## Note 1 – Summary of Operations and Significant Accounting Policies 

Nature of operations – Diodes Incorporated and its subsidiaries manufacture and distribute discrete semi- conductor devices to manufacturers in the communica- tions, computing, industrial, consumer electronics and automotive markets. The Company’s products include small-signal transistors and MOSFETs, transient voltage suppressors (TVSs), zeners, Schottkys, diodes, rectifiers, bridges and silicon wafers. The products are sold pri- marily throughout North America, Asia and Europe. 

Principles of consolidation – The consolidated financial statements include the accounts of the parent company, Diodes Incorporated (Diodes-North America), its wholly- owned subsidiaries; Diodes Taiwan Corporation, Ltd. (Diodes-Taiwan), Diodes Hong Kong, Ltd. (Diodes-Hong Kong) and FabTech, Inc. (FabTech or Diodes-FabTech); and its majority (95%) owned subsidiaries, Shanghai KaiHong Electronics Co., Ltd. (Diodes-China) and Diodes Shanghai Company, Ltd. (Diodes-Shanghai). 

All significant intercompany balances and transactions have been eliminated in consolidation. 

Revenue recognition – Revenue is recognized when there is persuasive evidence that an arrangement exists, when delivery has occurred, when our price to the buyer is fixed or determinable and when collectibility of the receivable is reasonably assured. These elements are met when title to the products is passed to the buyers, which is generally when our product is shipped to both origi- nal equipment manufacturers (OEMs) and electronics component distributors. The Company reduces revenue in the period of sale for estimates of product returns and other allowances. 

In 2003, Diodes-China received approximately $254,000 in high-technology grants as an incentive for further invest- ment from the local Chinese government. The grants were unrestricted and available upon receipt to fund the operations of Diodes-China. The Company recognized this grant income when received and recorded them within “other income” on the accompanying statements of income. No grant income was received in 2004 and the Company does not expect this type of income in the future. 

## notes to consolidated financial statements 

Product warranty – The Company generally warrants its products for a period of one year from the date of sale. Historically, warranty expense has not been significant. 

Inventories – Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out method. On an on-going basis both finished goods inventory and raw material inventory is evaluated for obsolescence and slow-moving items. 

This evaluation includes analysis of sales levels, sales projections, and purchases by item, as well as raw mate- rial usage related to our manufacturing facilities. Based upon this analysis, as well as an inventory aging analysis, a reserve for obsolete and slow-moving inventory is accrued (see Note 2). 

Property, plant and equipment – Property, plant and equipment are depreciated using straight-line and accel- erated methods over the estimated useful lives, which range from 20 to 55 years for buildings and 3 to 10 years for machinery and equipment. Leasehold improvements are amortized using the straight-line method over 3 to 5 years (see Note 3). 

Goodwill – Beginning in fiscal 2002 with the adoption of Statement of Financial Accounting Standards (SFAS) No. 142 ( “Goodwill and Other Intangible Assets” ), goodwill is no longer amortized, but instead tested for impairment at least annually. As a result of the Company’s adoption of SFAS No. 142, an independent appraiser hired by the Company, performed the required impairment tests of goodwill as of January 1, 2004 and 2005, and has deter- mined that the goodwill is fully recoverable. No good- will was acquired or impaired during the years ended December 31, 2002, 2003 and 2004. As of December 31, 2004, goodwill for Diodes-FabTech and Diodes-China was $4.2 million and $0.9 million, respectively. Prior to fiscal 2002, goodwill was amortized using the straight- line method over its estimated period of benefit. 

Impairment on long-lived assets – Certain long-lived assets of the Company are reviewed at least annually as to whether their carrying values have become impaired in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” 

