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

In December 2004, the FASB issued FASB Statement No. 153, Exchanges of Nonmonetary Assets – An Amend- ment of APB Opinion No. 29 . The amendments made by Statement No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” The provisions in Statement No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Adoption of this standard is not expected have a material impact on the consolidated financial statements. 

In September 2004, the EITF reached a consensus on EITF Issue No. 04-10, Applying Paragraph 19 of FAS 131 in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds . The consensus states that operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the objective and basic principles of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , the segments have similar economic characteristics, and the segments share a majority of the aggregation criteria (a)-(e) listed in paragraph 17 of SFAS No. 131. The effective date of the consensus in this Issue is for fiscal years ending after October 13, 2004. If the Financial Accounting Standards Board (FASB) ratifies EITF Issue No. 04-10, the Company does not anticipate a material impact on the financial statements. 

In March 2004, the EITF reached a consensus on the remaining portions of EITF 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments  with an effective date of June 15, 2004. EITF 03-01 provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. Investors are required to 

disclose quantitative information about: (i) the aggre- gate amount of unrealized losses, and (ii) the aggregate related fair values of investments with unrealized losses, segregated into time periods during which the invest- ment has been in an unrealized loss position of less than 12 months and greater than 12 months. In addition, in- vestors are required to disclose the qualitative informa- tion that supports their conclusion that the impairments noted in the qualitative disclosure are not other-than temporary. The Company determined that EITF 03-01 would not have a material impact on the financial state- ments. 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities – an Inter- pretation of ARB No. 51 , which provides guidance on the identification of and reporting for variable interest entities. Interpretation No. 46 expands the criteria for consideration in determining whether a variable inter- est Interpretation No. 46 is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. Interpretation No. 46 was effective for the Company in 2004 because the Com- pany entered into a joint venture for Diodes-Shanghai. The Company has a 95% interest. The Interpretation requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries. The primary beneficiary is the party that assumes the majority of the risk, which includes, but is not limited to, the entity’s ex- pected losses. Management concluded that its investment in Diodes-Shanghai did not meet the criteria for consoli- dation under the standard. Based upon our review, we concluded that management’s analysis and the conclu- sions contained therein appeared reasonable. 

In December 2004, the FASB also issued SFAS No. 151, “ Inventory Costs, an amendment of ARB No. 43, Chapter 4 ,” which will become effective for the Com- pany beginning January 1, 2006. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed pro- duction overhead costs to inventory be based on the 

