GEMSTAR INTERNATIONAL GROUP LTD - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]

FOR THE FISCAL YEAR ENDED MARCH 31, 1998

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-26878

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GEMSTAR INTERNATIONAL GROUP LIMITED
(Exact name of Registrant as specified in its charter)

BRITISH VIRGIN ISLANDS N/A
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

135 NORTH LOS ROBLES AVENUE, SUITE 800, PASADENA, CALIFORNIA 91101
(Address of Principal Executive Offices) (Zip Code)

(626) 792-5700
(Registrant's telephone number, including area code)

Securities registered or to be registered pursuant to Section 12(b) of the
Act: NONE

Securities registered or to be registered pursuant to Section 12(g) of the
Act:
ORDINARY SHARES, PAR VALUE $.01 PER SHARE
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

As of June 15, 1998, there were outstanding 48,507,739 shares of the
Registrant's ordinary shares, par value $.01 per share ("Ordinary Shares"),
which is the only class of Ordinary Shares of the Registrant. As of June 15,
1998, the aggregate market value of Ordinary Shares held by non-affiliates of
the Registrant, based on the closing sales price of $33 7/8 per share as
reported by Nasdaq, was approximately $1,142.4 million.

PART I

ITEM 1. BUSINESS.

GENERAL

Gemstar International Group Limited (the "Company" or "Gemstar") develops,
markets and licenses proprietary technologies and systems that simplify and
enhance consumers' interaction with electronics products and other platforms
that deliver video, programming information and other data. The Company seeks
to have its technologies widely licensed, incorporated and accepted as the
technologies and systems of choice by consumer electronics manufacturers;
service providers ("Service Providers") such as owners or operators of cable
systems, telephone networks, Internet service providers, direct broadcast
satellite providers, wireless systems and other multi-channel video
programming distributors; software developers; and consumers.

The Company's first proprietary system, VCR Plus+, was introduced in 1990
and is widely accepted as a de facto industry standard for programming VCRs
and is currently incorporated into virtually every major brand of VCR sold
worldwide. VCR Plus+ enables consumers to record a television program by
simply entering a PlusCode Number (a proprietary one to eight digit number)
into a VCR or television equipped with the VCR Plus+ technology ("PlusCode
Numbers"). PlusCode Numbers are printed next to television program listings in
over 1,800 publications worldwide, with a combined circulation of over 330
million.

The Company has also developed and acquired a large portfolio of
technologies and intellectual property necessary to implement interactive
programming guides (the "Gemstar Guide Technology") which enable consumers to
navigate through, sort, select, and record television programming. The Gemstar
Guide Technology has been licensed for, or incorporated into, televisions,
VCRs, TV-VCR combination units, cable set top boxes, integrated satellite
receiver decoders, personal computers, PCTVs and Internet appliances. The
Company believes that with the increase in programming content and number of
accessible channels, the Gemstar Guide Technology will become an increasingly
important tool for assisting consumers in sorting, selecting and recording
television programming. The Company further believes that its interactive
program guides will provide an attractive vehicle for the delivery of
advertising and other content to consumers.

The Company's primary source of revenues to date has been license fees paid
by consumer electronics manufacturers and publications for the licensing of
the VCR Plus+ technology and the right to print the PlusCode numbers,
respectively, and to a lesser extent, licensing of the Gemstar Guide
Technology. The Company pursues a licensing strategy for its VCR Plus+ system
and Gemstar Guide Technology wherein the Company is paid on-going per unit
license fees and, in certain instances, one-time, up-front license fees. In
addition, the Company is planning to pursue a recurring revenue model for its
proprietary Gemstar Guide Technology wherein the Company would receive
revenues from the delivery of advertising and promotion displayed on the
guides, from sponsorship of guide pages and from data services and interactive
transactions accessed through the guide, however, to date, the Company has not
derived any revenue from such model. The Company does not charge consumers
set-up or subscription fees for the use of the guide and encourages its
licensed Service Providers to similarly provide the guide without incremental
cost to the consumer.

The Company believes that successful implementation of the its technology
into a broad range of platforms requires the Company to coordinate the
activities of companies in many industries. Accordingly, the Company seeks
long-term relationships with a broad range of consumer electronics and other
manufacturers, television broadcasters, cable companies and software
developers. The Company recently entered into two strategic relationships to
cover multiple interactive program guide platforms. In November 1997, the
Company signed a multi-year agreement with Thomson Consumer Electronics, Inc.
("Thomson"), the United States' largest manufacturer and marketer of
television receivers and related video products, in which the parties agreed,
among other things, to cooperate in establishing the Gemstar Guide Technology
as the industry standard in North and South America, and to jointly pursue a
recurring revenue model in the consumer electronics sector. In January 1998,
the Company entered into a cross-licensing agreement with Microsoft
Corporation ("Microsoft") pursuant to which Microsoft agreed to license the
Gemstar Guide Technology as part of its TV viewer feature in the Windows 98
operating system. Microsoft has also licensed the right to incorporate the
Gemstar Guide Technology in products worldwide that incorporate interactive
program guides.

1

The Company's licensees include: Aiwa Company, Ltd.; Akai Electronics Co.,
Ltd.; Cox Cable Communications; Daewoo Electronics Company, Ltd.; Funai
Electric Co., Ltd.; GTE Communications Systems; Hitachi Corporation, Ltd.;
Hughes Network Systems; JVC; LG Electronics; Matsushita Electric Industrial
Co., Ltd. (Panasonic); Microsoft; Mitsubishi Electric Corporation; Orion
Electric Company, Ltd.; Philips/Magnavox; Pioneer Electronics Corp.; Samsung
Electronics Company, Ltd.; Sanyo Electric Co., Ltd.; Scientific-Atlanta; Sharp
Corporation; Shintom Co. Ltd.; Sony Corporation; SNET Personal Vision, Inc.;
Thomson (ProScan, RCA, GE); Time Warner Cable; Toshiba Corporation; Uniden
America Corporation; and Zenith Electronics Corporation.

The Company was organized in April 1992 as a British Virgin Islands
corporation. Historically, the Company's licensing operations in the United
States were conducted through Gemstar Development Corporation ("GDC"), the
shareholders of which were the same as the Company's shareholders, and the
Company operated internationally through its various subsidiaries incorporated
outside of the United States. In June 1995, the Company consolidated its
domestic and international licensing operations by exchanging Ordinary Shares
of the Company for all of the outstanding stock of GDC (the "GDC Exchange").
As a result of the GDC Exchange, GDC became a wholly owned subsidiary of the
Company. In May 1997, the Company acquired StarSight Telecast, Inc., a
California corporation ("StarSight"). In connection with the acquisition of
StarSight, the Company issued approximately 15.5 million Ordinary Shares for
all of the outstanding stock of StarSight and assumed outstanding StarSight
stock options and warrants which were converted to options and warrants to
purchase approximately 1.4 million and 1.8 million of the Company's Ordinary
Shares, respectively.

INDUSTRY OVERVIEW

Television viewers today are faced with a daunting array of viewing options.
Expansion of analog cable television system capacity has increased the number
of available channels in many households to 100 or more. Direct satellite
broadcast systems now available in most areas of the U.S. can deliver over 200
channels. The adoption of digital broadcasting technology and further
improvement in compression technologies promise an even greater increase in
channel capacity (300 to 500 channels) in digital cable or terrestrial digital
broadcast systems. Further fueling the wealth of consumer viewing choices is
the rapid growth in the number of national broadcast and cable networks in the
past decade, as well as the widespread availability of premium cable
programming and pay-per-view options.

The Company believes that the proliferation of television programming
choices gives rise to the need for consumer electronics devices, including
televisions and VCRs, that provide effective interactive methods of sorting,
selecting and recording television shows which go beyond the limited utility
offered by printed program listings. At the same time, the experience of
consumer electronics manufacturers shows that customer tolerance for complex
and expensive functionalities in video entertainment devices is extremely
limited. To appeal to a broad range of consumers, the Company believes that
home video technology enhancements must be intuitive, cost-effective and easy
to use.

Accordingly, the Company has focused on developing a variety of cost-
effective interactive technologies which help viewers cope with the
proliferation of programming options in a straightforward, user-friendly
manner. The Company's first product, the VCR Plus+ system, simplified the task
of recording television programming. Traditional VCR programming required
users to input multiple data items for each program to be recorded, including
the date, beginning time, length and channel of the desired programs--a
difficult, tedious and error-prone process for many users. By simplifying the
program recording process to entering a single PlusCode number for a desired
program, VCR Plus+ eliminates the complexity and frustration attendant to
traditional VCR programming methods. VCR Plus+ obviates the need for consumers
to track complex and changing program schedules and channel line-ups.
Similarly, the Gemstar Guide Technology is designed to simplify a viewer's
navigation, selection and recording of broadcast, cable and satellite
programming. Gemstar Guide Technology allows users to easily sort, select and
record programming from all available sources, and to intuitively schedule
programs for viewing or recording.

2

VCR Plus+ is now widely accepted and incorporated into most major brands of
VCR, television and TV-VCR combination products. Similarly, the Gemstar Guide
Technology has been licensed by major manufacturers, Service Providers and
software developers in the consumer electronics, satellite, cable,
multichannel multipoint distribution service, and personal computer
industries.

According to the Broadcast Information Bureau World Guide to Television
("BIB"), in France, Germany, Italy, United Kingdom and Spain, the percentage
of television households owning VCRs as of 1997, was 68%, 60%, 69%, 79% and
58%, respectively. BIB estimates that, as of 1997, 84.2% of the television
households in the U.S. owned VCRs. Electronic Industries Association estimated
that consumer VCR sales in the U.S. were over 16.7 million in 1997, an
increase of 7% percent over the previous year. The Company believes that VCR
sales in the U.S. are driven by the replacement of older equipment and the
purchase of multiple units for use within a single household, and that VCR
sales outside the U.S. are substantially greater than those within the U.S.
because of the greater percentage of television households lacking VCRs.
According to Electronic Industry Association, in 1997 consumer portable and
table color television sales in the U.S. were approximately 21.3 million
units. The Company estimates that the number of hardware platforms shipped
annually which are suitable for incorporating the Gemstar Guide Technology may
be as many as 50 million or more, and include televisions (24.5 million units
per year in the U.S., including TV-VCR combination units), VCRs (16.7 million
units per year in the U.S.), set top cable boxes (5 million units per year in
the U.S.), integrated satellite receivers and decoders (4 million per year in
the U.S.) and tuner-equipped personal computers.

The manufacture and sale of VCRs and televisions is highly competitive and
dominated by large consumer electronics companies such as Hitachi Corporation,
Ltd., Matsushita Electric Industrial Co., Ltd., Mitsubishi Electric
Corporation, Samsung Electronics Company, Ltd., Sony Corporation; Thomson,
Toshiba Corporation, Zenith Electronics Corporation and others. Manufacturers
of VCRs and televisions compete primarily on price and features. Innovations
such as remote control and on-screen programming were quickly adopted by major
manufacturers. Innovations such as these initially permit a product model to
command a premium price and, if cost-effective for mass market implementation,
may become "must-have" features that are later incorporated into a broad range
of products. The Company believes that the size of the television and VCR
markets and the competitive pressures within the industry present an
opportunity for companies that can provide innovative technologies that both
appeal to consumers and are attractive to, and cost-effective for,
manufacturers.

Service Providers such as cable system owners and operators and direct
broadcast satellite broadcasters compete with other multi-channel video
programming distributors based on price, the breadth of programming choices
and other viewing features. Service Providers seek to differentiate themselves
from competitive programming distributors and to enhance potential revenues by
offering viewers premium services such as "pay-per-view" programming and other
subscription services. The Company believes that consumer demand for systems
and technologies that help to organize viewing choices, together with Service
Providers' desire to differentiate themselves from competitive programming
distributors and to enhance potential revenues, provides an opportunity for
the Gemstar Guide Technology.

GEMSTAR STRATEGY

The Company's objective is to strengthen its position as a worldwide leader
in developing, marketing and licensing proprietary technologies and systems
that simplify and enhance consumers' interaction with electronics products and
other platforms that deliver video, programming information and other data.
Key elements of the Company's strategy include the following:

Develop Solutions that Address Consumer Needs. The Company believes that
the development of solutions that address consumers' needs for user-
friendly video entertainment products is central to the success of its
technologies and systems. Due to the complexity of video entertainment
devices, consumers typically utilize only a portion of their available
features. To appeal to a broad range of consumers, the Company believes
that home video technology enhancements must be intuitive, cost-effective
and easy to

3

use. Accordingly, the Company seeks to identify and develop technologies
and systems that simplify and enhance consumers' interaction with
electronics products and other platforms that deliver video, programming
information and other data, thereby providing significant value to
consumers. The Company also believes that the growth in available viewing
options has created a need for interactive program guides to assist
consumers in the sorting, selection and recording of programs, much like a
browser or a search engine facilitates the location of desired sites on the
Internet. The Company intends to continue to identify and address consumer
needs with value-added technologies.

Protect Proprietary Solutions. The Company believes that significant
value lies in the intellectual property it has developed, acquired and
incorporated into its technologies and systems. The markets in which the
Company competes are extremely competitive, and it is critical to the
Company's success that it protect and enhance its competitive advantages,
including its intellectual property. Accordingly, the Company has
implemented an extensive intellectual property protection program,
including seeking patent protection where appropriate. In addition, where
the Company believes that others have infringed its intellectual property
rights, it has taken appropriate actions, including litigation, to protect
its rights. The Company intends to continue to aggressively protect its
intellectual property and other competitive advantages.

Establish and Maintain Cross-Industry Support. The successful
implementation of the Company's technologies and systems requires the
Company to coordinate the activities of companies in many industries that
have not historically worked closely together, including consumer
electronics products manufacturers, publishers, broadcasters, cable and
software companies. The Company has established long-term relationships
within these industries and has demonstrated an ability to understand their
varying business objectives and coordinate cross-industry efforts. The
Company believes that its ability to work closely with disparate industry
participants facilitated the success of VCR Plus+ and will contribute to
the successful adoption of the Gemstar Guide Technology. The Company
believes that its ability to understand and coordinate the business
objectives of multiple industry groups provides a significant competitive
advantage.

Develop Multi-Platform Technologies and Systems. The Company seeks to
provide the technologies and systems through which video programming
information and other related data and services is obtained, irrespective
of the delivery platform. As a result, the Company is aggressively pursuing
a multi-platform strategy with respect to licensing its technologies and
systems. The Company has designed its technology to be adaptable to
multiple platforms so that its extensive feature set can become a de facto
industry standard. To date, the Company has licensed its technologies for
inclusion in a range of information delivery platforms that includes
televisions, VCRs, TV-VCR combination units, digital versatile disk
recorders ("DVD Recorders"), cable set top boxes, integrated satellite
receiver decoders, personal computers, PCTVs and Internet appliances. The
Company intends to license its technologies for use on other platforms that
it believes may be widely adopted by consumers.

License Broadly to Create de facto Standard. The Company's strategy is to
establish its technologies and systems as industry standards. Accordingly,
the Company strives to broadly license its technologies non-exclusively
within targeted industry groups. For example, VCR Plus+, widely accepted as
a de facto industry standard, is licensed to virtually every major VCR
manufacturer. Additionally, the Company has
licensed its Gemstar Guide Technology to television manufacturers, cable
operators, and DSS service providers and intends to continue to
aggressively pursue additional licensees. The Company has established
itself as an independent licensor that does not directly compete with its
licensees.

Pursue Recurring Revenue Model. The Company is pursuing recurring revenue
opportunities that may arise in connection with the implementation of the
Gemstar Guide Technology. For example, the Company believes it can provide
additional value-added services to end users, such as on-screen advertising
and subscription services that can be accessed through its future installed
base of Company-licensed interactive program guides.

4

PRODUCTS

VCR Plus+

VCR Plus+ was introduced in 1990 to simplify the programming of VCRs for
consumers and has been adopted as the standard VCR programming aid by
virtually every major consumer electronics manufacturer worldwide. VCR Plus+
is incorporated into VCRs by licensed consumer electronics manufacturers and
enables consumers to record a television program by simply entering a
proprietary one to eight digit PlusCode Number, via a remote control, into a
VCR or television. PlusCode Numbers are published next to television listings
in participating newspapers and television program guides. PlusCode Numbers
are generated through a patented process developed by the Company and are now
carried by over 1,800 newspapers and magazines worldwide, including the New
York Times, the Los Angeles Times, TV Guide, the Asahi Shimbun (Japan), the
Sun (U.K.), the Daily Mirror (U.K.) and the South China Morning Post (Hong
Kong). The Company estimates that in 1997 the combined worldwide circulation
of all publications that contained PlusCode Numbers was approximately 330
million.

The Company continues to develop and introduce additional VCR Plus+ features
that manufacturers can license from the Company to enhance the functionality
of VCR Plus+. These features include systems which are capable of automating
the setup for VCR Plus+, systems which control set-top boxes, systems which
update the clock information and cable channel lineup information, and systems
which enhance the functionality of the V-chip parental control system. The V-
chip parental control system becomes mandatory on at least half of each
manufacturers' TV models with a picture size of 13 inches or greater sold in
the United States beginning after July 1, 1998, and the remaining half of each
manufacturers' models by January 1, 2000, is intended to give a parent the
flexibility and control to identify specific shows to block or unblock from
viewing. VCR Plus+ is also licensed to be incorporated into DVD Recorders. The
Company believes that DVD Recorders incorporating the VCR Plus+ technology
will become commercially available during the Company's 1999 fiscal year.

Interactive Program Guides

The Gemstar Guide Technology was introduced by the Company to implement
interactive programming guides which enable consumers to navigate through,
sort, select and record television programming. The Gemstar Guide Technology
also allows broadcasters to disseminate program information, offers consumer
electronics manufacturers an additional television feature, and provides
Service Providers with an effective tool for marketing their video programming
content. The Gemstar Guide Technology has been licensed for, or incorporated
into, televisions, VCRs, TV-VCR combination units, cable set top boxes,
integrated satellite receiver decoders, personal computers, PCTVs and Internet
appliances. The Company believes that its interactive program guides will
provide an attractive vehicle for the delivery of advertising and other
content to consumers.

The following are major current and anticipated features of the Gemstar
Guide Technology, some of which are not available in all implementations of
the Company's guides:

Program Schedules. The Gemstar Guide Technology provides an up-to-date
and accurate on-screen program schedule listing all programs by title. The
program schedule covers all over-the-air broadcast and cable channels and
provides consumers with future schedule information from one to eight days.

Program Descriptions. In certain implementations, program descriptions
are provided. A program description for a movie, for example, may include
the title, year of release, leading actors/actresses, rating,
star-rating, plot description, black & white or color, stereo, closed
captioning and secondary audio information. Some implementations offer a
dynamic program description which is displayed as soon as the user
highlights a program title. Additionally, in certain implementations, two
levels of descriptions are presented, an abbreviated description, and a
detailed description.

Sorting Functions. The Gemstar Guide Technology offers a variety of
sorting capabilities. Implemented features include sorting by category
(such as movies, sports, children's programming), sorting by theme within a
category (such as drama, action, horror, within the movie category, and
baseball, basketball, football, within the sports category), and sorting by
title. Other features that may be implemented are sorting by rating (in
conjunction with parental guidance and parental control), sorting by
actors/actresses and directors, and sorting by new or repeat showings.

5

Picture-in-Guide. In consumer electronics implementations of the Gemstar
Guide Technology, the television picture is integrated into the guide
screen using picture-in-guide technology. This allows a viewer to continue
television viewing while using the guide. The picture window features full
video and sound while a written description of the program is presented.
The viewer then has a choice of two modes of operation. Under the first
mode, the picture window changes channels automatically to correspond with
the channel highlighted in the guide by the viewer. This mode permits full
text and video surfing by the viewer. Under the second mode, the picture
window is locked on a selected channel. This mode permits the viewer to
continue watching the current program while reviewing other program
options.

Tuning by Title. The Gemstar Guide Technology allows a viewer, with the
push of a button, to tune to a selected program that is highlighted on the
interactive program guide.

One Button Recording. The Gemstar Guide Technology enables a viewer to
highlight a program on the guide and schedule it for recording by touching
a single button. The viewer has the choice of recording single episodes,
daily episodes for programs like soap operas or talk shows, or weekly
episodes for programs that are televised once each week. A review screen
displays all programs selected for recording. In some implementations, the
length of tape needed to record all of the scheduled programs within the
next 24 hours is displayed.

One Button Scheduling. The Gemstar Guide Technology is expected to enable
a viewer to highlight a future program and schedule it for viewing. At the
appropriate time, the television will change channels, or cause the channel
to be changed, to the scheduled program. If the television is turned off,
it is automatically turned on, and automatically turned off after the end
of the scheduled program.

Automatic Clock and Channel Setup. The Gemstar Guide Technology
automatically sets the VCR clock and the channel lineup (both broadcast and
cable) as soon as the user enters the zip code in which the unit is
located.

The Company currently markets and licenses the Gemstar Guide Technology to
consumer electronics manufacturers which incorporate the technology into TVs,
VCRs and TV-VCR combination units ("Consumer Electronics Guides"), and to
Service Providers and manufacturers that supply Service Providers with cable
set-top boxes ("Service Provider Guides"). In the consumer electronics sector,
the Gemstar Guide Technology enables licensed manufacturers to enhance the
functionality and appeal of their products and to realize additional revenue
through premium pricing. The Company believes that the additional costs to
manufacturers of incorporating its technologies into their products must be as
low as possible in order to encourage adoption of its technology by
manufacturers. The Company also believes that its systems' design must be
user-friendly and aesthetically appealing to consumers. The Company's research
and design team in Bedford, Massachusetts works closely with each licensed
manufacturer to achieve these implementation and design objectives. In the
Service Provider sector, the Gemstar Guide Technology enables Service
Providers to market additional services to subscribers. The Gemstar Guide
Technology allows Service Providers to customize certain elements of the guide
for subscribers and also allows subscribers to upgrade features and services
over time. The guide is compatible with the Service Provider's subscription
management and pay-per-view operations.

LICENSEES AND LICENSING

The Company generates licensing revenue through licenses to consumer
electronics manufacturers, Service Providers and software developers, via a
combination of one-time, non-refundable licensing payments and per-unit
license fees as well as to newspapers, magazines and other publications via
license fees for the right to print the PlusCode Numbers. In some cases, the
Company also charges a fee for the development and transfer of relevant
technologies.

6

VCR Plus+

The Company has licensed the VCR Plus+ technology to virtually every major
VCR manufacturer, including the following manufacturers and their associated
North American, European, Asian and South American brands:

Aiwa Company, Ltd. Nokia Technology GmbH Shintom Co., Ltd.
Akai Electric Co., Ltd. North American Philips Corporation Sony Corporation
Daewoo ElectronicsCompany, Ltd. Orion Electric Company, Ltd. Thomson Consumer Electronics
Funai Electric Co., Ltd. Philips Electronics N.V. (Proscan, RCA, GE)
Goldstar Co., Ltd. Pioneer Electronics Corp. Toshiba Corporation
Hitachi Corporation, Ltd. Samsung Electronics Company, Ltd. Victor Company of Japan, Ltd.
Matsushita Electric Sanyo Electric Co., Ltd. Zenith Electronics Corporation
Industrial Co., Ltd. Sharp Corporation
Mitsubishi Electric Corporation

The licensed manufacturers which employ the Company's technology pay the
Company an ongoing per unit license fee based upon the number of units shipped
that incorporate the VCR Plus+ technology. In some cases, such manufacturers
have also paid the Company an up-front, one-time licensing fee. The Company
continues to develop and introduce additional VCR Plus+ features that
manufacturers can license from the Company to enhance the functionality of VCR
Plus+. Manufacturers are required to pay an additional license fee for each
unit incorporating an enhanced feature. License agreements with manufacturers
have terms which typically range from three to seven years.

The Company's license fees for the right to print its proprietary PlusCode
Numbers in publications are based on the circulation of each publication. The
Company's agreements with newspapers and magazines that publish PlusCode
Numbers have terms ranging from one to seven years and provide for modest
license fees to the Company. Agreements with certain publications require the
publications to provide substantial promotion of the VCR Plus+ system. The
Company has entered into an agency agreement with United Feature Syndicate,
Inc. to handle the licensing of PlusCode Numbers to newspapers in the U.S. and
other countries and to maintain certain ongoing relationships with existing
publishers.

Interactive Program Guides

The Company licenses the Gemstar Guide Technology to major consumer
electronics manufacturers, including the following manufacturers and their
associated North American, European, Asian and South American brands:

Hitachi, Ltd. Philips Consumer Electronics Company Thomson Multimedia S.A.
Matsushita Electric Industrial Co., Ltd. Sanyo Electric Company, Ltd. (Proscan, RCA, GE)
(Panasonic) Sharp Corporation Victor Company of Japan, Ltd.
Mitsubishi Electric Corporation Sony Corporation Zenith Electronics Corporation

The Company licenses the Gemstar Guide Technology to consumer electronics
manufacturers for a combination of a one-time non-refundable fee and
continuing license fees based on the number of units shipped incorporating the
licensed technology. License agreements with such manufacturers have terms
which typically range from three to seven years.

The Company licenses the Gemstar Guide Technology to Service Providers and
manufacturers in the cable, satellite and set-top box industries, including
the following:

CABLE OPERATORS SATELLITE SET-TOP BOX MANUFACTURERS
--------------- --------- -------------------------

Americast Hitachi Corporation, Ltd. Scientific Atlanta
Cox Cable Communications Hughes Network Systems
GTE Communications Systems Matsushita Consumer Electronics Company
Time Warner Cable Sony Corporation
TKR Cable Company Americast Toshiba Corporation
Thomson
Uniden America Corporation

7

In January 1998 the Company entered into a cross-licensing agreement with
Microsoft pursuant to which Microsoft agreed to adopt the Gemstar Guide
Technology as part of its TV Viewer feature in the Windows '98 operating
system and in Microsoft products worldwide that incorporate interactive
program guides.

The Company typically requires that licensees adhere to a set of
specifications for incorporating Gemstar technology in their products. The
specifications prescribe minimum functionality which must be implemented,
maximum permitted functionality, and certain functionalities or features which
require additional license fees or special licensing terms. The Company's
license agreements typically contain limitations on licensees' ability to
assert that the Company's technology infringes their intellectual property.
The Company intends to require software developer licensees to agree to obtain
such commitments from Service Providers to whom they supply software
incorporating Gemstar technology.

TECHNOLOGY

VCR Plus+

The Company's VCR Plus + technology allows a user to record a program simply
by entering a proprietary PlusCode Number into a VCR or television. The
PlusCode Numbers encode, in a compressed and encrypted form, the essential
elements of programming information, including date, time, channel and length
of program. The PlusCode Numbers are decoded by the Company's proprietary
software, which is embedded in a microprocessor in the VCRs or televisions by
licensed consumer electronics manufacturers. Accordingly, when the user enters
a PlusCode Number, the VCR Plus+ system turns on the VCR, records the
appropriate channel at the appropriate time and then shuts off the VCR. The
VCR Plus+ technology has also been incorporated into televisions and licensed
to be incorporated into DVD Recorders. A television incorporating the VCR
Plus+ technology controls a VCR through infrared signals.

Interactive Program Guides

In order to transmit programming information directly to end-users of its
interactive program guides, the Company has designed and implemented a data
delivery system (the "Gemstar Data Delivery System"). The Gemstar Data
Delivery System includes communication networks comprised of a central
computer which transmits program data via various means to the Company's
insertion equipment located in network headends, cable headends and broadcast
stations for inclusion in television signals, as well as proprietary methods
and technologies for assembling, editing, data encryption, data packaging,
data insertion, data distribution and data broadcasting of television program
listing information and other data. It also includes mirror sites, emergency
override systems and procedures, emergency recovery systems and procedures,
and data quality monitoring systems to ensure the successful transmission of
the Company's data.

The Company typically receives television program listing data from
commercial suppliers and applies quality control and editing procedures to
customize the data in a format suitable for the Company's interactive program
guides. The Company has entered into an agreement to purchase programming
information in electronic form from Tribune Media Service, Inc., a subsidiary
of the Tribune Company and a leading supplier of television program
information, as well as other commercial services. Once the data is received,
it is electronically converted into data packets ready for transmission. In
most cases, the data is encrypted. Consumer Electronic Guides utilize the VCR
Plus+ system for program identification, data encryption and data compression.
After the program information is reformatted, the data packets are transmitted
via a variety of transmission means, including land-line telephone link, NABTS
broadcast, and satellite link to the Company's insertion equipment located in
network headends, cable headends, and broadcast stations for inclusion in the
television signals. The data is then broadcast by the Company pursuant to
agreements with local television stations, cable broadcasters and national
television networks. The Gemstar Data Delivery System presently includes over
500 local television broadcast stations, three national cable networks,
five national broadcast networks (ABC, FOX, CBS, UPN and PBS) which combine to
cover virtually all U.S. television households with multiple redundancy in
most areas. Similar agreements have been reached with the Tokyo Broadcasting
System, the largest private television

8

network in Japan, Canadian Broadcasting Company, a national broadcaster in
Canada, and RTL, a national broadcaster in Germany. The Company also intends
to seek similar agreements with other broadcasters which will provide the
Company with additional redundancy of coverage and will provide broadcasters
with the ability to update their own program information. These television
stations and cable companies broadcast, both over the air and through local
cable television operators, the television program listing data for all
channels (including information of other networks or stations) through their
vertical blanking interval which is the unused air time between television
picture frames.

In each of its agreements with broadcasters, the Company has the right to
install its insertion equipment required to insert data into the vertical
blanking interval without charge to the broadcasters. In order to ensure the
availability and quality of such equipment to its broadcasters, in 1993 the
Company acquired a majority ownership interest in NORPAK Corporation, a
Canadian based company and leading manufacturer of broadcast data insertion
equipment. NORPAK Corporation presently supplies data-insertion equipment to
major broadcasters such as the ABC and CBS Television Networks and Turner
Broadcasting Systems.

The current design of the Company's Service Provider Guides includes a
software application that is downloaded and stored in flash memory in advanced
analog and digital converter boxes containing up to seven days of program
information. The application is supplied with data, updated daily, through the
Gemstar Data Delivery System to viewers through their Service Providers. The
Service Provider Guides store the infra-red code base of VCRs and cable set-
top boxes and control them by infra-red emission.

STRATEGIC RELATIONSHIPS

In addition to its customary licensing arrangements with consumer
electronics manufacturers and Service Providers, the Company has entered into
relationships with parties that can offer strategic benefits. The Company
believes that the design and capabilities of the Gemstar Guide Technology will
allow the Company and the entities with which the Company enters into
strategic relationships to target advertisers, such as cable and broadcast
television networks and video and entertainment related product providers to
generate advertising revenues. The Company intends to further exploit the
Gemstar Guide Technology through these strategic relationships.

Thomson. In November 1997, the Company signed an agreement with Thomson to
establish the Company's interactive program guides technologies in consumer
electronics. The first element is a multi-year, multi-million dollar license
of the Gemstar Guide Technology to Thomson. The second element provides for
cooperation in establishing the Company's interactive program guides as a
standard for North and South America. The third element provides for a long-
term cooperative effort by the Company and Thomson to explore opportunities
presented by the interactive program guide platform in the consumer
electronics area, including advertising, promotion, sponsorship and
interactive services.

Microsoft. In January 1998, the Company entered into a long-term, worldwide
cross-licensing agreement with Microsoft in which the two companies agreed to
cross license their respective intellectual property in the interactive
program guide area. Pursuant to the agreement, Microsoft purchased a non-
exclusive license to Gemstar's technology in the interactive program guide
area and the Company received a license to Microsoft's intellectual property
in the program guide area. Microsoft agreed to pay Gemstar a combination of
up-front and per unit license fees. The parties will also share in recurring
revenues that may result from an interactive program guide incorporated by
Microsoft, including advertising, promotion, sponsorship and linking.
Microsoft has agreed to license the Gemstar Guide Technology as a part of its
TV viewer feature in the Windows '98 operating system. Microsoft has also
incorporated interactive program guides under license from the Company in
current and future versions of its WebTV Plus Internet terminals worldwide.

9

COMPETITION

The Company's technologies and systems compete with those of other
companies. Many of the Company's present and potential future competitors
have, or may have, substantially greater resources than the Company to devote
to further technological and new product developments. The Company believes
that it will compete effectively based primarily on the originality of its
concepts, the speed with which it has introduced such concepts to the market,
the uniqueness of its designs, the focus of its business approach, the
strength of its intellectual property portfolio, the extensiveness of its
business relationships, the quality and innovation of its technologies and its
ability to identify and meet consumer needs. See "Certain Factors Affecting
Business, Operating Results And Financial Condition."

VCR Plus+ System

The Company is aware of no product other than VCR Plus+ that allows the user
to program a VCR by entering a numerical code. However, several products on
the market offer other simplified VCR programming functions and thus compete
with VCR Plus+. Such products include on-screen program guides incorporating
point-and-click recording capability. Certain of the Company's interactive
program guides use the VCR Plus+ system. As a result, licensees of such guides
also license the Company's VCR Plus+ technology. To the extent that electronic
program guides with recording capability offered by companies other than
Gemstar are widely adopted, such guides may reduce the need for VCR Plus+. All
electronic program guides, including those that do not have a point-and-click
recording feature, may compete with the printed television guides, and may
adversely affect the Company's PlusCode Number coverage and publication
license income.

Interactive Program Guides

Competition in the market for the delivery of television program schedule
information is intense. There are a number of companies with substantially
greater financial, sales and marketing resources than the Company who
produce and market television schedule information in various formats which
compete or will compete with the Company's interactive program guides products
and services. These alternative formats currently include traditional printed
television guides, as well as non-interactive (passive) and interactive on-
screen electronic guide services, printed television guides in newspapers and
weekly publications, and local cable television guides.

Certain manufacturers of cable and satellite set-top boxes, including
General Instrument, offer advanced analog and digital set-top boxes which
incorporate an interactive program guide with various features similar to
those offered by the Company's interactive program guides. Many of such
manufacturers have significantly greater resources than the Company to devote
to the development and commercialization of such products. If the competing
interactive on-screen guides are effectively developed and promoted, and are
not deemed to violate the Company's intellectual property rights, they will
present a significant competitive challenge to the Company's interactive
program guides.

Viewers who receive television programming via C-band satellite have access
to a subscription service called SuperGuide offered by Satellite Service
Company. SuperGuide provides satellite subscribers with an interactive on-
screen program guide using a remote control. SuperGuide presents a service
competitive to the Company's service in the satellite distribution channel and
would present an additional competitive challenge if extended to other
distribution channels.

Several other companies have announced that they will provide on-screen
programming information in connection with pay-per-view and satellite
broadcasting. There can be no assurance that the producers of such systems
will not expand the products to include interactive access to programming
information that will be competitive with the Company's interactive program
guides. See "--Certain Factors Effecting Business, Operating Results and
Financial Condition--Competition."

10

Printed television schedule competitors of the Company include TV Guide,
printed guides for satellite customers, local cable television guides and
local newspaper guides, all of which benefit from their familiarity to
television viewers, their broad base of distribution and their presentation of
feature articles and entertainment news. The established market presence of
printed program guides may give them a competitive advantage.

Although the Company believes that its interactive program guides are in a
strong competitive position with respect to its known competitors, there may
be competitors with additional strengths that are unknown to the Company. Such
potential competitors, which may include hardware manufacturers, software
developers, broadcasters or service providers, could be larger, more
established companies with greater resources in the program information
delivery market.

INTELLECTUAL PROPERTY RIGHTS AND PROPRIETARY INFORMATION

The Company operates in an industry where innovation, investment in new
ideas and protection of its resulting intellectual property rights are
important for success. The Company relies on a variety of intellectual
property protections for its products and services, including patent,
copyright, trademark and trade secret laws, and contractual obligations, and
pursues a policy of vigorously enforcing such rights. In addition, because
much of the Company's technology relies on complex encryption methods, the
technology is inherently difficult for unauthorized persons to penetrate.

The Company follows a vigorous and aggressive patent and trademark policy,
both in the U.S. and internationally. The Company has a number of methods and
design patents and pending patent applications relating to the VCR Plus+
system and its related technologies. In the area of interactive program
guides, the Company has a large portfolio of patents and pending applications
including those originated by the Company prior to the StarSight acquisition,
those originated by StarSight prior to the StarSight acquisition, those
acquired from inventor Michael R. Levine (including patents covering the broad
principles used in storing television programming data in a television
receiving device and allowing a user to select and display television guide
information), and exclusive licensing rights in certain third-party patents.
The Company believes that with this combination of rights, it has one of the
world's most extensive portfolios of intellectual property in the area of
interactive program guides which spans the fundamental concept of local
storage and retrieval of television program information to specific user
interface, functionality and methods of implementation of interactive program
guides. Pursuant to an agreement entered into in 1997, the Company has
acquired the future invention rights of Mr. Levine in the audio-visual
technology area. The Company also continues to develop and file additional
patent applications in a variety of areas in addition to the visual technology
area.

Most of the Company's licensing agreements contain a non-assertion provision
which prohibits the licensees from asserting patent infringement claims
against the Company's VCR Plus+ system or Gemstar Guide Technology. The
Company generally takes advantage of the Patent Convention Treaty procedures
for patent protection in foreign countries. This procedure results in a delay
in the application and issuance of foreign patents, but if and when issued, is
more cost efficient and these foreign patents will enjoy the same priority
date as their U.S. counterparts.

The Company holds extensive trademark registrations throughout the world and
has multiple trademark applications pending for a variety of marks. Marks for
which the Company has registrations or applications to register in the U.S. or
foreign countries include, Gemstar, VCR Plus+ (Video Plus+, ShowView and G
Code are marks used in place of the mark VCR Plus+ in certain countries to
avoid or minimize conflicts in those countries), Guide Plus+, ShowGuide,
ShowList, V-Chip Plus+, Index Plus+, PlusCode, CallSet, iPlus+, SpotPlus+,
Instant Programmer, Control Tower and C/3/. The Company has U.S. copyright
registrations for the encoding and decoding computer programs with respect to
its compression and encryption technology. The Company considers portions of
its encryption technology to be a protectable trade secret and has undertaken
considerable efforts to maintain its secrecy.

11

The Company's policy is to enter into nondisclosure agreements with each
employee and consultant or third party to whom any of the Company's
proprietary information is disclosed. These agreements prohibit the disclosure
of confidential information to anyone outside the Company, both during and
subsequent to employment or the duration of the working relationship.

RESEARCH AND DEVELOPMENT

The market for VCR- and television-related services and products is subject
to rapid and significant changes in technology and frequent new service and
product introductions. The Company believes that its future success will
depend on its ability to enhance its existing technologies and to introduce
new technologies on a competitive basis. Accordingly, the Company will
continue to engage in significant research and development activities. There
can be no assurance, however, that the Company will successfully complete the
development of any future technology or that such technology will be
compatible with, accepted by or incorporated in the technology or products of
third parties. Any significant delay or failure to develop new or enhanced
technology could have a material adverse effect on the Company's business,
financial condition and results of operations.

12

CERTAIN FACTORS AFFECTING BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION

This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the United States Securities Act of 1933, as amended, and
Section 21E of the United States Securities Exchange Act of 1934, as amended,
which involve risks and uncertainties. Such forward-looking statements are
subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed
below. Such factors, together with the other information in this Annual
Report, should be considered carefully in evaluating an investment in the
Ordinary Shares.

Dependence on Single Product Category; Uncertainty of Acceptance of New
Products; Rapid Technological Change. The Company's historical revenues to
date have been primarily derived from license fees for its VCR Plus+
technology, consisting of per unit license fees from VCR and television
manufacturers, and to a lesser extent, license fees for PlusCode Number
publication rights from newspapers and other publications. While VCR Plus+
license fees have increased significantly in each year since the Company's
inception, future growth of revenues derived from VCR Plus+ may be limited by
the fact that virtually all major VCR and television manufacturers have
licensed the VCR Plus+ technology, and the fact that the Company has already
expanded into most major markets worldwide. Any further growth in VCR Plus+
license revenues will come only from further penetration of increasingly
saturated markets. Accordingly, the Company's future success depends to a
significant extent upon its ability to develop, market and license emerging
and new products and services, including the Gemstar Guide Technology and the
Company's interactive program guide systems which have yet to generate
significant revenues. The Company has only a limited history on which to base
an evaluation of its interactive program guide business and prospects. The
market for consumer electronics products such as interactive program guides is
characterized by rapidly changing technologies, short product life cycles, the
frequent introduction of new products and evolving industry standards.
Moreover, consumer demand for new product categories such as interactive
program guides is inherently uncertain. There can be no assurance that the
Company will successfully develop, market and license the Gemstar Guide
Technology and the Company's interactive program guide systems, that the
Company will ever achieve significant revenues or operating income from its
interactive program guide business or, if significant revenues are achieved,
that they can be sustained. The failure of the Company's interactive program
guides to be accepted by consumers and achieve revenues could have a material
adverse effect on the Company's business prospects, financial condition and
results of operations.

Moreover, the life cycle of the Gemstar Guide Technology and any future
products and services developed by the Company may be limited by the emergence
of new entertainment products and technologies, changes in consumer
preferences and other factors. The Company's future performance will depend on
its ability to consistently (i) identify emerging technological trends in its
market, (ii) identify changing consumer needs, desires or tastes, (iii)
develop and maintain competitive technology, including new product and service
offerings, (iv) improve the performance, features and reliability of its
products and services, particularly in response to technological change and
competitive offerings, and (v) bring technology to market quickly at cost-
effective prices. There can be no assurance that the Company will be
successful in developing and marketing new products and services that respond
to technological and competitive developments and changing customer needs, or
that such products and services will gain market acceptance and be
incorporated into the technology or products of third parties. Any significant
delay or failure to develop new or enhanced technologies, including new
product and service offerings, would have a material adverse effect on the
Company's business, financial condition and results of operations.

Risks Associated with Strategic Relationships. Part of the Company's
business strategy is to enter into strategic or other similar collaborative
relationships with consumer electronics manufacturers, Service Providers,
software developers and other partners in order to offer products and services
to a larger customer base than could be reached through the Company's own
sales and marketing efforts. For instance, the Company has recently entered
into certain strategic relationships relating to the Gemstar Guide Technology,
including a multi-year, multi-element cooperative agreement with Thomson and a
cross-licensing agreement with Microsoft for

13

inclusion of the Gemstar Guide Technology in specified Microsoft products. The
Company believes that such strategic relationships can accelerate the market
penetration of the Company's products and technologies while limiting the
Company's sales and marketing costs. However, there can be no assurance that
the Company will be able to expand or maintain its existing strategic
relationships or establish new strategic relationships on commercially
reasonable terms, if at all. If the Company is unable to maintain its existing
strategic relationships, or to establish similar strategic relationships with
respect to future products and services, it will be required to devote
substantially more resources to the distribution, sale and marketing of its
products and services. Any future inability of the Company to maintain its
strategic relationships or to enter into additional strategic relationships,
or the failure of one or more of the Company's strategic relationships to
result in the development and maintenance of a market for the Company's
products and services, could have a material adverse effect on the Company's
business, operating results and financial condition.

Risks Associated with Changes in Consumer Electronics Market. The Company
derives a substantial majority of its revenues from manufacturer license fees
for its VCR Plus+ technology and Gemstar Guide Technology. Such fees are
largely assessed based on unit shipment volumes of televisions, VCRs and other
devices incorporating the Company's technologies. Accordingly, the Company's
future operating results are substantially dependent on continued growth in
the video entertainment products category, and any decline in sales of
consumer electronics products employing the Company's technologies would have
an immediate and adverse impact on the Company's operating results. Demand for
new VCRs and televisions may be adversely affected by increasing market
saturation, a decline in consumer interest due to a lack of desirable new
product features, and a decreased need for unit replacement as the durability
of consumer electronics products improves. Moreover, sales of consumer
electronics devices incorporating the Company's technologies may be adversely
impacted by the emergence of new product categories and consumer entertainment
options. For instance, even though the Company's VCR Plus+ technology has been
licensed to be incorporated into DVD Recorders, increased sales of non-
recording DVD Recorders or other non-recording video entertainment devices and
widespread availability of video on demand or near-video on demand services
from cable service providers may reduce demand for the Company's VCR Plus+
technology. The availability of alternative home entertainment options such as
the Internet may also reduce consumer spending on VCRs and televisions. A
decline in demand for VCRs, televisions and other consumer electronics devices
employing the Company's technologies would have a material adverse effect on
the Company's business, operating results and financial condition.

Seasonality and Variability of Results. The Company experiences variability
in its revenues and operating results on a quarterly basis as a result of many
factors. Most importantly, as consumer electronics manufacturers have
incorporated the Company's systems into an increasing numbers of products and
models, the Company's license revenues have displayed a seasonality typical of
the operating results of consumer electronics manufacturers. Shipments by
manufacturers of consumer electronics devices, tend to be higher in the third
and fourth calendar quarters, or the Company's second and third fiscal
quarters. However, because the Company generally receives license revenues
within 90 days after the end of the quarter in which the consumer electronics
devices incorporating its technology are shipped, licensing revenues are
typically higher during the Company's third and fourth fiscal quarters. In
addition, manufacturers' shipments vary from quarter to quarter depending on a
number of factors, including retail inventory levels and retail promotional
activities. As a result, the Company may experience variability in its
quarterly license revenues affecting period to period comparability and
performance. The Company's license revenues are also affected by the volume of
shipments by manufacturers. The Company's license agreements provide for
volume discounts based on the shipment volume in each year by a given
manufacturer, which can lower the average per unit license fee for a
manufacturer over the course of a year. The Company anticipates that its
revenues and operating results will also be affected by the timing of market
introductions and market acceptance of new systems. There can be no assurance,
however, that future systems developed by the Company, including the Company's
interactive program guides, will ever result in significant revenues or
profits. Further, if new systems achieve market acceptance, the timing of
manufacturers' implementation and shipments is uncertain and may result in
greater variability of the Company's quarterly and annual operating results.

14

Another factor contributing to the variability in the Company's quarterly
operating results is the increase in the Company's marketing and advertising
expenditures in preparation for new product launches and in the Company's
third fiscal quarter during the fall holiday season. The Company's planned
operating expenditures each quarter are based, in part, on the Company's
expectation as to future revenues in the same quarter. In addition, many of
the Company's expenditures are fixed costs. If revenues do not meet
expectations in any given quarter, operating results for the quarter may be
materially adversely affected. As a result, the Company believes that period
to period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
There can be no assurance that the Company's historic revenue growth or its
profitability will continue on a quarterly or annual basis.

Reliance on Third-Party Manufacturers. The Company depends on the
cooperation of third-party consumer electronics manufacturers which
incorporate the Company's technology into their products. The Company does not
manufacture such hardware itself. Most of the Company's license agreements do
not require the inclusion of the Company's technology into any specific number
or percentage of units shipped by the licensees, and only a few of these
agreements guarantee a minimum licensing fee to the Company over their term.
Accordingly, the Company cannot control or predict the number of models or
units shipped by any manufacturer employing the Company's technology. Most of
the above-described license agreements may be terminated by the manufacturer
without substantial financial penalty.

Further, there can be no assurance that the Company's interactive program
guides and related technologies and services will achieve market acceptance or
that manufacturers, Service Providers and software developers will devote
resources adequate to achieve such market acceptance. In addition, there can
be no assurance that such entities will in fact incorporate the Company's
technologies into their products, that licensing agreements
will not be terminated and, if terminated, that the Company would be able to
negotiate alternative relationships on commercially acceptable terms. The
Company has no control over the number of TVs, VCRs, DVD Recorders, TVCRs,
cable set-top boxes or other products incorporating the Company's technologies
that will be manufactured, and there can be no assurances with respect to the
quantity thereof that will include the Company's technologies or the amount of
licensing revenues the Company will receive as a result of inclusion by
manufacturers licensing or incorporating the Company's systems.

The incorporation of the Gemstar Guide Technology into televisions, VCRs,
TVCRs, DVD Recorders, set-top boxes, integrated satellite receiver decoders,
and other hardware currently requires a Company-designed Application Specific
Integrated Circuits ("ASIC"). The Company currently outsources the production
of ASICs. The development of, or the identification of alternative sources
for, ASICs could require significant lead time. An inability to provide for
sufficient quantities of ASICs could delay the incorporation of the Gemstar
Guide Technology into products, which would have a materially adverse effect
on the Company's business. Furthermore, there can be no assurance that
suppliers of such ASICs will successfully produce sufficient volumes of the
ASICs to ensure the timely availability of products incorporating the Gemstar
Guide Technology in commercial quantities. A failure in any one of the steps
leading to the successful incorporation of the Company's technologies into
products could have a material adverse effect on the Company's business. The
Company believes that the cost of the hardware required to support the Gemstar
Guide Technology must be significantly reduced in order for consumer
electronics manufacturers to incorporate the Company's interactive program
guides in a broader range of consumer electronics devices, including low-to-
mid range televisions and VCRs. Although the Company is currently attempting
to reduce the number and complexity of chips required to support its
interactive program guides and realize additional manufacturing efficiencies,
no assurance can be given that the cost of the required chip sets can be
significantly reduced. Moreover, the semiconductor industry is highly cyclical
and ASICs and memory chips are subject to unanticipated and dramatic price
volatility. Neither the Company nor, to its knowledge, any of the Company's
licensed manufacturers, have long-term supply agreements. As a result, a
significant increase in the cost of ASICs and memory chips could significantly
impede adoption of the Company's interactive program guide technologies by
manufacturers.

Dependence on the Cooperation of Cable, Television Broadcasters and
Publications. The Gemstar Data Delivery System, which broadcasts data
necessary to operate the Company's interactive program guides as well

15

as certain advanced features of VCR Plus+, depends on the cooperation of both
cable and television broadcasters. The Company has entered into agreements
with television broadcast networks (including ABC, FOX, CBS, UPN and PBS),
cable program providers (including WGN Superstation, The Family Channel and
A&E) and over 500 local television stations to broadcast data needed to
support the Gemstar Guide Technology and the other features through the
vertical blanking interval, the unused air time between television picture
frames. There can be no assurance that these broadcasters, program providers,
or local broadcast stations will broadcast the data without error. There can
be no assurance that these agreements will not be terminated, and upon
expiration, be renewed on terms acceptable to the Company or at all.

The Company's data broadcast through the vertical blanking interval could be
deleted or modified by local cable operators, so that such data would be
degraded or unavailable to some consumers. In such a case, the Company's
technology may become less attractive to end-users, or the Company may have to
incur additional expense to activate alternative measures to broadcast and
allow end-users to receive such data, or the Company may have to enter into
further agreements with local cable operators to ensure retransmission of
required information. There can be no assurance that such decrease in service
would be acceptable to end users, or that alternative measures of broadcasting
and receiving data would be acceptable, or that agreements with cable
operators could be reached or if reached, that they would be on terms
acceptable to the Company. In addition, increased use of digital broadcast
satellite or digital cable technology, which does not involve a vertical
blanking interval, would require the Gemstar Data Delivery System to be
modified to allow receipt of program data in digital form, and there can be no
assurances that such system could be so modified in a commercially acceptable
manner.

The Company purchases television program listing information from various
commercial vendors for insertion into, and dissemination through, the Gemstar
Data Delivery System. There can be no assurance that the quality, accuracy or
timeliness of such data will meet, or continue to meet, the standard required
to provide interactive program guides satisfactory to the end user.

The Gemstar Guide Technology that is integrated into set-top boxes requires
Service Providers to order new set-top boxes from manufacturers for
distribution to new and existing customers. The Company believes that delays
in the availability of set-top boxes incorporating new analog and digital
technology have caused many Service Providers to defer purchases of new set-
top boxes. Deployment of new set-top boxes has also been delayed by the high
cost of such devices and the capital spending constraints of many cable
operators. As a result, the deployment of Gemstar Guide Technology capable
hardware has been and could be further delayed. There can be no assurance that
the Company's agreements and arrangements with Service Providers will result
in the successful acceptance of the Gemstar Guide Technology or data services
by Service Providers or end-users.

The Company's VCR Plus+ system relies on consumer access to PlusCode Numbers
through licensed publications that carry the PlusCode Numbers. The Company
presently licenses the PlusCode Numbers to newspapers and major television
guides in VCR Plus+ markets worldwide. The license agreements call for royalty
payments to the Company and have initial terms ranging from one to seven
years. There is no assurance that these agreements will be renewed upon
expiration or, if renewed, that they will be on terms as favorable to the
Company as existing license agreements. In addition, the Company will be
dependent on the cooperation and support of publications in countries in which
it is not presently doing business in order to continue to expand the
international availability of the VCR Plus+ system.

Competition. The Company operates in a highly competitive and rapidly
evolving market. To compete successfully in this market, the Company must
produce and provide products and services which are relatively low in cost and
easy for consumers to use. There are a number of companies with substantially
greater financial, sales and marketing resources than the Company who produce
and market television schedule information in various formats which compete or
will compete with the Company's interactive program guides products and
services. These alternative formats currently include traditional printed
television guides, as well as non-interactive (passive) and interactive on-
screen electronic guide services, printed television guides in newspapers and
weekly publications, and local cable television guides.

16

Certain manufacturers of cable and satellite set-top boxes, including
General Instrument, offer advanced analog and digital set-top boxes which
incorporate an interactive program guide with various features similar to
those offered by the Company's interactive program guides. Many of these
manufacturers have significantly greater resources than the Company to devote
to the development and commercialization of such products. If the competing
interactive on-screen guides are effectively developed and promoted, and are
not deemed to violate the Company's intellectual property rights, they will
present a significant competitive challenge to the Company's interactive
program guides.

Viewers who receive television programming via C-band satellite have access
to a subscription service called SuperGuide offered by Satellite Service
Company. SuperGuide provides satellite subscribers with an interactive on-
screen program guide using a remote control. SuperGuide presents a service
competitive to the Company's service in the satellite distribution channel and
would present an additional competitive challenge if extended to other
distribution channels. Several other companies have announced that they will
provide on-screen programming information in connection with pay-per-view and
satellite broadcasting. There can be no assurance that the producers of such
systems will not expand the products to include interactive access to
programming information that will be competitive with the Company's
interactive program guides.

The Prevue Channel and other passive on-screen electronic guides with which
the Company's interactive program guides may compete are typically offered to
cable television subscribers at no cost. There can be no assurance that the
passive guides, which do not require a set-top box to deploy, will not
continue to command greater market share than the interactive guides or that
the producers of the passive guides will not develop new products that will
offer features similar to those found in the Company's interactive program
guides system.

Several entities have announced PC- and Internet-based guide products which
have many features similar to the Company's interactive program guides. Among
others, Intel Corporation currently offers Smart Guide, a PC-based electronic
program guide licensed from Harman Interactive Group. The combination of these
PC- and Internet-based guides and the present and future widespread
availability of Internet-enabled consumer electronics devices (including
Internet-enabled TVs and set-top boxes) and integrated PC-centered home
entertainment systems could pose a significant competitive challenge to the
Company's products. While the Company believes that current PC- and Internet-
based program guides are less attractive to consumers because they lack the
ability to directly control televisions and VCRs, and involve a delay in
responding to user commands, it is possible that the performance and
functionality of PC- and Internet-based guides will be enhanced such that they
are able to compete with the Company's electronic program guides in the
future.

Printed television schedule competitors of the Company include TV Guide,
printed guides for satellite customers, local cable television guides and
local newspaper guides, all of which benefit from their familiarity to
television viewers from their familiarity to television viewers, their broad
base of distribution and their presentation of feature articles and
entertainment news. The established market presence of printed program guides
may give them a competitive advantage.

The Company is aware of no product other than VCR Plus+ that allows the user
to program a VCR by entering a numerical code. However, several products on
the market offer other simplified VCR programming functions and thus compete
with VCR Plus+. Such products include on-screen program guides which
incorporate point-and-click recording capability and may compete with VCR
Plus+. Certain of the Company's electronic program guides use the VCR Plus+
system, such that every unit that licenses the Gemstar Guide Technology also
licenses the Company's VCR Plus+ technology. However, to the extent that
electronic program guides with recording capability offered by companies other
than Gemstar are widely adopted, such guides may reduce the need for VCR
Plus+. All electronic program guides, including those that do not have a
point-and-click recording feature, may compete with the printed television
guides, and may adversely affect the Company's PlusCode Number coverage and
publication license income.

There may be competitors with significant competitive strengths which are
not known to the Company or discussed herein. Such potential competitors may
include larger, more established companies both within and

17

outside of the interactive multimedia services and interactive television
fields that could develop, deliver and sell simplified VCR programming
products, on-screen program guides or other devices that meet all or portions
of the functionality provided by the Company's technology. There can be no
assurance that the Company's systems will achieve consumer acceptance or that
they will be able to compete successfully with such known or unknown
competitors, some of which possess substantially greater financial, sales and
marketing resources than those of the Company.

Dependence on Key Employees. The Company is dependent on certain key members
of its management, operations and development staff, including Henry C. Yuen,
its Chief Executive Officer, the loss of whose services could have a material
adverse effect on the Company. Although the Company has employment contracts
with such key employees, such employment contracts would generally not
restrict the employee's ability to leave the Company. Furthermore, recruiting
and retaining additional qualified engineering, marketing, and operations
personnel will be critical to the Company's success. There can be no assurance
that the Company will be able to recruit or retain such personnel on
acceptable terms. Failure to attract and retain key personnel could have a
material adverse effect on the Company's business, operating results and
financial condition.

Passive Foreign Investment Company. A foreign corporation is classified as a
"passive foreign investment company" ("PFIC") if (1) 75% or more of its gross
income (including the pro rata gross income of any subsidiary of which the
corporation owns 25% or more of the stock by value) in a taxable year is
passive income or (2) the average percentage of its assets by value (including
the pro rata value of the assets of any subsidiary of which the corporation
owns 25% or more of the stock by value) which produce or are held for the
production of passive income is at least 50% in a taxable year. (For purposes
of these tests, stock of a 25% or more owned U.S. subsidiary (by value) is a
non-passive asset and income from such stock is non-passive income.) Passive
income includes dividends, interest and royalties but excludes royalties that
are derived in the active conduct of a trade or business (as defined for U.S.
federal income tax purposes) and that are received from an unrelated person.

The Company does not believe that it is currently a PFIC because, based on
the substantial management and operational functions of its subsidiaries in
connection with the creation and development of its proprietary products, the
royalty income of these subsidiaries is derived from the active conduct of a
trade or business and because the average value of assets producing passive
income is less than 50% of aggregate asset value. Characterization of royalty
income as active business income is based on the treatment of the Company's
operating subsidiaries, collectively, as the developer and licensor of the
proprietary products for purposes of this test. However, there is little
authority on which to rely in this area, and there can be no assurance that
the Internal Revenue Service will agree with this position. For purposes of
the assets test, the Company values its tangible and intangible assets on a
fair market basis. If the Company were a PFIC, a U.S. holder would be subject
to increased tax liability upon the sale of the Company Ordinary Shares at a
gain or upon the receipt of certain dividends, unless such U.S. holder makes
an election (a "qualifying electing fund election") to be taxed currently on
his pro rata portion of the Company's income, whether or not such income is
distributed in the form of dividends or otherwise.

A U.S. holder making a qualifying electing fund election is required for
each taxable year to include in income a pro rata share of the ordinary
earnings of the qualifying electing funds as ordinary income and a pro rata
share of the net capital gain of the qualifying electing fund as long-term
capital gain. The Company will, at the request of a shareholder making a
"qualifying electing fund election," comply with the applicable information
reporting requirements. U.S. holders should consult their tax advisors
regarding the consequences of PFIC status, including certain reporting
requirements applicable to U.S. shareholders of a PFIC, and the election to
treat the Company as a qualifying electing fund.

Patent, Proprietary Information and Related Litigation. The Company's
continuing success depends in part on its ability to protect and maintain the
proprietary nature of its technology through a combination of patents, trade
secrets, trademarks, copyrights, licenses and other intellectual property
arrangements. The Company has been notified in the past and the Company may be
notified in the future of claims that the Company

18

may be infringing patents or other intellectual property rights owned by third
parties. In the past the Company has been involved in disputes regarding its
intellectual property rights and believes it may be involved in similar
disputes in the future. While the Company intends to vigorously protect its
intellectual property rights, there can be no assurance that in the future any
patents held by the Company will not be invalidated. Further, there can be no
assurance that the Company's pending patent applications will issue or that a
third party will not violate, or attempt to invalidate, the Company's
intellectual property rights, possibly forcing the Company to expend
substantial legal fees. An adverse determination in any such dispute could
result in the loss of the company's proprietary rights, subject the Company to
significant liabilities and litigation costs or prevent the Company from
licensing its technologies, any of which could have a material adverse effect
on the Company's business, operating results and financial condition.
Moreover, the laws of certain foreign countries in which the Company's
technology is or may in the future be licensed may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States, thus increasing the possibility of infringement of the Company's
intellectual property. In addition, if any of the Company's licensees
determine that any additional third party licenses are required as a result of
any dispute, there can be no assurance that any such licenses would be
available on terms acceptable to Company, if at all. Additionally, there can
be no assurance that certain aspects of the Company's technology will not be
reverse-engineered by third parties without violating the Company's
proprietary rights. The Company's existing protections also may not preclude
competitors from developing products with features and prices similar to or
better than those of the Company.

To preserve its intellectual property rights, the Company believes it may be
necessary to initiate litigation against one or more third parties. In
addition, one or more of these parties may bring suit against the Company.
In the event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. Any litigation, whether as a plaintiff or as defendant,
would likely result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not
such litigation is ultimately determined in favor of the Company. In addition,
the results of any litigation matter are inherently uncertain.

Holding Company Structure; Restrictions on Subsidiary Dividends. The Company
conducts all of its operations through subsidiaries. Accordingly, the primary
source of the Company's income is dividends and other distributions from its
subsidiaries. Some of the Company's subsidiaries were formed under and have
operations in countries other than the British Virgin Islands, the
jurisdiction of the Company's organization. In addition, each of the Company's
subsidiaries receives its revenues in either U.S. dollars or the local
currency of the jurisdictions in which it operates. As a consequence, the
Company's ability to obtain dividends or other distributions is subject to,
among other things, possible restrictions on dividends under applicable local
laws and foreign currency exchange regulations of the jurisdictions in which
its subsidiaries operate. In addition, dividends or distributions from the
Company's U.S. subsidiary are subject to a 30% withholding tax, which makes
such dividends and distributions unattractive. The subsidiaries' ability to
pay dividends or make other distributions to the Company is also subject to
the subsidiaries having sufficient funds from their operations legally
available for the payment of dividends or other distributions which are not
needed to fund their operations, obligations or other business plans. Because
the Company is a shareholder of its subsidiaries, the Company's right to the
assets of such subsidiaries will be subordinated to the rights of all
creditors and claimants against its subsidiaries. Additionally, while the
Company has paid certain cash dividends to shareholders in the past, the
Company has no current plans to pay cash dividends, and there can be no
assurance that current or future laws of the British Virgin Islands will not
restrict or eliminate the ability of the Company to pay dividends to
shareholders.

Volatility of Stock Price. There has been a history of significant
volatility in the market price of the Company's Ordinary Shares on the Nasdaq
National Market, and it is likely that the market price of the Company's
Ordinary Shares will continue to be subject to significant fluctuations. For
example, in the 52-week period preceding June 23, 1998, the Company's stock
price fluctuated from a low of $15 1/8 to a high of $45 3/4. The Company
believes that future announcements concerning the Company, its competitors or
its principal

19

customers, including technological innovations, new product introductions,
governmental regulations, litigation or changes in earnings estimated by
analysts, may cause the market price of the Ordinary Shares to fluctuate
substantially in the future. Sales of substantial amounts of the Company's
outstanding Ordinary Shares in the public market could materially adversely
affect the market price of the Ordinary Shares. Further, in recent years the
stock market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of any high
technology companies and that often have been unrelated to the operating
performance of such companies. These fluctuations as well as general economic,
political and market conditions such as recessions, international currency
fluctuations, potential insolvency of international distributors and
representatives, or tariffs and other trade barriers, may materially adversely
affect the market price of the Ordinary Shares.

Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four-
digit entries to distinguish 21st century dates from 20th century dates. As a
result, in approximately two years, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with compliance. The Company has made and will continue to make
modifications in its computer system to address these compliance issues.
Although the Company believes that it is Year 2000 compliant, there can be no
assurance that coding errors or other defects will not be discovered in the
future. Any Year 2000 compliance problem of the Company, its vendors or its
customers could result in a material adverse effect on the Company's business,
operating results and financial conditions.

EMPLOYEES

The Company employed 165 individuals, including 13 part-time employees, as
of March 31, 1998, of whom 15 were employed outside the U.S. None of the
Company's employees is covered by a collective bargaining agreement or is
presently represented by a labor union. The Company has not experienced any
work stoppages and considers its employee relations to be good.

FORWARD-LOOKING STATEMENTS

This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the United States Securities Act of 1933, as amended
and Section 21E of the United States Securities Exchange Act of 1934, as
amended) that are based on the reasonable expectations and beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. Such forward-looking statements are
subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. When used in this document and in the documents
incorporated herein by reference, the words "may," "will," "continue,"
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. Such statements reflect the current views of the
Company or its management with respect to future events and are subject to
certain risks, uncertainties and assumptions including, but not limited to the
following, the Company's ability to have its technologies widely licensed,
incorporated and accepted as the technologies of choice; that the Company
considers its employee relations to be good; with an increase in programming
content and number of accessible channels, the Gemstar Guide Technology will
become an increasingly important tool for assisting customers in sorting,
selecting and recording television programming; the Company's belief that DVD
Recorders incorporating the Company's VCR Plus+ technology will become
commercially available during its 1999 fiscal year; the Company's ability to
enter into long-term relationships with a broad range of consumer electronics
and other manufacturers, television broadcasters, cable companies and software
developers; that the Company's interactive program guides will provide an
attractive vehicle for the delivery of advertising to consumers; the
proliferation of television programming choices gives rise to the need for
consumer electronics devices, including televisions and VCRs; the number of
hardware platforms shipped annually which are suitable for Gemstar Guide
Technology may be as many as 50 million or more; the size of the television
and VCR markets and the

20

competitive pressures within the industry present an opportunity for companies
that can provide innovative technologies that both appeal to consumers and are
attractive to, and cost-effective for, manufacturers; the consumer demand for
systems and technologies that help organize viewing choices provides an
opportunity for Gemstar Guide Technology; the Company's ability to work
closely with disparate industry participants will contribute to the successful
adoption of the Gemstar Guide Technology; the Company's intention to license
its technologies for use on other platforms; the Company's belief it can
provide additional value-added services to end-users; the design and
capabilities of the Gemstar Guide Technology will allow the Company to enter
into strategic relationships to target advertisers; the Company's interactive
program guides will provide an attractive vehicle for the delivery of
advertising and other content to consumers; the ability to enhance existing
technologies and introduce new technologies on a competitive basis; the
performance and functionality of the Company's PC- and Internet-based guides;
the timing of market introductions and the acceptance of new systems; the
Company's belief that it is Year 2000 compliant; and the Company's belief that
it has a reasonable basis for its tax position with the Internal Revenue
Service.

Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from those expressed in,
or implied by, any such forward-looking statements. Factors that could cause
or contribute to such material differences include, but are not limited to,
those discussed in Item 1 under "Business" and "Certain Factors Affecting
Business, Operating Results and Financial Conditions" and Item 3, "Legal
Proceedings," as well as those factors discussed elsewhere in this Form 10-K
and in the documents incorporated herein by reference. The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company undertakes no
obligation to release publicly any updates or revisions to any such forward-
looking statements that may reflect events or circumstances occurring after
the date of this Form 10-K.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company leases an office facility in Pasadena, California covering
approximately 14,354 square feet. The Company's lease on such property expires
on October 14, 2000. The Company leases two facilities in Fremont, California,
one covering approximately 28,500 square feet that expires on March 31, 2002,
and the other covering approximately 32,000 square feet that expires on April
30, 2000. The Company leases an office facility in Bedford, Massachusetts
covering 15,602 square feet. The Company's lease on the Bedford property
expires on December 31, 1998. The Company leases an office facility in Hong
Kong covering approximately 3,000 square feet. The Company's lease on the Hong
Kong property is month to month and can be terminated by either party at any
time.

The Company believes that its facilities are adequate to meet the Company's
needs for the foreseeable future. Should the Company need additional space,
management believes that the Company will be able to secure additional space
at reasonable rates.

ITEM 3. LEGAL PROCEEDINGS.

In October 1993, United Video Satellite Group, Inc. ("United Video") and its
Tracker, Inc. subsidiary brought suit against StarSight, a now wholly owned
subsidiary of the Company, in the United States District Court for the
Northern District of Oklahoma, seeking a declaratory judgment that its
interactive program guide products do not infringe certain of StarSight's
patents. StarSight counterclaimed charging infringement of one of the patents.
Through subsequent procedural motions, the lawsuit expanded to include a total
of ten patents to which StarSight has rights and to federal antitrust claims.
The Court has deferred consideration of all of the other claims and
counterclaims pending the resolution of the infringement, validity and
enforceability issues of one of the patents. A phased bench trial began on May
8, 1996, with United Video essentially presenting its case in chief on the
validity and enforceability issues related to this patent. In subsequent
proceedings, StarSight presented witnesses relating to the validity,
enforceability and infringement of this patent. To date there has been no
ruling from the Court on this issue. Proceedings have been scheduled by the
Court to resume in July 1998.

21

On May 17, 1997, StarSight filed a Demand for Arbitration with the American
Arbitration Association ("AAA") in San Francisco, California, and by such
action commenced an arbitration action against General Instrument, Inc.
("GI"). The claims in the arbitration center upon GI's alleged delay in
deploying StarSight-capable set-top boxes, and GI's development of a competing
interactive program guide which allegedly uses StarSight patented technology,
confidential information and technical information in violation of a License
and Technical Assistance Agreement executed by the parties on October 1, 1992.
The arbitration is scheduled to commence July 13, 1998 in San Francisco,
California.

In response to the Demand for Arbitration filed by StarSight, on December 1,
1997 GI filed a complaint against StarSight in the United States District
Court for the Northern District of California (San Francisco Division),
requesting that the Court enjoin StarSight from pursuing certain of its claims
before the AAA. On January 9, 1998, GI moved for a preliminary injunction, and
StarSight simultaneously moved to dismiss the complaint. The District Court
action filed by GI was dismissed in its entirety pursuant to a voluntary
dismissal filed by GI.

On August 5, 1997, TV Data Technologies, Inc. ("TV Data") filed a demand of
arbitration with the American Arbitration Association ("AAA") against
StarSight, the Company's wholly owned subsidiary, related to two agreements
with TV Data to provide StarSight with certain television program listing data
(the "Listing Data Contract") and television and cable channel lineup
information (the "Channel Lineup Contract" and collectively, the "Contracts").
In the demand, as amended, TV Data claimed that StarSight has violated the
terms of the Listing Data Contract by delivering or agreeing to deliver such
data and information to third parties, has failed to make timely payments as
required by the Contracts, and has repudiated and terminated the Listings Data
Contract without any legal right or excuse to do so. TV Data seeks injunctive
relief to prohibit the delivery of data to third parties unless in conformance
with the terms of the Listing Data Contract, payments of amounts allegedly due
under the Listing Data Contract, unspecified damages, pre-judgment interest,
legal fees and any other legal or equitable relief deemed proper by the
arbitration panel. The Company has denied TV Data's claims. An arbitration
hearing on TV Data's demands is currently scheduled for August 1998.

The United States Internal Revenue Service (the "Service") has conducted an
audit of the federal tax returns for Gemstar Development Corporation ("GDC"),
a U.S. subsidiary of the Company, for the years ended March 31, 1991, 1992 and
1993. The Service has issued a 30-day letter to GDC in which it has proposed
adjustments to GDC's taxable income by reallocating income to GDC, for revenue
related to the Company's VCR Plus+ technology. The Company has filed a protest
with the Service. The Company believes that it has a reasonable basis for its
tax position and accordingly plans to vigorously defend its position. While
there can be no assurance as to the ultimate outcome of the audit, the Company
believes that it has made adequate provision in its financial statements with
respect to the proposed adjustments.

The Company and its subsidiaries are from time to time also involved in
routine legal matters incidental to their businesses. In the opinion of the
Company, the resolution of such matters will not have a material effect on its
financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On March 12, 1998, the Company held a Special Meeting of shareholder at
which the shareholders approved the following: (i) amendments to, and the
restatement of, the Company's 1994 Stock Incentive Plan, as amended, (the
"Stock Incentive Plan") to increase the number of Ordinary Shares reserved for
issuance thereunder, extend the term thereof, and make certain other changes
to the Plan; and (ii) certain performance-based provisions of the Amended and
Restated Employment Agreement (the "New Yuen Agreement") for Henry C. Yuen,
the Company's President and Chief Executive Officer. The amendments to the
Stock Incentive Plan increased the number of the Company's Ordinary Shares
reserved for issuance thereunder from 9,100,000 to 20,000,000 and increased
the limit on the number of Ordinary Shares that may be delivered to any one
person from 6,000,000 to 10,000,000. See Item 10, "Directors and Executive
Officers of the Registrant," and Item 11, "Executive Compensation."

22

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

NASDAQ NATIONAL MARKET

The Company's Ordinary Shares began trading on the Nasdaq National Market
("Nasdaq Stock Market") on October 11, 1995, under the symbol GMSTF. Prior to
that date, the Ordinary Shares were not listed or traded on any organized
market system.

The sole market for the Company's Ordinary Shares continues to be the Nasdaq
Stock Market in the United States. The Ordinary Shares of the Company are not
currently traded on any non-United States trading market.

The following table sets forth, for the previous two fiscal years, the high
and low sales prices per share of Ordinary Shares on the Nasdaq Stock Market
as reported by Nasdaq for the last two fiscal years:

HIGH LOW
------- -------

FISCAL YEAR ENDED MARCH 31, 1997
First Quarter.............................................. $40 1/4 $24
Second Quarter............................................. 31 3/4 23
Third Quarter.............................................. 29 3/4 12 1/4
Fourth Quarter............................................. 18 1/2 9 5/8
FISCAL YEAR ENDED MARCH 31, 1998
First Quarter.............................................. $21 1/2 $10
Second Quarter............................................. 25 1/2 15 1/8
Third Quarter.............................................. 26 1/8 18 5/8
Fourth Quarter............................................. 37 3/8 20 3/4

The reported closing sales price of the Company's Ordinary Shares on the
Nasdaq Stock Market on June 15, 1998 was $33 7/8. As of June 15, 1998, there
were 48,507,739 Ordinary Shares outstanding and approximately 231 holders of
record.

DIVIDENDS

The Company has not paid any dividends since its Ordinary Shares began
trading on the Nasdaq Stock Market. The Company's Board of Directors has no
current plans to pay cash dividends. Future dividend policy will depend on the
Company's earnings, capital requirements, financial condition and other
factors considered relevant by the Company's Board of Directors.

23

ITEM 6. SELECTED FINANCIAL DATA.

The Company acquired VideoGuide, Inc. ("VideoGuide") and StarSight Telecast,
Inc. ("StarSight") in December 1996 and May 1997, respectively. Both
acquisitions were accounted for under the pooling of interests method and
accordingly, the Company's historical consolidated financial statements were
restated for all periods to include the accounts and results of operations of
VideoGuide and StarSight. See Note 2 of the Notes to Consolidated Financial
Statements for a discussion of these business combinations. This information
should be read in conjunction with the Consolidated Financial Statements and
related Notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations.

YEAR ENDED MARCH 31,
--------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS
DATA:
Revenues.................... $ 27,025 $ 41,814 $ 55,365 $ 82,997 $126,552
Operating costs and
expenses:
Selling and marketing...... 16,468 24,970 68,923 45,924 30,993
Research and development... 11,866 16,169 17,462 16,286 13,372
General and
administrative............ 16,111 27,827 25,162 25,558 18,693
Merger costs (1)........... -- -- -- -- 11,713
-------- -------- ---------- -------- --------
Total operating costs and
expenses................ 44,445 68,966 111,547 87,768 74,771
-------- -------- ---------- -------- --------
Earnings (loss) from
operations................. (17,420) (27,152) (56,182) (4,771) 51,781
Other income, net........... 2,462 2,391 2,650 5,156 7,359
-------- -------- ---------- -------- --------
Earnings (loss) from
continuing operations
before income tax expense.. (14,958) (24,761) (53,532) 385 59,140
Income tax expense.......... 2,238 3,681 5,497 8,369 20,433
-------- -------- ---------- -------- --------
Earnings (loss) from
continuing operations...... (17,196) (28,442) (59,029) (7,984) 38,707
Earnings from discontinued
operations (2)............. 6,726 5,197 -- -- --
-------- -------- ---------- -------- --------
Net earnings (loss)...... $(10,470) $(23,245) $ (59,029) $ (7,984) $ 38,707
======== ======== ========== ======== ========
Basic earnings (loss) per
share (3):
Earnings (loss) from
continuing operations..... $ (0.44) $ (0.71) $ (1.41) $ (0.17) $ 0.81
Earnings from
discontinuing operations.. 0.17 0.13 -- -- --
-------- -------- ---------- -------- --------
Net earnings (loss)...... $ (0.27) $ (0.58) $ (1.41) $ (0.17) $ 0.81
======== ======== ========== ======== ========
Weighted average shares
outstanding................ 38,816 39,792 41,929 46,707 47,654
======== ======== ========== ======== ========
Diluted earnings (loss) per
share (3):
Earnings (loss) from
continuing operations..... $ (0.44) $ (0.71) $ (1.41) $ (0.17) $ 0.76
Earnings from
discontinuing operations.. 0.17 0.13 -- -- --
-------- -------- ---------- -------- --------
Net earnings (loss)...... $ (0.27) $ (0.58) $ (1.41) $ (0.17) $ 0.76
======== ======== ========== ======== ========
Weighted average shares
outstanding, assuming
dilution................... 38,816 39,792 41,929 46,707 50,763
======== ======== ========== ======== ========

MARCH 31,
---------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)

BALANCE SHEET DATA:
Working capital............. $57,256 $25,700 $25,477 $ 53,976 $110,446
Total assets................ 97,680 64,457 96,513 131,276 186,078
Debt (4).................... 9,812 -- -- -- --
Shareholders' equity (5).... 75,062 39,916 34,246 53,717 103,482

- - -------
(1) Merger costs for the year ended March 31, 1998 were incurred as a result
of the acquisition of StarSight. See Note 2 of the Notes to Consolidated
Financial Statements for a discussion of the business combination.
(2) Discontinued operations for the year ended March 31, 1995 included a
nonrecurring tax benefit of $8.1 million.
(3) See Note 1 of the Notes to Consolidated Financial Statements for a
discussion of earnings (loss) per share information.
(4) Amounts are included in current net assets and non-current net liabilities
related to discontinued operations.
(5) Cash dividends of $0.20 and $0.12 per Ordinary Share were declared in the
years ended March 31, 1994 and 1995, respectively.

24

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

OVERVIEW

The Company develops, markets and licenses proprietary technologies and
systems that simplify and enhance consumers' interaction with electronics
products and other platforms that deliver video, programming information and
other data. The Company generates revenues through licensing of their
technology and intellectual property to consumer electronics manufacturers,
service providers, software developers, microchip makers and Internet
appliance manufacturers, as well as to newspapers and television guide
publishers through a combination of upfront, non-refundable license payments
and per unit license fees. Historically, the primary source of revenues has
been license fees paid by consumer electronics manufacturers and publications
for the licensing of the VCR Plus+ technology and the right to print the
PlusCode numbers, respectively. Starting fiscal year 1998, the Company began
to derive significant license revenues from the Gemstar Guide Technology.
Revenues from up front license fees are recognized ratably over the term of
the particular license and revenues from on-going per unit license fees are
recognized when payments are due, and generally, when payments are actually
received from the licensee.

The Company acquired VideoGuide, Inc. ("VideoGuide") and StarSight Telecast,
Inc. ("StarSight") in December 1996 and May 1997, respectively. Both
acquisitions were accounted for under the pooling of interests method and
accordingly, the Company's historical consolidated financial statements were
restated for all periods to include the accounts and results of operations of
VideoGuide and StarSight.

Both VideoGuide and StarSight incurred substantial operating losses since
their inception through the date of acquisition by the Company. Due to these
losses, the restated financial results as reported contain significant
marketing, research and development, and general and administrative expenses
resulting in significant operating losses during certain periods. All of the
selling and marketing efforts and a portion of the research and development
effort expended by VideoGuide were directed toward marketing a subscription-
based electronic program guide service delivered through the 900 MHz paging
signal. After the acquisition, the VideoGuide service was terminated in
September 1997. A significant portion of the selling and marketing and
research and development effort of StarSight was directed toward marketing a
subscription-based electronic program guide service delivered through the
vertical blanking interval of the television signal. A significant portion of
the general and administrative expenses incurred by StarSight prior to the
acquisition was comprised of legal fees related to litigation with the
Company, which terminated upon the acquisition.

The fiscal year 1998 results show significant cost reductions after the
acquisitions of VideoGuide and StarSight which was due primarily to the
implementation of the Company's cost control measures. Such measures resulted
in lower payroll costs due to headcount reductions, cost savings from
combining marketing and development efforts and reduction of legal costs by
eliminating the litigation between the Company and StarSight. The Company also
realized synergies of the combined companies which resulted in further cost
savings.

Recent Developments

The Company has integrated the technical expertise of VideoGuide and
StarSight to better serve the respective needs of consumer electronics
manufacturers and service providers, and combined the technologies developed
by VideoGuide and StarSight into the Gemstar Guide Technology. The Company
also developed significant strategic relationships in the consumer electronics
and computer/Internet appliance sectors.

. In November 1997, the Company entered into a multi-year license agreement
with Thomson for the Gemstar Guide Technology and entered into a joint
venture, TDN, Inc., for the exploration of advertising, promotion,
linking and transaction opportunities through interactive program guides
on consumer electronics platforms.

25

. In January 1998, the Company entered into a worldwide cross-licensing
agreement with Microsoft in which the two companies agreed to cross-
license their respective intellectual property in the interactive program
guide area and under which Microsoft agreed to license the Company's
intellectual property in all Microsoft interactive program guide
products.

The Company continued to add new license agreements for the Gemstar Guide
Technology with consumer electronics manufacturers, and licensees in the cable
and satellite industries.

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto. The following table presents
the Company's results of operations for the years ended March 31, 1996, 1997
and 1998. Such results of operations have been restated for the effects of the
acquisitions of VideoGuide and StarSight accounted for under the pooling of
interests method. The table also presents unaudited pro forma results of
operations for the years ended March 31, 1996 and 1997, which reflect the
Company's reported results, excluding VideoGuide's results and StarSight's
results prior to the acquisitions. The Company has included the prior period
financial information on a pro forma basis for informational purposes and to
facilitate the understanding of the effects of the two acquisitions on the
Company's results of operations. The pro forma results do not purport to
present the Company's results of operations in accordance with generally
accepted accounting principles.

STATEMENT OF OPERATIONS DATA
(IN THOUSANDS)

AS REPORTED PRO FORMA
YEAR ENDED MARCH 31, YEAR ENDED MARCH 31,
--------------------------- ---------------------
1996 1997 1998 1996 1997
-------- ------- -------- ---------- ----------
(UNAUDITED)

Revenues.................... $ 55,365 $82,997 $126,552 $ 53,436 $ 70,367
Operating costs and
expenses:
Selling and marketing..... 68,923 45,924 30,993 15,496 20,661
Research and development.. 17,462 16,286 13,372 8,428 10,699
General and
administrative........... 25,162 25,558 18,693 9,957 12,160
Merger costs.............. -- -- 11,713 -- --
-------- ------- -------- ---------- ----------
Total operating costs
and expenses........... 111,547 87,768 74,771 33,881 43,520
-------- ------- -------- ---------- ----------
Earnings (loss from
operations................. (56,182) (4,771) 51,781 19,555 26,847
Othe