## Diodes Incorporated and Subsidiaries management ’ s discussion and analysis of financial condition and results of operations 

In 2004, our largest external supplier of products was LSC, a related party. Approximately 17.2% and 17.3% of our sales were from product manufactured by LSC in 2004 and 2003, respectively. Also, in 2004 and 2003, approximately 3.5% and 4.6%, respectively, of our sales were from product manufactured by companies owned by Keylink International (a related party). In addition, sales of products manufactured by Diodes-China and Diodes-FabTech were approximately 49% and 20% in 2004, respectively, versus 39% and 23% in 2003, respec- tively. We anticipate that Diodes-China will become an increasingly valuable supplier. No other manufacturer of discrete semiconductors accounted for more than 4% and 9% of our sales in 2004 and 2003, respectively. 

All of the raw materials we use in our manufacturing operations are available both domestically and abroad. Although we believe alternative sources exist for the products of any of our suppliers, the loss of any one of our principal suppliers or the loss of several suppliers in a short period of time could have a materially adverse effect on our financial statements until an alternate source is located and has commenced providing such products or raw materials. 

## Related Parties 

We conduct business with two related party companies, LSC (and its subsidiaries) and Keylink International (formerly Xing International) (and its subsidiaries). LSC, a 32.3% shareholder, is our largest shareholder, and Keylink International is owned by our 5% joint venture partner in Diodes-China and Diodes-Shanghai. C.H. Chen, our President and Chief Executive Officer, and a member of our Board of Directors, is also Vice- Chairman of LSC. M.K. Lu, a member of our Board of Directors, is President of LSC, while Raymond Soong, our Chairman of the Board, is the Chairman of the Lite- On Group, a significant shareholder of LSC. 

In addition to being our largest external supplier of products, in 2004, we sold silicon wafers to LSC totaling 11.1% (10.7% in 2003) of our total sales, making LSC our largest customer. The Company has a long-stand- ing sales agreement where the Company is the exclusive North American distributor for certain of LSC product lines. In addition, the Company leases warehouse space from LSC for its operations in Hong Kong. Such trans- actions are on terms no less favorable to the Company than could be obtained from unaffiliated third parties. The Audit Committee of the Board of Directors has approved the contracts related to the transactions. 

In December 2000, the Company acquired the wafer foundry, FabTech, Inc., from LSC. As part of the purchase price, at December 31, 2004, LSC holds a subordinated, interest-bearing note for approximately $3.8 million. In May 2002, the Company renegotiated the terms of the note to extend the payment period from two years to four years, and therefore, monthly pay- ments of approximately $208,000 plus interest began in July 2002. In connection with the terms of the acquisi- tion, LSC entered into a volume purchase agreement to purchase wafers from FabTech. In addition, as per the terms of the stock purchase agreement, the Company has entered into several management incentive agree- ments with members of FabTech’s management. The agreements provide members of FabTech’s manage- ment guaranteed annual payments as well as contingent bonuses based on the annual profitability of FabTech, subject to a maximum annual amount. Any portion of the guaranteed and contingent liability paid by FabTech is reimbursed by LSC. Year 2004 is the final year of the management incentive agreements, with final payment by March 31, 2005. 

In addition to the 3.5% of our sales of product manu- factured by companies owned by Keylink International, in 2004, the Company sold silicon wafers to companies owned by Keylink International totaling 0.9% (1.1% in 2003) of the Company’s total sales. In addition, Diodes- China and Diodes-Shanghai both lease their manufac- turing facilities from, and subcontract a portion of its manufacturing process (metal plating and environmen- tal services) to Keylink International. The Company 

