than the fair market value of the shares as of the date of grant and the options expire after the tenth anniversary of the date of grant. In fiscal 2001, the subsidiary granted 0.9 million options under the 2000 Plan at a weighted average exercise price of $2.45. Included in the options granted during the fiscal year were replacement options granted to certain employees of Creative Technology Ltd to acquire 235,000 and 30,000 of the subsidiary companys shares at an exercise price of $2.50 and $1.00 per share respectively. These options were granted in lieu of the cancellation of 470,000 shares at an exercise price of $2.50 per share and 60,000 shares at $1.00 per share. The replacement options vested immediately on grant date and the share compensation expense arising from replacement of options amounted to $0.7 million which was expensed in fiscal 2001. The subsidiary did not grant options in fiscal 2002 and fiscal 2003.

Payments Due by Period (US$000) Debt Obligations Long Term Debt Convertible Note Capital Lease Obligations Total Debt Obligations $ $ Total 29,091 8,764 3,433 41,288 $ $ Less than 1 year 3,423 1,949 5,372 $ $ 1 to 3 years 6,845 8,764 1,439 17,048 $ 4 to 5 years $ 6,6,890 $ $ After 5 years 11,978 11,978
NOTE 11 DEBT OBLIGATIONS (Contd) Creative has various other credit facilities relating to overdrafts, letters of credit, bank guarantees and short term loans with several banks totaling approximately $92.5 million at June 30, 2003. Within these credit facilities, sub-limits have been set on how Creative may utilize the overall credit facilities. At June 30, 2003, $3.0 million in letters of credit and $1.6 million in bank guarantees were drawn under these facilities. Facilities under letters of credit and bank guarantees bear interest at approximately the banks prime rates, and for interest rates on overdraft and short term loan facilities, please see above comments.
NOTE 12 MINORITY INTEREST In May 2000, a wholly owned subsidiary issued 5.0 million convertible preference shares at $4.50 per share, resulting in net proceeds to the subsidiary of $22.5 million. In November 2001, Creative entered into agreements with the holders of these 5.0 million convertible preference shares to repurchase all such shares for $10.0 million cash. The repurchase was completed during the quarter ended March 31, 2002 and the excess of carrying value over the repurchase price paid of $11.8 million was credited to additional paid in capital. In July 2002, CTC declared dividends of approximately $4 million to its shareholders, namely Creative and Bukit Frontiers Pte Ltd (BFPL), a company owned by Creatives Chairman and CEO, Sim Wong Hoo. Creative and BFPL received a net dividend of approximately $2 million each. In accordance with the joint venture agreement with BFPL as approved by Creatives shareholders, in July 2002, Creative acquired from BFPL the remaining 50% interest that it did not currently own in its building located in the International Business Park in Singapore. The consideration payable by Creative for the 50% interest in CTC amounted to approximately $4 million. Additionally, Creative repaid the outstanding building-related loans of $7.1 million to BFPL. The financial consideration for the purchase of CTC shares was set at CTCs audited net asset valued at July 4, 2002, based on the value of the building as determined by an independent property appraiser. The acquisition was accounted for by the purchase method. The payment was allocated to land and buildings, deferred tax liability and against minority interest.
NOTE 13 OTHER CHARGES In fiscal 2002, Creative wrote off $26.1 million of in-process technology arising from the acquisition of 3Dlabs (see Note 16). In fiscal 2001, Creative recorded restructuring and other charges of $22.8 million included in operating expenses and an inventory charge of $8.2 million to cost of goods sold. The $8.2 million inventory charge primarily related to digital video recorders and certain graphic cards written down to their estimated sales values. The $22.8 million restructuring and other charges comprised $5.1 million in employee separation costs, $3.3 million in facility exit costs, fixed asset impairment write-downs of $3.2 million and write-off of other assets acquired from Aureal amounting to $11.2 million. Employee separation costs represented the costs of involuntary severance benefits for approximately 400 positions. As of June 30, 2002, all the affected employees had separated from the Company and all payments were made. Facility exit costs primarily include lease termination and unutilized capacity costs. At June 30, 2003, there is no accrual for employee separation costs and accrual for exit costs of $0.4 million were included in accrued liabilities in the consolidated balance sheet. During fiscal 2003, an adjustment for over accrual of facility exit costs of $0.2 million was reversed to the selling, general and administrative expenses. Fixed asset impairment write-downs of $3.2 million and write-off of other assets acquired from Aureal of $11.2 million in fiscal 2001 are attributed to manufacturing and other equipment associated with the facilities being closed as well as certain other intangible assets which have been impaired as a result of recent changes in market conditions.

Cash Other current assets Property and equipment Total assets acquired Total liabilities assumed Net liabilities assumed $ $ $ 11,285 13,899 10,717 35,901 (56,963) (21,062)
The following table summarizes the allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed (in US$000):
Net liabilities assumed Goodwill Acquired in-process technologies Other intangible assets consisting of: Existing technology Patent/core technology Non-competition agreement Trade name/trademarks Total purchase price excluding deferred share compensation Total deferred share compensation Total purchase price including deferred share compensation 7,580 6,4,160 $ 116,264 7,053 $ 123,317 $ (21,062) 91,976 26,080
The intangible assets are being amortized over their respective benefit periods, which range from one to six years. In accordance with SFAS 142, Goodwill and Other Intangible Assets, Creative will assess goodwill for impairment at least annually. In accordance with the prevailing accounting standards, the amount of $26.1 million allocated to acquired in-process technology was written off as other charges in fiscal 2002. It is reasonably possible that the development of this technology could fail because of either prohibitive cost, inability to perform the required efforts to complete the technology or other factors outside of Creatives control such as a change in the market for the resulting developed products. In addition, at such time that the project is completed it is reasonably possible that the completed products do not receive market acceptance or that Creative is unable to produce and market the product cost effectively. The following unaudited pro forma information has been prepared assuming that the above acquisitions had taken place at the beginning of the earliest periods presented. The amount of the aggregate purchase price allocated to in-process technology has been excluded from the pro forma information as it is a non-recurring item. The pro forma financial information is not necessarily indicative of the combined results that would have occurred had the acquisitions taken place at the beginning of the earliest period, nor is it necessarily indicative of results that may occur in the future.

Major customers: In fiscal 2003, 2002 and 2001, no customer accounted for more than 10% of net revenues. As of June 30, 2003 and 2001, two and one customer(s) respectively accounted for more than 10% of net accounts receivable and as of June 30, 2002, no customer accounted for more than 10% of net accounts receivable.

STOCK MARKET INFORMATION

Creatives ordinary shares have been traded on the NASDAQ National Market (NASDAQ) since August 3, 1992, under the symbol CREAF. Creatives ordinary shares have been traded on the Singapore Exchange (SGX-ST) since June 15, 1994. In January 2003, Creative announced that it intends to move to a single primary stock exchange listing on the SGXST. Consequently, Creative intends to delist its ordinary shares from NASDAQ and will initiate steps that can facilitate the elimination of its U.S. public reporting obligations. On June 1, 2003, a flow back restriction was commenced. The flow back restriction stops the electronic transfer of Creatives ordinary shares from the register of The Central Depository (Pte) Limited in Singapore to accounts with brokers located in the United States. The delisting of Creative ordinary shares from NASDAQ would not affect the status of Creatives shares on the SGX-ST. The following table presents, for the registered shares on the NASDAQ and SGX-ST: (i) the annual high and low market prices for the five most recent full fiscal years; (ii) the high and low market prices for each full fiscal quarter for the two most recent full fiscal years; and (iii) the high and low market prices for each month for the most recent six months. These prices do not include retail markups, markdowns, or commissions.
NASDAQ (Price in US$/Share) High Low Annual High and Low Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Quarterly High and Low Fiscal 2002: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 2003 First Quarter Second Quarter Third Quarter Fourth Quarter Monthly High and Low March 2003 April 2003 May 2003 June 2003 July 2003 August 2003 18.56 38.00 23.81 15.05 10.50 8.12 9.69 8.10 4.20 5.65 SGX-ST (Price in Singapore $/Share) High Low 30.30 64.00 41.00 27.90 18.90 14.10 16.60 14.90 8.15 10.10

9.00 8.30 15.05 12.20

4.20 4.24 8.16 8.40

16.90 15.10 27.90 22.90

8.15 8.25 14.80 15.10

10.50 8.55 7.75 8.30

6.26 6.10 5.65 6.06

18.90 14.70 13.70 14.70

11.50 11.10 10.10 10.70
6.55 6.65 6.77 8.30 8.63 10.69
5.65 6.06 6.20 6.52 7.91 7.73
11.80 12.30 11.90 14.70 15.20 18.80
10.10 10.70 11.10 11.40 14.10 13.80
As of September 19, 2003, there were approximately 14,735 shareholders of record of the ordinary shares, of which approximately 282 were registered in the US, and approximately 14,453 in Singapore. Because many of the US shares are held by brokers and other institutions on behalf of shareholders, Creative is unable to estimate the total number of shareholders represented by these US record holders. On September 19, 2003, the closing price of Creatives ordinary shares on the NASDAQ National Market was $10.85 and on the SGX-ST was S$18.80.

THE CREATIVE NETWORK

Worldwide Corporate Headquarters Creative Technology Ltd. 31 International Business Park, Creative Resource, Singapore 609921 Tel: +65-Fax: +65-Website: www.creative.com
INSIDE ASIA Singapore Broadxent Pte Ltd 31 International Business Park, Creative Resource, Singapore 60991 Tel: +65-Fax: +65-China Creative Future Computer Co. Ltd Creative Park, No.18, Anhuaxili Block 2, Chaoyang District, Beijing 100011 Peoples Republic of China Tel: +86-10-Fax: +86-10-Hong Kong Creative Labs (HK) Limited Unit 927-931, 9/F., Hongkong International Trade & Exhibition Centre, 1 Trademart Drive, Kowloon Bay, Kowloon, Hong Kong Tel: +852-Fax: +852-Japan Creative Media K.K. Kanda Eight Bldg., 3F, 4-6-7 Soto-Kanda, Chiyoda-ku, Tokyo 101-0021, Japan Tel: +81-3-Fax: +81-3-Malaysia Cubic Electronics Sdn Bhd No.1, Jalan T.U.43, Taman Tasik Utama, Air Keroh, 75450 Melaka, Malaysia Tel: +60-6-Fax: +60-6-Taiwan Creative Labs Taiwan Co., Ltd 15F, No. 163, Sec. 1, Keelung Road, Taipei, Taiwan, R.O.C. Zip Code: 110 Tel: +886-2-Fax: +886-2-Australia/New Zealand Creative Labs Pty Ltd Shop 3 5, 524 Parramatta Road Petersham. NSW 2049 Australia Tel: +61-2-Fax: +61-2-9021 9899
US Headquarters Creative Labs, Inc. 1901 McCarthy Boulevard, Milpitas, CA 95035 Tel: +1-408-Fax: +1-408-428 6611
Europe Headquarters Creative Labs (Ireland) Ltd. Ballycoolin Business Park, Blanchardstown, Dublin 15, Ireland Tel: +353-1-Fax: +353-1-820 9557
INSIDE USA Operations Center 5555 Auto Mall Parkway, Fremont, CA94538 Tel: +1-510-Creative Labs Customer Response Center 1523 Cimarron Plaza, Stillwater, Oklahoma 74075 Tel: +1-405-Fax: +1-405-Cambridge SoundWorks, Inc. 100 Brickstone Square, Andover, MA 01810 Tel: +1-978-Fax: +1-978-Website: www.cambridgesoundworks.com Broadxent, Inc. 188 Topaz Street, Milpitas, CA 95035 Tel: +1-408-Fax: +1-408-Website: www.broadxent.com E-mu Systems, Inc. 1600 Green Hills Road, Scotts Valley, CA 95066-4924 Tel: +1-831-Fax: +1-831-Website: www.emu.com Creative Advanced Technology Center 1500 Green Hills Road, Suite 101 Scotts Valley, CA 95067 Tel: +1-831-Fax: +1-831-Website: www.sei.com 3Dlabs (Alabama) Inc. 9668 Madison Boulevard, Madison, AL 35758 Tel: +1-256-Fax: +1-256-Website: www.3dlabs.com.
INSIDE EUROPE United Kingdom Creative Labs (UK) Ltd Unit 3, The Pavilions, Ruscombe Business Park, Ruscombe, Berkshire, RG10 9NN, UK Tel: +44-118-Fax: +44-118-3Dlabs Ltd Meadlake Place Thorpe Lea Road Egham, Surrey, TW20 8HE, UK Tel: +44-178-Fax: +44-178-Benelux Creative Labs N.V. Royal House, Coremansstraat 34 bus 2, B-2600 Bercham Tel: +32-3-2878777 Fax: +32-3-2308550 Denmark Creative Labs A/S Gydevang 39-41, DK-3450 Allerd, Denmark. Tel: +45-48-Fax: +45-48-France Creative Labs, SA 47/53 rue Raspail 92594 Levallois Perret Cedex, France Tel: +33-50 Fax: +33-51 Germany Creative Labs, GmbH Feringastrasse 4, 85774 Mnchen-Unterfhring, Germany Tel: +49-89-Fax: +49-89-Italy Creative Labs Srl Strada 4 ED A/2, 20090 Assago Milanofiori, (MI), Italy Tel: +39-02-Fax: +39-02-Poland Creative Labs Sp. z o.o 02-708 Warsaw ul. Bzowa 21, Poland Tel: +48-22-65 Tel/Fax: +48-22-Portugal Creative Labs Lda. Av. Eng. Duarte Pacheco, Torre 2 Amoreiras, piso 4, sala 4 1070-102 Lisboa, Portugal Tel: +351-21-20 Fax: +351-21-27 Spain Creative Labs, S.L. Constitucin 1-4, 3 Edificio Diagonal 1, 08960 Sant Just Desvern Barcelona, Spain Tel: +34-93-Fax: +34-93-Sweden Creative Technologies Scandinavia AB Spnga Center, Stormbyvgen 2-4, Spnga, Sweden Tel: +46-8-Fax: +46-8-795 7835