VALUATION OF INVESTMENTS Creative holds equity investments in various companies from less than 1% to 100% of the issuers outstanding capital stock. Investments in companies in which Creative acquires more than 50% of the outstanding capital stock, or which are under Creatives effective control, are treated as investments in subsidiaries, and the balance sheets and results of operations are fully consolidated after making an allowance for any minority interests. Companies in which Creatives investments total between 20% and 50% of such companys capital stock are treated as associated companies and recorded on an equity basis, whereby the cost of investment is adjusted to recognise Creatives share of all post acquisition results of operations. As for investments of less than 20%, non-quoted investments are carried at cost, less provisions for permanent impairment where necessary, and quoted investments are reported at fair value with the unrealised gains and losses included as a separate component of shareholders equity. 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.
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.

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.

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.
PricewaterhouseCoopers Singapore August 5, 2003
CONSOLIDATED BALANCE SHEETS
(In US$000, except per share data) June ASSETS Current assets: Cash and cash equivalents Marketable securities Accounts receivable, less allowances of $18,417 and $22,159 Inventory Other assets and prepaids Total current assets Property and equipment, net Investments Other non-current assets Total Assets LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable Accrued liabilities Income taxes payable Current portion of long term obligations and others Total current liabilities Long term obligations Minority interest in subsidiaries Shareholders equity: Ordinary shares (000); S$0.25 par value; Authorized: 200,000 shares Outstanding: 79,714 and 78,866 shares Additional paid-in capital Unrealized holding gains on quoted investments Deferred share compensation Retained earnings Total shareholders equity Total Liabilities and Shareholders Equity $ $ June 30 2002

19,094 9,129 3,706 (79) 2,186 (113) 13,618 (7,777)
24,636 5,233 2,759 26,080 1,843 1,49,303 (5,341)
20,706 6,298 3,214,754 (49,934)
23,968 28,182 1,388 6,368 (11,940) (3,125) (8,294) 99,688
18,243 50,589 2,193 1,298 (33,659) (29,431) (6,014) 89,440
4,478 75,066 17,575 15,673 (94,608) (6,360) (749) 77,505
(15,695) 2,605 11,248 (5,516) (4,914) (12,272)
(8,730) 383 13,936 (25,806) (9,152) (20,629) (49,998)
(34,957) 138 88,874 (110,397) (13,106) (69,448)
(6,690) (3,992) 4,073 30,802 (21,697) (2,887) (19,824) (2,065) (22,280)
229 (10,019) 8,195 (18,013) (2,758) (292) (18,024) (40,682)
1,071 (670) 9,265 (91,029) (4,671) (54) (39,414) (155) (125,657)
The accompanying notes are an integral part of these consolidated financial statements. 20

Years ended June 30 2002

Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Interest paid Income taxes paid, net Non cash transaction: Buyout of a subsidiarys preference shares Shares issued for aqcuisition of subsidiary Purchase of property and equipment financed by capital leases

65,136 166,917 $ 232,053

(1,240) 168,157 $ 166,917 $
(117,600) 285,757 168,157

1,061 10,951

752 11,711

1,028 9,158

11,789 71,724
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In US$000, except share data) Ordinary Shares (000) Balance at June 30, 2000 Shares issued under employee options and share purchase plans Repurchase of ordinary shares Shares issued for purchase of Aureal assets Dividends paid Reversal of unvested deferred share compensation, net Amortization of deferred share compensation Comprehensive loss Balance at June 30, 2001 Shares issued under employee options and share purchase plans Repurchase of ordinary shares Dividends paid Reversal of unvested deferred share compensation, net Amortization of deferred share compensation Comprehensive loss Buyout of a subsidiarys preference shares Shares and share options issued for acquisition of 3Dlabs Balance at June 30, 2002 Shares issued under employee options and share purchase plans Dividends paid Reversal of unvested deferred share compensation, net Amortization of deferred share compensation Comprehensive income (loss) Balance at June 30, 2003 80,325 $ Ordinary Share Capital Unrealised Additional Holding Gains Deferred Paid In (Losses) on Share Capital Investments Compensation 173,948 $

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 be commensurate with the risk inherent in Creatives current business model. Creative performed an assessment for goodwill impairment as at June 30, 2003 and accordingly no impairment of goodwill is assessed.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd) Goodwill and other intangible assets (Contd) A summary of goodwill and other intangible assets are as follows (in US$000):
As of June Other intangible assets Accumulated amortization Other intangible assets, net Goodwill Net goodwill and other intangible assets $ $ 33,682 (24,917) 8,765 91,976 100,741 $ $ 2002 33,682 (15,788) 17,894 91,976 109,870
Goodwill and other intangible assets fully amortized were excluded from above. Other intangible assets amortization expense was $9.1 million, $5.2 million and $6.3 million for fiscal year 2003, 2002 and 2001, respectively, and estimated to be $1.8 million each in fiscal year 2004 to fiscal 2007 and $1.4 million in fiscal 2008. 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. Restructuring costs and accruals for excess facilities In accordance with the provisions of EITF Issue No. 94-3, Accounting for Restructuring Charges, and Staff Accounting Bulletin No.100, Restructuring and Impairment Charges, Creative records restructuring costs when it commits to an exit plan and significant changes to the exit plan are not likely. The estimated loss on facilities which Creative intends to sublease is based on estimates of the timing and amount of sublease income. Creative reassesses this liability quarterly based on market conditions. Exit activities initiated after December 31, 2002, will be accounted for in accordance with SFAS No. 146, Accounting For Costs Associated With Exit Or Disposal Activities. 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.

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 Stock-Based 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 December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation, Transition and Disclosures. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect in interim financial statements. Creative has adopted the interim and annual disclosure requirements of SFAS 148 in this fiscal year 2003. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities. Under that interpretation, certain entities known as Variable Interest Entities (VIE) must be consolidated by the primary beneficiary of the entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. For VIEs in which a significant (but not majority) variable interest is held, certain disclosures are required. FIN 46 requires disclosure of VIE in financial statements issued after January 31, 2003, if it is reasonably possible that as of the transition date: (1) the Company will be the primary beneficiary of an existing VIE that will require consolidation or, (2) the Company will hold a significant variable interest in, or have significant involvement with, an existing VIE. Any VIEs created after January 31, 2002, are immediately subject to the consolidation guidance in FIN 46. The measurement principles of this interpretation will be effective for the Companys 2003 financial statements. Creative does not have any significant entities that require disclosure or new consolidation as a result of adopting the provisions of FIN 46. In April 2003, the FASB issued SFAS 149, Amendment of SFAS 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on Creatives financial position or results of operations. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for interim periods beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have a material impact on Creatives financial position or results of operations.

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.

A summary of options granted to employees, consultants and directors under the subsidiarys stock option plan is presented below:
Options Outstanding Number of Shares (000) Balance as of June 30, 2000 Options granted Options canceled Balance as of June 30, 2001 Options granted Options canceled Balance as of June 30, 2002 Options granted Options canceled Balance as of June 30, 2003 3,(2,540) 2,200 (2,195) 5 (5) Weighted Average Exercise Price ($) 1.98 2.45 1.80 2.39 2.39 2.50 2.50
Creative and Subsidiary Pro Forma Disclosures The fair value of the purchase rights under the Creative employee share purchase plan and stock option plan is estimated using the Black-Scholes model based on the following assumptions:
Fiscal 2003 Volatility Risk-free interest rates Share purchase plan Stock options Dividend yield Expected lives: Share purchase plan Stock options 6 months 0.01 years after vest date 6 months 0.01 years after vest date 6 months 2.18% to 3.26% 1.27% to 3.01% 3.0% 2.18% to 5.16% 2.16% to 5.16% 2.5% 3.78% to 6.09% 45% Fiscal 2002 60% Fiscal 2001 50%
NOTE 9 EMPLOYEE SHARE PURCHASE AND STOCK OPTION PLANS (Contd)
Years ended June Weighted average fair value of stock options granted: Stock options: At market Below market $ $ 1.70 $ $ 1.53 3.74 $ $ 2002 2001
The fair value of the purchase rights under the subsidiary stock option plan is estimated at the date of the grant using the Black-Scholes model based on the following assumptions:
Fiscal 2003 Volatility Risk-free interest rates Dividend yield Expected lives Fiscal 2002 Fiscal 2001 3.78% to 6.34% 0.01 years after vest date
The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:
In US$000, except for per share data Years ended June Net income (loss) as reported Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects Add: Stock-based employee compensation expense included in reported net income, net of related tax effects Pro forma net income (loss) Earnings (loss) per share: Basic as reported Basic pro forma Diluted as reported Diluted pro forma $ $ $ $ 0.30 0.25 0.29 0.25 $ $ $ $ (0.27) (0.32) (0.27) (0.32) $ $ $ $ (1.65) (1.71) (1.65) (1.71) $ $ 23,377 $ 2002 (19,727) 2001 $ (130,373)

3Dlabs has an overdraft facility for 2.0 million Pounds Sterling expiring on December 31, 2002 and the outstanding balance was $3.7 million as at June 30, 2002. The facility charges interest at a rate of 1.0% above the banks currency base rate if the overdraft balance is less than 2.0 million Pounds Sterling and 4.0% above the banks currency base rate at any amount exceeding 2.0 million Pounds Sterling. The banks currency base rate was 4.0% at June 30, 2002. A $3.5 million restricted investment with a Bermuda financial institution was held as collateral for this facility in the form of a certificate of deposit (see Note 1). At June 30, 2003, the outstanding balance has been repaid in full and all liabilities discharged. In August 2000, 3Dlabs entered into a $1.0 million credit facility to finance certain software purchases. The facility requires equal quarterly installments of $0.25 million and expired December 31, 2001. The repayments under the credit facility were revised in 2001, resulting in equal monthly repayments of $0.08 million commencing January 2002. The advances under the facility accrue interest at a per annum rate of the banks currency base rate of 4.0% plus 1%. At June 30, 2002, $0.75 million was outstanding. A $1.0 million restricted investment with a Bermuda financial institution was held as collateral for this facility in the form of a certificate of deposit (see Note 1). At June 30, 2003, the outstanding balance has been repaid in full and all liabilities discharged. 3Dlabs has entered into a Loan and Security Agreement with a financial institution in an amount up to $20.0 million or 85% of the qualified accounts receivable of 3Dlabs U.S. companies, whichever is less. The Agreement expires in July 2004 and is secured by all tangible and intangible assets of 3Dlabs. Borrowings under the Agreement bear interest at 1.25% above the institutions prime rate. The Agreement contains certain covenants, including that 3Dlabs meet certain agreedupon financial covenants. There were no borrowings outstanding under the Agreement as at June 30, 2003. In December 1999, prior to its acquisition by Creative, 3Dlabs issued a subordinated convertible note to an investor in the principal amount of $7.5 million which matures in December 2004. The outstanding unpaid principal balance under the note bears interest at a rate of 4.5% per annum, payable upon conversion, prepayment or at maturity. The holder of the note has the option to convert all or a portion of the outstanding unpaid principal balance under the note plus interest into shares of 3Dlabs common stock at a conversion price of $5.563 per share or to transfer the note to a third party. At any time after June 2002, 3Dlabs has the option to require the noteholder to convert all or a portion of the outstanding unpaid principal balance under the note plus interest, so long as the weighted average closing share price of 3Dlabs common stock is equal to or greater than the conversion price of $5.563 for twenty trading days prior to the conversion date. In August 2002, after the closing of the acquisition of 3Dlabs by Creative, 3Dlabs, the noteholder and Creative entered into an amendment of the convertible subordinated note agreement and convertible subordinated note to allow the outstanding unpaid principal balance under the note plus interest to be convertible into ordinary shares of Creative, at the conversion price equal to $18.05. To-date, no conversion has been made. 3Dlabs may prepay the outstanding unpaid principal balance plus interest due upon thirty days prior written notice to the noteholder. The following table presents the payments due by period for the long term debt and capital lease obligations as of June 30, 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.

Graphics

Creative WebCam Pro

Creative WebCam Pro eX

Creative CardCam

Creative CardCam Value

Creative WebCam Go ES

3D Labs Wildcat VP

3D Labs Wildcat 4
Graphic Blaster Picture Perfect

3D Blaster 5 RX9800 Pro

Communications

Prosumer Speakers System

From Strength to Strength _ The Future
No longer contented with being the leader in the sound card industry, we have tapped on our strength and expertise to extend to other areas of audio. In line with our far-reaching vision and strategy, we have produced a slew of top-notch quality MP3 players and speakers amongst a host of Creative products for consumers who are IT-savvy, who want choices and who want to be entertained. More than that, we must be swift, nimble and flexible to ride on favorable market forces or react to changes in order to remain competitive. All this is made possible by a team of dedicated people who believe and enjoy what we do. This is what motivates us to keep innovating and create quality products that aspire to deliver fantastic digital entertainment for many unforgettable, inspiring experiences. e lifest tyle digital entertainment philosophy.
Creative Broadband Blaster BritePort 7420C
Creative Broadband Blaster BritePort Router 8110
Network Blaster Wireless LAN Access Point
Network Blaster Wireless LAN PCMCIA Card
Newton Theater T300 6.1 Home Theater Speaker System
Newton Series T500 Tower Speakers
Newton Series T300 Tower Speakers
Newton Theater MC300.5 Home Theater Speaker System
Network Blaster Wireless LAN USB Adapter
Network Blaster Wireless 2020 PCMCIA Card
Network Blaster Wireless 2103 Access Point Router
Network Blaster Wireless Access Point
Network Blaster Notebook Adapter
MovieWorks 208 Home Theater Speaker System
MusicWorks 411 Mini-System
Newton Series MC500 Main/Center Speakers
Newton Series S300 Surround Speakers
Newton Series P500 Powered Subwoofer

Network Blaster Wireless USB Adapter
Network Blaster Wireless Access Point Router

Modem Blaster USB DE5673

Modem Blaster V.92 USB

Modem Blaster PCI

Newton Series M50 Bookshelf Speakers

SoundWorks Radio CD

Twelve Transportable Speaker System
Outdoor 62 All-Weather Speakers
Ambiance 82 In-Wall Speakers