UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     .

DIODES INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware		95-2039518
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
15660 North Dallas Parkway, Suite 850
Dallas, Texas		75248
(Address of principal executive offices)		(Zip code)

(972) 385-2810
(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the registrant’s Common Stock outstanding as of November 5, 2008 was 41,050,591

 

 

Table of Contents

		Page
Part I – Financial Information			3
Item 1 – Financial Statements			3
Consolidated Condensed Balance Sheets as of December 31, 2007 and September 30, 2008			3
Consolidated Condensed Statements of Operations for the Three and Nine Months ended September 30, 2007 and 2008			5
Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 2007 and 2008			6
Notes to Consolidated Condensed Financial Statements			8
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3 – Quantitative and Qualitative Disclosures About Market Risk			46
Item 4 – Controls and Procedures			47
Part II – Other Information			48
Item 1 – Legal Proceedings			48
Item 1A – Risk Factors			48
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3 – Defaults Upon Senior Securities			50
Item 4 – Submission of Matters to a Vote of Security Holders			50
Item 5 – Other Information			50
Item 6 – Exhibits			51
Signature			52
EX-10.1
EX-10.2
EX-10.3
EX-18.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)

ASSETS

		December 31,				September 30,
		2007				2008
						(unaudited)
CURRENT ASSETS
Cash and cash equivalents		$	56,179			$	82,679
Short-term investments			323,472				—
Total cash and short-term investments			379,651				82,679
Accounts receivable, net			89,578				110,310
Inventories			53,031				99,094
Deferred income taxes, current			5,173				7,060
Prepaid expenses and other			10,576				13,681
Total current assets			538,009				312,824
LONG-TERM INVESTMENT, available-for-sale securities			—				284,818
PROPERTY, PLANT AND EQUIPMENT, net			123,407				183,203
DEFERRED INCOME TAXES, non-current			3,241				24,811
OTHER ASSETS
Goodwill			25,135				51,559
Intangible assets, net			9,643				43,813
Other			6,930				7,435
Total assets		$	706,365			$	908,463

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY
(In thousands, except share data)

		December 31,				September 30,
		2007				2008
						(unaudited)
CURRENT LIABILITIES
Line of credit		$	—			$	18,217
Accounts payable			55,145				51,493
Accrued liabilities			27,841				35,200
Income tax payable			1,732				4,936
Current portion of long-term debt			1,345				1,347
Current portion of capital lease obligations			145				432
Total current liabilities			86,208				111,625
LONG-TERM DEBT, net of current portion
2.25% convertible senior notes due 2026			230,000				230,000
Long-term borrowings			5,815				169,723
CAPITAL LEASE OBLIGATIONS, net of current portion			1,331				2,132
OTHER LONG-TERM LIABILITIES			6,249				16,774
Total liabilities			329,603				530,254
MINORITY INTEREST IN JOINT VENTURES			7,164				9,102
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS’ EQUITY
Preferred stock — par value $1.00 per share; 1,000,000 shares authorized; no shares issued or outstanding			—				—
Common stock — par value $0.66 2/3 per share; 70,000,000 shares authorized; 40,172,491 and 41,042,237 issued and outstanding at December 31, 2007 and September 30, 2008, respectively			26,782				27,361
Additional paid-in capital			121,412				131,331
Retained earnings			220,504				244,868
Accumulated other comprehensive income (loss)			900				(34,453)
Total stockholders’ equity			369,598				369,107
Total liabilities and stockholders’ equity		$	706,365			$	908,463

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2008				2007				2008
NET SALES		$	105,264			$	134,047			$	293,567			$	345,645
COST OF GOODS SOLD			71,112				95,929				199,214				235,993
Gross profit			34,152				38,118				94,353				109,652
OPERATING EXPENSES
Selling, general and administrative			14,607				20,914				40,682				52,655
Research and development			3,554				7,360				9,654				16,090
Amortization of acquisition-related intangible assets			—				1,583				—				1,583
Purchased in-process research and development			—				7,865				—				7,865
Restructuring charge			—				—				1,771				—
Total operating expenses			18,161				37,722				52,107				78,193
Income from operations			15,991				396				42,246				31,459
OTHER INCOME (EXPENSES)
Interest income			4,712				1,824				13,031				9,826
Interest expense			(1,706	)			(3,291	)			(5,127	)			(7,274	)
Other			(13	)			(897	)			(69	)			(2,394	)
Total other income (expenses)			2,993				(2,364	)			7,835				158
Income (loss) before income taxes and minority interest			18,984				(1,968	)			50,081				31,617
INCOME TAX PROVISION			(2,243	)			(319	)			(7,122	)			(5,315	)
Income (loss) before minority interest			16,741				(2,287	)			42,959				26,302
Minority interest in earnings of joint ventures			(640	)			(659	)			(1,601	)			(1,938	)
NET INCOME (LOSS)		$	16,101			$	(2,946	)		$	41,358			$	24,364
EARNINGS (LOSS) PER SHARE
Basic		$	0.40			$	(0.07	)		$	1.05			$	0.60
Diluted		$	0.38			$	(0.07	)		$	0.98			$	0.57
Number of shares used in computation
Basic			39,845				40,889				39,430				40,585
Diluted			42,445				40,889				42,099				42,746

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Nine Months Ended
		September 30,
		2007				2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	41,358			$	24,364
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			18,849				27,298
Amortization of intangibles			627				2,370
Purchased in-process research and development			—				7,865
Amortization of convertible bond issuance costs			941				933
Minority interest earnings			1,602				1,938
Share-based compensation			7,253				7,697
Loss (gain) on disposal of property, plant and equipment			305				(41	)
Changes in operating assets:
Accounts receivable			(11,821	)			(8,301	)
Inventories			(19	)			(12,184	)
Prepaid expenses and other current assets			(3,044	)			(383	)
Deferred income taxes			1,816				(2,091	)
Changes in operating liabilities:
Accounts payable			(1,550	)			(9,294	)
Accrued liabilities			381				(4,189	)
Other liabilities			2,554				(1,147	)
Income taxes payable			(89	)			1,799
Net cash provided by operating activities		$	59,163			$	36,634
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired		$	—			$	(153,158	)
Purchases of available-for-sale securities			(69,768	)			(4,435	)
Proceeds from sale of available-for-sale securities			43,050				7,282
Purchases of property, plant and equipment			(41,642	)			(41,196	)
Proceeds from sale of property, plant and equipment			99				56
Net cash used by investing activities		$	(68,261	)		$	(191,451	)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on line of credit, net		$	934			$	18,334
Net proceeds from issuance of common stock			6,120				2,802
Proceeds from long-term debt			—				165,000
Repayments of long-term debt			(1,681	)			(1,135	)
Repayments of capital lease obligations			(111	)			(265	)
Net cash provided by financing activities		$	5,262			$	184,736
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			92				(3,419	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(3,744	)			26,500
CASH AND CASH EQUIVALENTS, beginning of period			48,888				56,179
CASH AND CASH EQUIVALENTS, end of period		$	45,144			$	82,679

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (cont’)
(Unaudited)
(In thousands)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION

		Nine Months Ended
		September 30,
		2007				2008
Acquisition:
Fair value of assets acquired		$	—			$	191,999
Liabilities assumed			—				(38,841)
Cash acquired			—				24,566
Cash paid for the acquisition		$	—			$	177,724

The accompanying notes are an integral part of these financial statements.

DIODES INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE A – Basis of Presentation and Recently Issued Accounting Pronouncements

     Unless the context otherwise requires, the words “Diodes,” “the Company,” “we,” “us” and “our” refer to Diodes Incorporated and its subsidiaries. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) (“GAAP”) for interim financial information and with the instructions to Form 10-Q. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP for complete financial statements. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2007. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the period presented have been included in the interim period. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The condensed consolidated financial data at December 31, 2007 is derived from audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. As permitted under GAAP, interim accounting for certain expenses, including income taxes, are based on full year forecasts. Such amounts are expensed in full in the year incurred. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.

     All significant intercompany balances and transactions have been eliminated.

Corporate Structure

     During 2007, we undertook an internal restructuring whereby our foreign subsidiaries were structured under our newly formed, wholly owned Netherlands holding company, Diodes International B.V. In addition, Shanghai Kai Hong Electronic Co., Ltd. and Shanghai Kai Hong Technology Co., Ltd. were structured under Diodes Hong Kong Holding Company Limited., a newly formed, wholly owned subsidiary of Diodes International B.V. The primary purpose of this internal restructuring was for treasury management and tax planning functions.

     In connection with our acquisition of Zetex plc (“Zetex”) (see-Note M – Business Acquisitions), we formed Diodes Holdings UK Limited and Diodes Investment Company, which are the holding companies for Diodes Zetex Limited and its subsidiaries.

     The consolidated financial statements include the parent company, Diodes Incorporated, and the following:

Holding companies
Diodes International B.V.		100% owned
Diodes Hong Kong Holding Company Limited		100% owned
Diodes Holdings UK Limited		100% owned (2008)
Diodes Investment Company		100% owned (2008)
Subsidiaries
Diodes Taiwan Inc.		100% owned
Diodes Hong Kong Limited		100% owned
Anachip Corp.		99.81% owned
Shanghai Kai Hong Electronic Co., Ltd.		95% owned
Shanghai Kai Hong Technology Co., Ltd.		95% owned
Diodes FabTech Inc.		100% owned
Diodes United Kingdom Limited		100% owned
Diodes Korea Inc.		100% owned
Diodes Germany GmbH		100% owned
Diodes France SARL		100% owned (2008)
Diodes Zetex Limited		100% owned (2008)

Reclassifications

     Certain prior year’s balances have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on previously reported net income or stockholders’ equity.

Change in Accounting Principle

     During the third quarter of fiscal year 2008, the Company changed the timing of its annual goodwill impairment testing from the end of the fourth quarter, December 31, to the beginning of the fourth quarter, October 1. This change allows the Company to complete its annual goodwill impairment testing in advance of its year-end closing. The Company determined that the change in accounting principle related to the annual goodwill impairment testing date is preferable under the circumstances.

Recently Issued Accounting Pronouncements

     In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 clarifies the application of FASB Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 became effective upon issuance and includes prior periods for which financial statements have not been issued. The Company’s adoption of this pronouncement for its third quarter of fiscal year 2008 financial statements did not have a material impact on the fair values assigned.

     In June 2008, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on EITF Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. EITF Issue No. 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception in paragraph 11(a) of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF Issue No. 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the future impacts and required disclosures of this pronouncement.

     In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share (“EPS”) pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Upon adoption, a company is required to retrospectively adjust its EPS data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is currently evaluating the future impacts and required disclosures of this pronouncement.

     In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion are not addressed by paragraph 12 of Accounting Principles Board Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. FSP APB 14-1 also specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the future impacts and required disclosures of this pronouncement and believes that there will be a material adjustment made to account for the liability and equity components of the Company’s $230 million convertible senior notes separately. Preliminarily, the Company expects to allocate approximately $136 million of the $230 million convertible senior notes to equity and record an additional non-cash interest expense of approximately $2.8 million for fiscal year 2009. Furthermore, this allocation will be treated retrospectively as of the date of issuance of the convertible senior notes and therefore, will be treated as if convertible senior notes have always been accounted for in accordance with this pronouncement.

     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect SFAS No. 162 to have a material impact on the preparation of its consolidated financial statements.

     In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Asset. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to

measure the fair value of the asset under SFAS 141R, Business Combinations, and other accounting principles generally accepted in the U.S. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The guidance for determining the useful life of a recognized intangible asset in this FSP shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The Company is currently evaluating the future impacts and required disclosures of adopting this pronouncement.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an Amendment of SFAS No. 133 (“SFAS 161”). SFAS 161 requires that objectives for using derivatives instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the future impacts and required disclosures of adopting this pronouncement.

     In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”), which changes how business acquisitions are accounted.  SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination.  Among the more significant changes in the accounting for acquisitions are the following: i) Transaction costs will generally be expensed. Certain such costs are presently treated as costs of the acquisition; ii) In-process research and development (“IPR&D”) will be accounted for as an asset, with the cost recognized as the research and development is realized or abandoned. IPR&D is presently expensed at the time of the acquisition; iii) Contingencies, including contingent consideration, will generally be recorded at fair value with subsequent adjustments recognized in operations. Contingent consideration is presently accounted for as an adjustment of purchase price; and iv) Decreases in valuation allowances on acquired deferred tax assets will be recognized in operations. Such changes previously were considered to be subsequent changes in consideration and were recorded as adjustments to goodwill. SFAS 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008.  Early adoption is prohibited. The Company is currently evaluating the future impacts and required disclosures of this pronouncement.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”), which establishes new standards governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries.  Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decreases in the parent’s ownership interest, that leave control intact, be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCIs even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. SFAS 160 is effective for financial statements issued beginning January 1, 2009. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. After adoption, noncontrolling interests ($4.8 million and $7.2 million for the years ended December 31, 2006 and 2007, respectively) will be classified as stockholders’ equity, a change from its current classification between liabilities and stockholders’ equity. The Company is currently evaluating the future impacts and required disclosures of this pronouncement.

     In December 2007, the FASB ratified the EITF consensus on EITF Issue No. 07-1, Accounting for Collaborative Arrangements, that discusses how parties to a collaborative arrangement (which does not establish a legal entity within such arrangement) should account for various activities. The consensus indicates that costs incurred and revenues generated from transactions with third parties (i.e., parties outside of the collaborative arrangement) should be reported by the collaborators on the respective line items in their statements of operations pursuant to EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent.  Additionally, the consensus provides that statements of operations characterization of payments between the participants in a collaborative arrangement should be based upon existing authoritative pronouncements; analogy to such pronouncements is not within their scope; or a reasonable, rational, and consistently applied accounting policy election. EITF Issue No. 07-1 is effective for financial statements issued beginning January 1, 2009 and is to be applied retrospectively to all periods presented for collaborative arrangements existing as of the date of adoption. The Company is currently evaluating the future impacts and required disclosures of this pronouncement.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 became effective for financial statements issued beginning January 1, 2008 and did not have a material effect on the Company’s financial position, results of operations or cash flows. In February 2008, FSP No. 157-2, Effective Date of FASB Statement No. 157, was issued that delayed the application of SFAS 157 for non-financial assets and non-financial liabilities, until January 1, 2009 (see Note E – Fair Value Measurements).

NOTE B – Functional Currencies, Comprehensive Income and Foreign Currency Translation

     Functional Currencies and Translation – The functional currency for most of our international operations is the U.S. dollar. The functional currency for our subsidiaries Diodes Taiwan Inc., Anachip Corp. and Diodes Zetex Limited is their local currency, as the Company believes it is the appropriate currency for them to use. Assets and liabilities denominated in foreign currencies are translated at the exchange rate on the balance sheet date. Income and expense accounts denominated in foreign currencies are translated at the average exchange rate during the period presented. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income or loss within stockholders’ equity in the consolidated condensed balance sheets. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are recorded as other income (expense) in the consolidated condensed statements of operations. The Company had foreign exchange transaction losses of approximately $0.1 million and $1.0 million for the three months ended September 30, 2007 and 2008, respectively, and approximately $0.4 million and $2.7 million for the nine months ended September 30, 2007 and 2008, respectively.

     Comprehensive Income (Loss) – GAAP generally requires that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as separate components of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income or loss. The components of other comprehensive income or loss include foreign currency translation adjustments, unrealized holding losses for available-for-sale securities, unrealized gain on defined benefit plan and foreign currency loss on forward contracts. Accumulated other comprehensive income was $0.9 million at December 31, 2007 and accumulated other comprehensive loss was $34.5 million at September 30, 2008. The $35.4 million change in other comprehensive loss was primarily a result of a $22.7 million, net of tax, unrealized loss of available-for-sale securities (see Note F – Short-term and Long-term Investments), a $13.4 million currency translation loss and a $1.6 million foreign currency loss on forward contract, net of tax, partially offset by a $2.4 million, net of tax, unrealized gain on defined benefit plan (see Note P – Defined Benefit Plan) during the first nine months of 2008.

     Total comprehensive income for the three and nine months ended September 30, 2007 and 2008 was as follows (in thousands):

Total Comprehensive Income (Loss)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2008				2007				2008
Net income (loss)		$	16,101			$	(2,946	)		$	41,358			$	24,364
Translation adjustment			304				(18,110	)			114				(13,429	)
Unrealized loss on available-for-sale securities, net of tax			—				(6,213	)			—				(22,737	)
Unrealized gain on defined benefit plan, net of tax			—				10,970				—				2,430
Foreign currency loss on forward contracts, net of tax			—				(2,042	)			—				(1,617	)
Comprehensive income (loss)		$	16,405			$	(18,341	)		$	41,472			$	(10,989	)

NOTE C — Hedging

     As a multinational company, our transactions are denominated in a variety of currencies. During the second quarter of 2008, in connection with the acquisition of Zetex, the Company adopted forward exchange contracts, designated as foreign-currency cash flow hedges, to reduce the potentially adverse effects of foreign-currency exchange rate fluctuations that occur in the normal course of business. The Company uses forward exchange contracts to hedge, thereby attempting to reduce our overall exposure to the effects of currency fluctuations on cash flows. The Company does not permit speculation in financial instruments for profit on the exchange rate price fluctuation, trading in currencies for which there are no underlying exposures, or entering into trades for any currency to intentionally increase the underlying exposure.

     These forward exchange contracts are recognized on the balance sheet at their fair value. Unrealized gain positions are recorded as assets and unrealized loss positions are recorded as liabilities. Changes in the fair values of the outstanding forward exchange contracts that are highly effective are recorded in other comprehensive income until net income is affected by the variability of the cash flows of the hedged transaction. Changes in the fair values of the forward exchange contracts not effective as hedging instruments are recognized in earnings in the current period. Results of ineffective hedges are recorded in the expense line item being hedged in the consolidated condensed statements of operations.

     The Company assesses both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those forward exchange contracts are expected to remain highly effective in future periods.

     As of September 30, 2008, the Company had forward contracts, primarily relating to the Diodes Zetex Limited operations, of approximately $33.1 million that mature monthly over the next 15 months. For the nine months ended September 30, 2008, the Company had net foreign exchange hedge-related transaction losses of $1.5 million related to hedging the Zetex acquisition purchase price and deferred net unrealized losses on outstanding forward exchange contracts recorded as other comprehensive gain of $1.6 million (net of tax). For the nine months ended September 30, 2008, the Company had no material ineffective hedges because forward foreign currency contract amounts were less than the specifically identified anticipated transactions.

NOTE D – Earnings (Loss) Per Share

     The shares used in the computation of basic and diluted earnings (loss) per common share were as follows (in thousands, except per share data):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2008				2007				2008
BASIC
Weighted average number of common shares outstanding used in computing basic earnings (loss) per share			39,845				40,889				39,430				40,585
Net income (loss)		$	16,101			$	(2,946	)		$	41,358			$	24,364
Earnings (loss) per share		$	0.40			$	(0.07	)		$	1.05			$	0.60
DILUTED
Weighted average number of common shares outstanding used in computing basic earnings (loss) per share			39,845				40,889				39,430				40,585
Add: Assumed exercise of stock options and stock awards			2,600				—				2,669				2,161
			42,445				40,889				42,099				42,746
Net income (loss)		$	16,101			$	(2,946	)		$	41,358			$	24,364
Earnings (loss) per share		$	0.38			$	(0.07	)		$	0.98			$	0.57

     Earnings (loss) per share are based upon the weighted average number of shares of Common Stock and common stock equivalents outstanding, including those related to share-based compensation and convertible notes. Earnings per share are computed using the “treasury stock method” under FASB Statement No. 128. The convertible notes include a net share settlement feature which requires us to redeem the par amount of the bond in cash and any remaining value, assuming the bond is in the money, in incremental shares, cash or a combination thereof. The net share settled convertible as structured is defined in EITF 90-19, Instrument C, which allows us to use the treasury stock method of calculating the diluted earnings per share. The incremental value of the shares is determined based on the average price of our Common Stock over the reporting period. There are no shares in the earnings per share calculation related to the convertible notes outstanding as our average stock price did not exceed the conversion price of $39.00 and, therefore, there is no conversion spread. For the three months ended September 30, 2008, the Company has excluded the assumed exercise of stock options and stock awards from the calculation of diluted net loss per share because these securities are anti-dilutive.

NOTE E – Fair Value Measurements

     As stated in “Note A — Basis of Presentation and Recently Issued Accounting Pronouncements,” on January 1, 2008, we adopted the methods of fair value as described in SFAS 157 to value the financial assets and liabilities. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

     SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning

those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

     Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

     Level 2 Inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

     Level 3 Inputs — Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

     Historically, the fair value of the Company’s auction rate securities (“ARS”) has approximated par value due to the frequent resets through the auction process. While we continue to earn interest on investments at the maximum contractual rate, these investments are not currently trading and therefore, do not currently have a readily determinable market value. Accordingly, the estimated fair value of the ARS no longer approximates par value.

     Due to lack of observable market quotes on our $320.6 million ARS portfolio, the fair value measurements have been estimated using Level 3 inputs. The fair value was based on factors that reflect assumptions market participants would use in pricing, including, among others: relevant future market conditions including those that are based on the expected cash flow streams, the underlying financial condition and credit quality of the issuer and bond insurer, the percent of the Federal Family Education Loan Program (“FFELP”) guaranty, and the maturity of the securities, as well as the market activity of similar securities. The valuation of our ARS investment portfolio is subject to uncertainties that are difficult to predict and the future actual market prices may differ materially (see Note F — Short-term and Long-term Investments).

     Financial assets and liabilities carried at fair value as of September 30, 2008 are classified in the following table (in thousands):

		Level 1:
		Quoted				Level 2:
		Prices in				Significant				Level 3:
		Active Markets				Other				Significant
		for Identical				Observable				Unobservable				Total at
Description		Assets				Inputs				Inputs				September 30, 2008
Available-for-sale securities		$	—			$	—			$	284,818			$	284,818
Total		$	—			$	—			$	284,818			$	284,818

     The following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period ended September 30, 2008 (in thousands):

		Available-for-sale securities
Beginning balance as of January 1, 2008		$	320,700
Total gains or losses (unrealized) Included in other comprehensive loss			(35,807	)
Purchases, issuances, and settlements			(75	)
Ending balance as of September 30, 2008		$	284,818

     Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at September 30, 2008.

     Certain non-financial assets and non-financial liabilities measured at fair value on a recurring and non-recurring basis include goodwill, other intangible assets and other non-financial long-lived assets. As previously stated above, SFAS 157 will be applicable to these fair value measurements beginning January 1, 2009.

NOTE F – Short-term and Long-term Investments

     Short-term and long-term investments at September 30, 2008 and December 31, 2007, were as follows (in thousands):

						Unrealized				Unrealized
As of September 30, 2008		Cost Basis				Gains				Losses				Fair Value
Long-term investments:
Available-for-sale investment in auction rate securities		$	320,625			$	—			$	(35,807	)		$	284,818
Total long-term investments		$	320,625			$	—			$	(35,807	)		$	284,818

						Unrealized				Unrealized
As of December 31, 2007		Cost Basis				Gains				Losses				Fair Value
Short-term investments:
Available-for-sale investment in auction rate securities		$	320,700			$	—			$	—			$	320,700
Money market mutual funds			2,772				—				—				2,772
Total short-term investments		$	323,472			$	—			$	—			$	323,472

As of September 30, 2008, we had $320.6 million invested in ARS, which are generally long-term debt instruments that provided liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals. These mechanisms historically have allowed existing investors to roll over their holdings and continue to own the respective securities or to liquidate their holdings by selling their securities at par value.

     Historically, the Company invested in ARS for short periods of time as part of its cash management program. However, the recent uncertainties in the credit markets and the failure of the auctions for the Company’s ARS have prevented us and other investors from liquidating holdings of ARS. An auction failure, which is not a default in the underlying debt instrument, occurs when the amount of securities submitted for sale exceeds the amount of purchase orders, resulting in our continuing to hold these securities. The maturity dates for the Company’s ARS range from 19 to 39 years and averages 32 years. Based on current market conditions, if a secondary market does not develop, it is likely that auctions related to these securities will continue to be unsuccessful.  Unsuccessful auctions will result in our holding securities beyond their next scheduled auction reset dates, thereby limiting the liquidity of these investments. See Note R – “Subsequent Event” for further information.

     Due to the inability to trade all of the Company’s investments in ARS in the current market, the Company continues to earn interest on its ARS at a weighted average rate of 2.6% of as September 30, 2008, which it is currently collecting. The weighted average maximum contractual default rate is 17.3%.

     The Company’s ARS are primarily in student loan association bonds. None of our investments are collateralized mortgage obligations or are any other type of mortgage-backed or real estate-backed security.

     As of September 30, 2008, approximately 85.7%, or $274.8 million, of the $320.6 million par value ARS are collateralized by higher education funded student loans that are supported by the federal government as part of FFELP. The following table shows a natural grouping of the FFELP guaranteed securities, as well as the percentage of the ARS portfolio guaranteed by FFELP (in thousands).

% of FFELP guaranty		Par Value				% of Total
Greater than 99.0%		$	195,000				60.8	%
Between 81.2% and 82.1%			86,825				27.1	%
50.50%			17,000				5.3	%
10.00%			3,850				1.2	%
non-FFELP guaranteed			18,000				5.6	%
Total		$	320,675				100.0	%

     As of September 30, 2008, our portfolio of ARS was valued using a valuation model that relies exclusively on Level 3 inputs. The valuation resulted in the ARS being discounted by a range of 7.8% to 25.3% of par value. The resulting discount of the total ARS portfolio was 11.2% of par value, or $35.8 million pre-tax unrealized loss (see Note E – Fair Value Measurements).

     We currently have the ability and intent to hold these ARS investments until a recovery of the auction process or until maturity. Because of the inability to determine when our investments in ARS would settle, as of March 31, 2008, we reclassified the entire ARS balance from short-term investments to long-term investment, available-for-sale securities on our consolidated balance sheet.

     Although we are uncertain as to when the liquidity issues relating to these investments will improve, we consider these issues to be only temporary, and thus reduced the carrying value of the ARS to $284.8 million by recording a $22.7 million unrealized loss (net of $13.1 million tax effect) in other comprehensive loss.

     It is possible that further declines in ARS fair value may occur. We continue to monitor the market for ARS and consider its impact (if any) on the fair market value of the investments. If the current market conditions deteriorate further, we may be required to record additional unrealized losses in other comprehensive income or record impairment charges to the statements of operations.

NOTE G – Inventories

     Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out method (in thousands).

		December 31,				September 30,
		2007				2008
Raw materials		$	19,918			$	29,411
Work-in-progress			11,868				30,314
Finished goods			21,245				39,369
		$	53,031			$	99,094

NOTE H – Goodwill and Other Intangible Assets

     The following amounts of goodwill and intangible assets relating to the acquisition of Zetex are preliminary (See Note M – Business Acquisitions). The final amounts and determinable lives of goodwill and intangible assets are subject to change upon the completion of the Company’s valuation of the assets acquired and liabilities assumed, which it expects to complete by 2008 year-end.

     Changes in goodwill are as follows (in thousands):

		2007																2008
						Acquisitions/																Acquisitions/
						purchase				Currency												purchase				Currency
		Balance,				accounting				exchange				Balance,				Balance,				accounting				exchange				Balance,
		January 1				adjustments				and other				December 31				January 1				adjustments				and other				September 30
Total		$	25,030			$	—			$	105			$	25,135			$	25,135			$	28,056			$	(1,632	)		$	51,559

     Intangible assets at September 30, 2008 are (in thousands):

				As of
				September
				30, 2008
				Gross								Currency
				Carrying				Accumulated				exchange
Intangible Assets		Useful life		Amount				Amortization				and other				Net
Amortized Intangible Assets:
Patents, trademarks and trade names		5-15 years		$	14,006			$	(1,942	)		$	(227	)		$	11,837
Software license		3 years			1,212				(684	)			(41	)			487
Developed product technology		2-10 years			29,248				(1,308	)			(2,283	)			25,657
Customer relationships		12 years			6,521				(174	)			(515	)			5,832
Total amortized intangible assets:				$	50,987			$	(4,108	)		$	(3,066	)		$	43,813

     Amortization expense related to intangible assets subject to amortization was $0.2 million and $1.9 million for the three months ended September 30, 2007 and 2008, respectively.

     Amortization expense related to intangible assets subject to amortization was $0.6 million and $2.4 million for the nine months ended September 30, 2007 and 2008, respectively.

NOTE I – Income Tax Provision

     Income tax expense of $0.3 million and $5.3 million was recorded for the three and nine months ended September 30, 2008, respectively. This resulted in an effective tax rate of 12.3% in the nine months ended September 30, 2008, as compared to 15.0% in the same period of last year and compared to 13.2% for the full year of 2007. Our lower effective tax rate compared with the same period last year was the result of income tax refunds in China and lower income in the U.S. and higher income in lower-taxed jurisdictions, partially offset by an increased income tax rates at our China subsidiaries due to the phase-out of previously granted income tax holidays. For the nine month ended September 30, 2007, the Company reported domestic and foreign pre-tax income of approximately $(0.6) million and $49.5 million, respectively. For the nine month ended September 30, 2008, the Company reported domestic and foreign pre-tax income of approximately $(17.5) million and $63.1 million, respectively, excluding $14.0 million pre-tax purchase accounting adjustments.

     Our global presence requires us to pay income taxes in a number of jurisdictions. In general, earnings in the U.S. and Taiwan are currently subject to tax rates of 39.0% and 25.0%, respectively. In addition, Taiwan earnings are subject to an additional 10% retained earnings tax should the Taiwan earnings not be distributed. Earnings in Hong Kong are subject to a 16.5% tax for local sales or local source sales; all other Hong Kong sales are not subject to foreign income taxes. Earnings in Taiwan and Hong Kong are also subject to U.S. taxes with respect to those earnings that are derived from product manufactured by our China subsidiaries and sold to customers outside of Taiwan and Hong Kong, respectively. The U.S. tax rate on this Subpart F income is computed as the difference between the foreign effective tax rates and the U.S. tax rate. In accordance with U.S. tax law, we receive credit against our U.S. federal tax liability for income taxes paid by our foreign subsidiaries.

     As an incentive for the formation of Anachip Corp., its earnings are subject to a five-year tax holiday (subject to certain qualifications of Taiwanese tax law). In the third quarter of 2006, we elected to begin this five-year tax holiday as of January 1, 2006. Beginning 2011, Anachip Corp’s earnings will be subject to the statutory Taiwan income tax rate.

     Prior to 2008, earnings in the Songjiang district of China have a standard central government tax rate of 24.0%. However, as an incentive for establishing Shanghai Kai Hong Electronic Co., Ltd., its earnings were subject to a 0% tax rate by the central government from 1996 through 2000, and to a 12.0% tax rate from 2001 through 2007. For 2008, we expect a tax rate of 25%. In addition, due to a $15 million permanent re-investment of Shanghai Kai Hong Electronic Co., Ltd.’s earnings in 2004, it has received additional preferential tax treatment (earnings will be exempted from central government income tax for two years, and then subject to tax rates in the range of 12.0% to 12.5% for the following three years) on earnings that are generated by this investment.

     In addition, the earnings of Shanghai Kai Hong Electronic Co., Ltd. would ordinarily be subject to a standard local government tax rate of 3.0% through 2007. However, as an incentive for establishing Shanghai Kai Hong Electronic Co., Ltd., the local government waived this tax from 1996 through 2007.

     In 2004, we established our second Shanghai-based manufacturing facility, Shanghai Kai Hong Technology Co., Ltd., located in the Songjiang Export Zone of Shanghai, China. In the Songjiang Export Zone, the central government standard tax rate is 15.0%, and there is no local government tax. As an incentive for establishing Shanghai Kai Hong Technology Co., Ltd., its 2005 and 2006 earnings were exempted from central government income tax and the 2007 earnings were subject to a 7.5% tax rate. For 2008, we expect a tax rate of 12.5%.

     It is unclear to what extent our China subsidiaries will receive preferential tax treatment. The recent China government income tax reform terminates some existing tax incentives for foreign enterprises doing business in China. The central government tax rate in China increased to 25% beginning in 2008; however, we believe Shanghai Kai Hong Electronic Co., Ltd may qualify for a “high technology” preferential tax treatment that would reduce the tax rate to 15% and Shanghai Kai Hong Technology Co., Ltd. may also qualify for a transitional tax rate of 9%.

     The impact of the tax holidays decreased the Company’s tax expense by approximately $6.9 million and $5.7 million for the nine months ended September 30, 2007 and 2008, respectively. The benefit of the tax holiday on basic and diluted earnings per share for the nine months ended September 30, 2007 was $0.17 and $0.16, respectively. The benefit of the tax holiday on basic and diluted earnings per share for the nine months ended September 30, 2008 was $0.14 and $0.13, respectively.

     On June 9, 2008, the Company completed the acquisition of all the outstanding ordinary capital stock of Zetex. Zetex’s earnings in the United Kingdom are currently subject to a tax rate of 28% and its earnings in Hong Kong are subject to a 16.5% tax rate. In addition, Zetex’s earnings in Germany are subject to a 30% tax rate.

     We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for tax years before 2005. The Internal Revenue Service has contacted the Company regarding an examination for the tax year ended 2005. With respect to state and local jurisdictions and countries outside of the U.S., with limited exceptions, we are no longer subject to income tax audits for years before 2002. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest and penalties, if any, have been provided for in our FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN48”) reserve for any adjustments that may result from future tax audits. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

     We adopted the provisions FIN48 effective January 1, 2007. As a result of the implementation of FIN48, we increased our liability for unrecognized tax benefits, primarily related to our foreign subsidiaries, by approximately $2.0 million during the first quarter of 2007, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. As of January 1, 2008 and September 30, 2008, the gross amount of unrecognized tax benefits was approximately $4.1 million and $4.5 million, respectively.

     It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits or competent authority proceedings. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

     In addition, funds repatriated from foreign subsidiaries to the U.S. may be subject to federal and state income taxes. As of January 1, 2007, we had accrued $3.3 million for U.S. taxes on future dividends from our foreign subsidiaries. With the establishment of the holding companies in 2007, the Company intends to permanently reinvest overseas all of its earnings from its foreign subsidiaries. Accordingly, the $3.3 million liability was reversed during 2007, and U.S. taxes are no longer being recorded on undistributed foreign earnings. Furthermore, the Company determined that it was more likely than not that a portion of its federal foreign tax credit carryforwards would expire before they could be utilized. Accordingly, the Company recorded a $5.0 million valuation allowance during the twelve months ended December 31, 2007.

NOTE J – Deferred Compensation

     Beginning January 1, 2007, the Company implemented a Non-Qualified Deferred Compensation Plan (the “Deferred Compensation Plan”) for executive officers, key employees and members of the Board of Directors (the “Board”). The Deferred Compensation Plan allows eligible participants to defer the receipt of eligible compensation until designated future dates. The Company offsets its obligations under the Deferred Compensation Plan by investing in the actual underlying investments. These investments are classified as trading securities and are carried at fair value. At September 30, 2008, these investments totaled approximately $2.2 million. All gains and losses in these investments are equally offset by corresponding gains and losses in the Deferred Compensation Plan liabilities.

NOTE K – Share-based Compensation

     We maintain share-based compensation plans for our officers, key employees, and our Board, which provide for stock options and stock awards. For further details regarding the Company’s share-based compensation plans, please see Note 15 of our notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007.

     Stock Options. Through March 31, 2006, substantially all stock options granted vest in equal annual installments over a three-year period and expire ten years after the grant date. Beginning April 1, 2006, substantially all stock options granted vest in equal annual installments over a four-year period and expire ten years after the grant date.

     For the three months and nine months ended September 30, 2007 and 2008, share-based compensation expense associated with the Company’s stock options recognized in the statements of operations is as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2008				2007				2008
Cost of sales		$	59			$	7			$	219			$	112
Selling and administrative expense			1,173				764				3,680				2,915
Research and development expense			112				69				355				280
Total stock option expense		$	1,344			$	840			$	4,254			$	3,307

     Stock option expense for the three months and nine months ended September 30, 2007 and 2008 was estimated on the date of grant using the Black-Scholes option pricing model. For the nine months ended September 30, 2008, the Company granted stock options to purchase approximately 241,000 shares of the Company’s Common Stock, which vest in equal annual installments over a four-year period and expire ten years from the date of grant. Options granted during the nine months ended September 30, 2008 had a weighted-average grant date fair value of $16.70.

     The total intrinsic value (actual gain) of options exercised during the nine months ended September 30, 2008 was approximately $8.7 million. The total net cash proceeds received from stock option exercises during the nine months ended September 30, 2008 was $2.8 million.

     A summary of the stock option plans as of September 30, 2008 follows (in thousands):

										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
		Shares				Exercise				Contractual				Value
Stock options		(000)				Price				Term (yrs)				($000)
Outstanding at January 1, 2008			4,268			$	10.06				6.0			$	85,393
Granted			241				27.95
Exercised			(488)				5.74								8,679
Forfeited or expired			(46)				23.76
Outstanding at September 30, 2008			3,975			$	11.53				5.6			$	32,618
Exercisable at September 30, 2008			3,415			$	9.21				5.1			$	32,610

     The aggregate intrinsic value in the table above is before applicable income taxes and represents the amount optionees would have received if all options had been exercised on the last business day of the period indicated, based on our closing stock price.

     As of September 30, 2008, total unrecognized stock-based compensation expense related to unvested stock options, net of forfeitures, was approximately $7.8 million, before income taxes, and is expected to be recognized over a weighted average of approximately 2.8 years.

     Share Grants. Restricted stock awards and restricted stock units generally vest in equal annual installments over a four-year period.

     For the three months and nine months ended September 30, 2007 and 2008, share-based compensation expense associated with the Company’s share grants recognized in the statements of operations is as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2008				2007				2008
Cost of sales		$	66			$	91			$	135			$	240
Selling and administrative expense			1,077				1,434				2,636				3,696
Research and development expense			112				198				227				453
Total share grant expense		$	1,255			$	1,723			$	2,998			$	4,389

     A summary of the status of our non-vested share grants as of September 30, 2008 follows (in thousands):

						Weighted-				Aggregate
						Average				Intrinsic
		Shares				Grant-Date				Value
Share Grants		(000)				Fair Value				($000)
Nonvested at January 1, 2008			1,018			$	18.34			$	30,602
Granted			262				27.25
Vested			(382)				15.98				9,517
Forfeited			(45)				26.28
Nonvested at September 30, 2008			853			$	21.71			$	15,737

     During the three months ended September 30, 2007 and 2008, there was $1.3 million and $1.7 million, respectively, of share-based compensation expense related to non-vested stock award arrangements granted under the plans.

     During the nine months ended September 30, 2007 and 2008, there was $3.0 million and $4.4 million, respectively, of share-based compensation expense related to non-vested stock award arrangements granted under the plans.

     The total intrinsic value (actual gain) of restricted stock grants vested during the nine months ended September 30, 2008 was approximately $9.5 million.

     As of September 30, 2008, total un-recognized share-based compensation expense related to non-vested stock award arrangements, net of forfeitures, was approximately $15.2 million, before income taxes and is expected to be recognized over a weighted average of approximately 2.3 years.

NOTE L – Segment and Geographic Information

     An operating segment is defined as a component of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief decision-making group consists of the President and Chief Executive Officer, Chief Financial Officer, Senior

Vice President of Operations, Senior Vice President of Sales and Marketing and Senior Vice President of Finance. For financial reporting purposes, we operate in a single segment, standard semiconductor products, through our various manufacturing and distribution facilities. We aggregated our products since the products are similar and have similar economic characteristics, and the products are similar in production process and share the same customer type.

     Our primary operations include the domestic operations in Asia, North America and Europe.

     The accounting policies of the operations are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2007. Revenues are attributed to geographic areas based on the location of subsidiaries producing the revenues (in thousands):

Three Months Ended														Consolidated
September 30, 2007		Asia				North America				Europe (1)				Segments
Total sales		$	135,597			$	31,629			$	—			$	167,226
Inter-company sales			(56,777	)			(5,185	)			—				(61,962	)
Net sales		$	78,820			$	26,444			$	—			$	105,264
Income (loss) before income taxes and minority interest		$	19,657			$	(673	)		$	—			$	18,984
Property, plant and equipment		$	104,044			$	15,174			$	—			$	119,218
Assets		$	214,990			$	471,912			$	—			$	686,902

Three Months Ended														Consolidated
September 30, 2008		Asia				North America				Europe				Segments
Total sales		$	164,859			$	31,839			$	13,626			$	210,324
Inter-company sales			(69,010	)			(6,262	)			(1,005	)			(76,277	)
Net sales		$	95,849			$	25,577			$	12,621			$	134,047
Income (loss) before income taxes and minority interest		$	18,531			$	(8,080	)		$	(12,419	)		$	(1,968	)
Property, plant and equipment		$	109,587			$	27,955			$	45,661			$	183,203
Assets		$	337,186			$	387,294			$	183,983			$	908,463

Nine Months Ended														Consolidated
September 30, 2007		Asia				North America				Europe (1)				Segments
Total sales		$	367,504			$	92,295			$	—			$	459,799
Inter-company sales			(150,172	)			(16,060	)			—				(166,232	)
Net sales		$	217,332			$	76,235			$	—			$	293,567
Income (loss) before income taxes and minority interest		$	50,679			$	(598	)		$	—			$	50,081
Property, plant and equipment		$	104,044			$	15,174			$	—			$	119,218
Assets		$	214,990			$	471,912			$	—			$	686,902

Nine Months Ended														Consolidated
September 30, 2008		Asia				North America				Europe				Segments
Total sales		$	464,008			$	92,252			$	18,906			$	575,166
Inter-company sales			(206,372	)			(22,110	)			(1,039	)			(229,521	)
Net sales		$	257,636			$	70,142			$	17,867			$	345,645
Income (loss) before income taxes and minority interest		$	57,383			$	(16,941	)		$	(8,825	)		$	31,617
Property, plant and equipment		$	109,587			$	27,955			$	45,661			$	183,203
Assets		$	337,186			$	387,294			$	183,983			$	908,463

Geographic Information

     Revenues were derived from (billed to) customers located in the following countries. “All Others” represents countries with less than 10% of the total revenues each (in thousands):

		Net Sales
		for the Three Months								Percentage of
		Ended September 30,								Net Sales
		2007				2008				2007				2008
China		$	42,451			$	41,565				40.3	%			31.0	%
Taiwan			23,267				34,013				22.1	%			25.4	%
United States			21,930				26,000				20.8	%			19.4	%
All Others			17,616				32,469				16.8	%			24.2	%
Total		$	105,264			$	134,047				100.0	%			100.0	%

		Net Sales
		for the Nine Months								Percentage of
		Ended September 30,								Net Sales
		2007				2008				2007				2008
China		$	104,490			$	102,650				35.6	%			29.7	%
Taiwan			80,087				100,061				27.3	%			28.9	%
United States			62,759				67,240				21.4	%			19.5	%
All Others			46,231				75,694				15.7	%			21.9	%
Total		$	293,567			$	345,645				100.0	%			100.0	%

NOTE M– Business Acquisitions

     Zetex Acquisition – On June 9, 2008, the Company completed the acquisition of all the outstanding ordinary capital stock of Zetex, a company incorporated under the laws of England and Wales. The shareholders of Zetex received 85.45 pence in cash per Zetex ordinary share, valuing the fully diluted share capital of Zetex at approximately U.S.$176.3 million (based on a USD:GBP exchange rate of 1.9778), excluding acquisition costs, fees and expenses.

     As consideration for Zetex, the Company paid the following (in thousands):

Purchase price (net of cash acquired)		$	149,144
Acquisition related costs			4,014
Total purchase price		$	153,158

     In addition, in order to finance the acquisition, the Company entered into a loan for $165 million, which accrued interest at a floating rate of interest per annum equal to the sum of the prevailing daily 30-day LIBOR plus 1.25% as of September 30, 2008 (see Note N – Margin Loan for further details), secured by its ARS portfolio.

     The results of operations of the Zetex acquisition have been included in the consolidated financial statements from June 1, 2008. The purpose of this acquisition was to create revenue, operating and cost synergies and to enhance the Company’s leadership in discrete and analog solutions. In addition, the Company believes that the acquisition will strengthen and broaden the Company’s product offerings, including entry into the LED lighting and automotive markets and expand the Company’s geographical footprint in the European markets.

     A final determination of the allocation of the purchase price to the assets acquired and liabilities assumed has not been made and should be considered preliminary. The final determination is subject to the completion of the Company’s valuation of the assets acquired and liabilities assumed, which it expects to complete by 2008 year-end.

     The following summarizes the preliminary (subject to final determination) allocation of the purchase price to the fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

						Changes in
						purchase price
		Purchase price				allocation
		allocation on				recorded				Revised purchase
		acquisition				during third				price allocation on
		date				quarter of 2008				acquisition date
Assets acquired:
Accounts receivable, net		$	13,445			$	—			$	13,445
Inventory			30,605				5,386				35,991
Prepaid expenses and other current assets			4,363				—				4,363
Property, plant and equipment, net			50,145				2,146				52,291
Deferred tax assets			5,235				5,041				10,276
Other long-term assets			136				—				136
Trademarks and other intangible assets			7,991				39,449				47,440
Goodwill			85,036				(57,399	)			27,637
Total assets acquired		$	196,956			$	(5,377	)		$	191,579
Liabilities assumed:
Accounts payable		$	6,057			$	—			$	6,057
Accrued expenses and other liabilities			16,154				652				16,806
Pension liability			10,873				—				10,873
Deferred tax liabilities			7,288				(6,029	)			1,259
Other liabilities			3,846				—				3,846
Total liabilities assumed			44,218				(5,377	)			38,841
Total net assets acquired		$	152,738			$	—			$	152,738