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Article by DailyStocks_admin    (11-24-08 10:30 AM)

Diodes Inc. CEO SHEW LU KEH bought 62491 shares on 11-18-2008 at $4.71

BUSINESS OVERVIEW

GENERAL

We are a global supplier of application specific standard products within the broad discrete and analog semiconductor markets. These products include diodes, rectifiers, transistors, MOSFET’s, protection devices, functional specific arrays, power management devices including DC-DC switching and linear voltage regulators, amplifiers and comparators, Hall effect sensors and silicon wafers used to manufacture these products.

We design, manufacture and market these semiconductors focused on diverse end-use applications in the consumer electronics, computing, industrial, communications and automotive sectors. Semiconductors, which provide electronic signal amplification and switching functions, are basic building-block electronic components that are incorporated into almost every electronic device. We believe that our focus on standard semiconductor products provides us with a meaningful competitive advantage relative to other semiconductor companies that provide a wider range of semiconductor products.

Our product portfolio addresses the design needs of many advanced electronic devices including high-volume consumer devices such as digital audio players, notebook computers, flat-panel displays, mobile handsets, digital cameras and set-top boxes. We believe that we have particular strength in designing innovative surface-mount semiconductors for applications with a critical need to minimize product size while maximizing power efficiency and overall performance, and at a lower cost than alternative solutions. Our product line includes over 4,000 products, and we shipped approximately 10.2 billion units, 14.5 billion units, and 18.1 billion units in 2005, 2006, and 2007, respectively. From 2002 to 2007, our net sales grew from $115.8 million to $401.2 million, representing a compound annual growth rate of 28.2%.

We serve over 130 direct customers worldwide, which consist of original equipment manufacturers (OEMs) and electronic manufacturing services (EMS) providers. Additionally, we have approximately 60 distributor customers worldwide, through which we indirectly serve over 10,000 customers. Our customers include: (i) industry leading OEMs, in a broad range of industries, such as Bose Corporation, Honeywell International, Inc., Cisco Systems, Inc., LG Electronics, Inc., Motorola, Inc., Quanta Computer, Inc., Sagem Communication, Samsung Electronics Co., Ltd., Delta Electronics, and Hella, Ltd.; (ii) leading EMS providers such as Celestica, Inc., Flextronics International, Ltd., Hon Hai Precision Industry Co., Ltd., Inventec Corporation, Jabil Circuit, Inc., and Sanmina-SCI Corporation who build end-market products incorporating our semiconductors for companies such as Apple Computer, Inc., Dell, Inc., EMC Corporation, Intel Corporation, Microsoft Corporation, Thompson, Inc., and Roche Diagnostics; and (iii) leading distributors, such as Arrow Electronics, Inc., Avnet, Inc., Future Electronics, Zenitron Corporation, Rutronic and Yosun Industrial Corporation. For 2006 and 2007, our OEM and EMS customers together accounted for 54.2% and 61.1%, respectively, of our net sales.

We were incorporated in 1959 in California and reincorporated in Delaware in 1969. We are headquartered in Dallas, Texas. We have two manufacturing facilities located in Shanghai, China, one analog design facility located in Hsinchu, Taiwan, and our wafer fabrication facility is in Kansas City, Missouri. Our sales, marketing and logistical centers are located in Westlake Village, California; Taipei, Taiwan; Shanghai and Shenzhen, China; and Hong Kong. In 2007, we strengthened our product design centers in Dallas, San Jose, Shanghai and Taiwan to position our design engineers to work more closely with our customers and enable us to deliver a stream of innovative solutions in our targeted product categories. We also have regional sales offices and/or representatives in: Derbyshire, England; Toulouse, France; Frankfurt, Germany; and in various cities throughout the U.S.

As part of our growth strategy, in December 2005, we announced the acquisition of Anachip Corporation, a fabless Taiwanese semiconductor company focused on analog ICs designed for specific applications, and in November 2006, we acquired the net assets of APD Semiconductor, Inc., a privately held U.S.-based fabless discrete semiconductor company. See “Our Strategy” for more discussion of these acquisitions.

During 2007, we undertook an internal restructuring whereby our foreign subsidiaries were placed under our newly formed, wholly-owned Netherlands holding company, Diodes International B.V. ("Diodes BV"). In addition, Diodes China and Diodes Shanghai were placed under Diodes Hong Kong Holding Company, Ltd., a newly-formed wholly-owned subsidiary of Diodes BV. The primary purpose of this internal restructuring was for treasury management and tax planning functions.

SEGMENT REPORTING AND FINANCIAL 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, Asia President, 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 operations include the domestic operations (Diodes Incorporated and Diodes-FabTech) located in the United States and the Asian operations (Diodes-Taiwan, located in Taipei, Taiwan, and Diodes-Anachip located in Hsinchu, Taiwan, Diodes-China and Diodes-Shanghai both located in Shanghai, China, and Diodes-Hong Kong located in Hong Kong, China). For reporting purposes, European operations are consolidated into the domestic (North America) operations. Information about our net revenues, net income, assets and property, plant and equipment is described in our notes to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

OUR INDUSTRY

Semiconductors are critical components used in the manufacture of an increasing variety of electronic products and systems. Since the invention of the transistor in 1948, continuous improvements in semiconductor processes and design technologies have led to smaller, more complex and more reliable devices at a lower cost per function. The availability of low-cost semiconductors, together with increased customer demand for sophisticated electronic systems, has led to the proliferation of semiconductors in diverse end-use applications in the consumer electronics, computing, industrial, communications and automotive sectors. These factors have also led to an increase in the total number of semiconductor components in individual electronic systems and an increase in value of these components as a percentage of the total cost of the electronic systems in which they are incorporated.

OUR COMPETITIVE STRENGTHS

We believe our competitive strengths include the following:

Flexible, scalable and cost-effective manufacturing - Our manufacturing operations are a core element of our success and we have designed our manufacturing base to allow us to respond quickly to changes in demand trends in the end-markets we serve. For example, we have structured our Shanghai assembly, test and packaging facilities to enable us to rapidly and efficiently add capacity and adjust product mix to meet shifts in customer demand and overall market trends. As a result, for the past several years we have operated our Shanghai facilities at near full capacity, while at the same time significantly expanding that capacity. Additionally, the Shanghai location of our manufacturing operations provides us with access to a highly-skilled workforce at a low overall cost base while enabling us to better serve our leading customers, many of which are located in Asia.

Integrated packaging expertise - We believe that we have particular expertise in designing and manufacturing innovative and proprietary packaging solutions that integrate multiple separate discrete elements into a single semiconductor product called an array. Our ability to design and manufacture highly integrated semiconductor solutions provides our customers with products of equivalent functionality with fewer individual parts, and at lower overall cost, than alternative products. For example, one of our leading diode array products integrates eight discrete elements into a single highly miniaturized package that provides four times the functionality, with less than 20% of the space requirements of the previous solution. This combination of integration, functionality and miniaturization makes our products well suited for high-volume consumer applications such as digital audio players, notebook computers and digital cameras.

Broad customer base and diverse end-markets - Our customers include leading OEMs such as Bose Corporation, Honeywell International, Inc., LG Electronics, Inc., Cisco Systems, Inc., Motorola, Inc., Quanta Computer, Inc., Sagem Communication, Samsung Electronics Co., Ltd., Delta Electronics, and Hella, Ltd., as well as leading EMS providers such as Celestica, Inc., Flextronics International, Ltd., Hon Hai Precision Industry Co., Ltd., Inventec Corporation, Jabil Circuit, Inc., and Sanmina-SCI Corporation. Overall, we serve over 130 direct customers and over 10,000 additional customers through our distributors, including leading distributors such as Arrow Electronics, Inc., Avnet, Inc., Future Electronics, Zenitron Corporation, Rutronic and Yosun Industrial Corporation. Our products are ultimately used in end-products in a large number of markets served by our broad base of customers, which we believe makes us less dependent on either specific customers or specific end-user applications.

Customer focused product development - Effective collaboration with our customers and a high degree of customer service are essential elements of our business. We believe focusing on dependable delivery of semiconductor solutions tailored to specific end-user applications, has fostered deep customer relationships and created a key competitive advantage for us in the highly fragmented discrete and analog semiconductor marketplace. We believe our close relationships with our OEM and EMS customers have provided us with deeper insight into our customers’ product needs. This results in differentiation in our product designs and often provides us with insight into additional opportunities for new design wins in our customers’ products.

Management continuity and experience - We believe that the continuity of our management team is a critical competitive strength. Five members of our executive management team have an average of over 13 years of service at the Company and the length of their service with us has created significant institutional insight into our markets, our customers and our operations.

In June 2005, we appointed Dr. Keh-Shew Lu as President and Chief Executive Officer. Dr. Lu has served as a director of Diodes since 2001 and has 30 years of relevant industry experience. Dr. Lu began his career at Texas Instruments, Inc. in 1974 and retired in 2001 as Senior Vice President and General Manager of Worldwide Analog, Mixed-Signal and Logic Products. Our Chief Financial Officer, Carl Wertz, has been employed by us since 1993 and has over 20 years of financial experience in manufacturing and distribution industries. Joseph Liu, our Senior Vice President of Operations, joined us in 1990 and has over 30 years of relevant industry experience, having started his career in 1971 at Texas Instruments. Similarly, Mark King, our Senior Vice President of Sales and Marketing, has been employed by us since 1991, as has Steven Ho, our Asia President. In 2006, we strengthened our executive management team with the addition of: Richard White, Senior Vice President of Finance, who brings with him 30 years of senior level finance experience, including 25 years at Texas Instruments; Francis Tang, Vice President of Product Development, promoted from Global Product Manager in May of 2006; and Edmund Tang, Vice President of Corporate Administration, with 30 years of managerial and engineering experience.

OUR STRATEGY

Our strategy is to continue to enhance our position as a global supplier of standard semiconductor products, and to continue to add other product lines, such as power management products, using our packaging technology capability.

The principal elements of our strategy include the following:

Continue to rapidly introduce innovative discrete and analog semiconductor products - We intend to maintain our rapid pace of new product introductions, especially for high-volume, growth applications with short design cycles, such as digital audio players, notebook computers, flat-panel displays, mobile handsets, digital cameras, set-top boxes and other consumer electronics and computing devices. During 2007, we introduced approximately 240 new devices and achieved new design wins at over 100 OEMs. We believe that continued introduction of new and differentiated product solutions is critically important in maintaining and extending our market share in the highly competitive semiconductor marketplace.

Sales of new products (products that have been sold for three years or less) for the years ended December 31, 2005, 2006 and 2007 amounted to 13.9%, 28.2% and 35.1% of total sales, respectively , and this growth includes the contribution of the Anachip acquisition in early 2006 as well as the SBR â technology acquired in the APD acquisition in late 2006. New products generally have gross profit margins that are higher than the margins of our standard products. We expect net sales derived from new products to increase in absolute terms, although our net sales of new products as a percentage of our net sales will depend on the demand for our standard products, as well as our product mix. New product revenue in 2007 was driven by products in sub-miniature array, QFN, PowerDI Ô 323, PowerDI Ô 123, PowerDI Ô 5, SBR â and Schottky platforms, in both the discrete and analog product lines.

Expand our available market opportunities - We intend to aggressively maximize our opportunities in the standard semiconductor market as well as in related markets where we can apply our semiconductor design and manufacturing expertise. A key element of this is leveraging our highly integrated packaging expertise through our Application Specific Multi-Chip Circuit (ASMCC) product platform, which consists of standard arrays, function specific arrays and end-equipment specific arrays. We intend to achieve this by:

Ø
Continuing to focus on increasing packaging integration, particularly with our existing standard array and customer-specific array products, in order to achieve products with increased circuit density, reduced component count and lower overall product cost;

Ø
Expanding existing products and developing new products in our function specific array lines, which combine multiple discrete semiconductor components to achieve specific common electronic device functionality at a low cost; and

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Developing new product lines, which we refer to as end-equipment specific arrays, which combine discrete components with logic and/or standard analog circuits to provide system-level solutions for high-volume, high-growth applications.

Maintain intense customer focus - We intend to strengthen and deepen our customer relationships. We believe that continued focus on customer service would increase our net sales, operating performance and overall market share. To accomplish this, we intend to continue to closely collaborate with our customers to design products that meet their specific needs. A critical element of this strategy is to continue to further reduce our design cycle time in order to quickly provide our customers with innovative products. Additionally, to support our customer-focused strategy, we are continuing to expand our sales force and field application engineers, particularly in Asia and Europe.

Enhance cost competitiveness - A key element of our success is our overall low-cost base. While we believe that our Shanghai manufacturing facilities are among the most efficient in the industry, we will continue to refine our proprietary manufacturing processes and technology to achieve additional cost efficiencies. Additionally, we intend to continue to operate our facilities at high utilization rates and to increase product yields in order to achieve meaningful economies of scale.

Pursue selective strategic acquisitions - As part of our strategy to expand our standard semiconductor product offerings and to maximize our market opportunities, we may acquire discrete, analog or mixed-signal technologies, product lines or companies in order to support our ASMCC product platform and enhance our standard and new product offerings.

In December 2005, we announced the acquisition of Anachip Corporation, a fabless Taiwanese semiconductor company focused on analog ICs designed for specific applications, and h eadquartered in the Hsinchu Science Park in Taiwan . This acquisition, which was completed in January 2006, is in line with our long-t erm strategy. Anachip’s main product focus is power management ICs. The analog devices they produce are used in LCD monitor/TV's, wireless LAN 802.11 access points, brushless DC motor fans, portable DVD players, datacom devices, ADSL modems, TV/satellite set-top boxes, and power supplies. Anachip brings a design team with strong capabilities in a range of targeted analog and power management technologies.

On November 3, 2006, we purchased the net assets of APD Semiconductor, Inc., a privately held U.S.-based fabless semiconductor company. APD Semiconductor is headquartered in Redwood City, California, with a sales, application, and administration center in Taipei, Taiwan. APD Semiconductor’s main product focus is its patented and trademarked Super Barrier Rectifier (“SBR ® ”) technology. Utilizing a low cost IC wafer process, the SBR technology uses a MOS cellular design to replace standard traditional Schottky or PN junction diodes. The SBR ® technology uses an innovative-patented process technique that allows its key parameters to be easily tuned to optimize any customer applications. This adaptive and scalable technology allows for increased power saving with better efficiency and reliability at higher operating temperatures for end- user applications like digital audio players, DC/DC converters. AC/DC power supplies, LCD monitors, Power-over-Ethernet (POE), Power Factor Correction (PFC) and TV/satellite set-top boxes. The SBR technology offers industry-leading products like the SBR20U100CT, which has the lowest forward voltage and highest efficiency and power saving in its class. The APD acquisition will further strengthen our technology leadership in the discrete semiconductor market and expand our product capabilities across important segments of our end-markets.

CONVERTIBLE BONDS OFFERING

On October 12, 2006, we issued and sold convertible senior notes with an aggregate principal amount of $230 million due 2026 (the “Notes”), which pay 2.25% interest per annum on the principal amount of the Notes, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2007.

The Notes will be convertible into cash or, at our option, cash and shares of our Common Stock based on an initial conversion rate, subject to adjustment, of 25.6419 shares (split adjusted) per $1,000 principal amount of Notes (which represents an initial conversion price of $39.00 per share, split adjusted), in certain circumstances. In addition, following a “make-whole fundamental change” that occurs prior to October 1, 2011, we will, at our option, increase the conversion rate for a holder who elects to convert its Notes in connection with such “make-whole fundamental change,” in certain circumstances.

We intend to use the net proceeds for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments, or purchases of our own Common Stock.

FOLLOW-ON PUBLIC OFFERING

In October 2005, we sold approximately 3.2 million shares (split adjusted) of our Common Stock in a follow-on public offering, raising approximately $71.7 million (net of commissions and expenses). We used approximately $31 million and $8 million of the proceeds in connection with the Anachip and ADP acquisitions, respectively, and w e intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes, including additional acquisitions.

OUR PRODUCTS

Our product portfolio includes over 4,000 products that are designed for use in high-volume consumer devices such as digital audio players, notebook computers, flat-panel displays, mobile handsets, digital cameras and set-top boxes. We target and serve end-equipment market segments that we believe have higher growth rates than other end-market segments served by the overall semiconductor industry.

Our broad product line includes:

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Discrete semiconductor products, including performance Schottky rectifiers; performance Schottky diodes; Zener diodes and performance Zener diodes, including tight tolerance and low operating current types; standard, fast, super-fast and ultra-fast recovery rectifiers; bridge rectifiers; switching diodes; small signal bipolar transistors; prebiased transistors; MOSFETs; thyristor surge protection devices; and transient voltage suppressors;

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Complex high-density diode, transistor and mixed technology arrays, in multi-pin ultra-miniature surface-mount packages, including customer specific and function specific arrays;

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Silicon wafers used in manufacturing these products; and

Ø
Power management devices and Hall effect sensors through our Anachip acquisition

Our semiconductor products are an essential building-block of electronic circuit design and are available in thousands of permutations varying according to voltage, current, power handling capability and switching speed.

Our complex diode and transistor arrays help bridge the gap between discrete semiconductors and integrated circuits. Arrays consist of multiple discrete semiconductor devices housed in a single package. Our discrete surface-mount devices, which are components that can be attached to the surface of a substrate with solder, target end-equipment categories with critical needs to minimize size while maintaining power efficiency and performance.

CEO BACKGROUND

(1) Raymond Soong has been the Chairman of the Boards of LSC and Lite-On Technology Corporation, a Lite-On Group company, since 1992. Mr. Soong also serves on the board of Actron Technology Corporation, a Lite-On Group company. See “General Information - Security Ownership of Certain Beneficial Owners and Management” and “Proposal One - Election of Directors - Certain Relationships and Related Transactions” for a discussion of the relationships among Lite-On Technology, LSC and the Company. Mr. Soong is a graduate of the National Taipei Institute of Technology's Electronic Engineering Department. After serving as a senior engineer for RCA and as a chief engineer for Texas Instruments, Inc. (“TI”), Mr. Soong, together with several of his co-workers, founded Taiwan Lite-On Electronic Co. Ltd. (“Taiwan Lite-On”), a manufacturer of electronic components and subsystems, in 1975. Mr. Soong is also Chairman of the Company's Nominating Committee.

(2) C.H. Chen was appointed Vice Chairman of the Board of Directors in June 2005. Mr. Chen previously served as the Company's President and Chief Executive Officer from 2000 until 2005. From 1969 to 1990, Mr. Chen held various positions at TI, most recently as Vice President of TI Taiwan. In 1990, he left TI to found Dyna Image Corporation, a Lite-On Group company and the world's leading supplier of contact image sensors (CISs), which merged with LSC in December 2000. Mr. Chen is currently the Vice Chairman of LSC, Vice Chairman of Dynacard Corporation, Supervisor of Lite-On Technology Corporation, Chairman of Co-Tech Copper Foil Corporation, a board member of Actron Technology Corporation, Chairman of the Company's Compensation and Stock Options Committee, an ex officio member of the Nominating Committee and a member of the Strategic Planning Committee.

(3) Dr. Keh-Shew Lu was appointed President and Chief Executive Officer of the Company in June 2005 after serving on the Board of Directors since 2001. From 1998 to 2001, Dr. Keh-Shew Lu served as Senior Vice President of TI and General Manager of Worldwide Mixed-Signal and Logic Products. His responsibilities included all aspects of the analog, mixed-signal and logic products for TI worldwide business, including design, process and product development, manufacturing and marketing. From 1996 to 1998 Dr. Lu was manager of TI's worldwide memory business. In addition, he served as President of TI Asia from 1994 until 1997, where he had responsibility for all of TI's activities in Asia (excluding Japan). Since beginning his career at TI in 1974, Dr. Lu has held a number of technical and managerial positions within TI's Semiconductor Group, including Vice President and division manager of the Linear Products Division. Dr. Lu holds a Bachelor's degree in engineering from the National Cheng Kung University in Taiwan, and a Master's degree and doctorate in electrical engineering from Texas Tech University. Dr. Lu is also a director of two publicly held companies in Taiwan: Lite-On Technology Corporation and Winbond Electronics Corporation (“Winbond”). Winbond is focused on the development, manufacture, and marketing of personal computer, telecommunications, and consumer electronics products. Dr. Lu is Founding Chairman of Asia American Citizen's Council, and is a member of the Advisory Board to Southern Methodist University's Asian Studies Program. Dr. Lu is Chairman of the Company's Strategic Planning Committee.

(4) Michael R. Giordano, CIMA, joined the private-banking firm of UBS Financial Services, Inc. as a Senior Vice President-Investment Consulting when UBS acquired PaineWebber, Inc in 2000. PaineWebber, Inc. acquired his previous employer, Kidder Peabody and Co., Inc., with whom he was employed since 1979. Mr. Giordano advises corporations, foundations, trusts, and municipal governments in investments and finance. Formerly a captain and pilot in the United States Air Force, Mr. Giordano received his Bachelor of Science degree in Aerospace Engineering from California State Polytechnic University and his Masters degree in Business Administration (Management and Finance) from the University of Utah. Mr. Giordano also did post-graduate work in International Investments at Babson College. Mr. Giordano is certified by the Investment Management Consultants Association. Mr. Giordano is also certified by the John E. Anderson Graduate School of Management, UCLA as a Corporate Director having demonstrated understanding of directorship and corporate governance. Mr. Giordano was Chairman of the Board and Chief Executive Officer of the Leo D. Fields Co. from 1980 to 1990, when GWC Holdings acquired it. Mr. Giordano served as a director to Professional Business Bank, a publicly traded corporation from 2001 to 2003. Mr. Giordano is Chairman of the Company's Audit Committee and a member of the Compensation and Stock Options Committee and the Strategic Planning Committee.

(5) Lu-Pao Hsu is currently serving as Chairman of Philips Taiwan Quality Foundation, a position he has held since 2002. Previously, he served as Supervisor of the Board at Delta Electronics (2000-2003); Vice Chairman, (1998-2000) and CEO (2001) of HannStar Display; a director of TSMC (1991-2000); and Executive Vice President of Philips Taiwan (1989-1998). He also has served on the Board of Directors of Winbond Electronics Corporation since 1999, Vanguard International Semiconductor Corporation since 2003, ZyXEL Communications Corporation since 2006 , and as an independent director of Lite-On Technology Corporation since 2004. Mr. Hsu has completed the International Executive Program at IMD, the Advanced Management Program at Harvard Business School, and holds a Bachelor of Science degree in Physics from National Cheng Kung University in Taiwan. In addition, since 1998, Mr. Hsu has been an Esteemed Chair Lecturer at the College of Management at National Chiao Tung University in Taiwan, where he served as Associate Professor from 1971 to 1972.

(6) In 2000, Dr. Shing Mao retired as Chairman of the Board of a wholly owned subsidiary of Taiwan Lite-On, in which position he served since 1988. See “General Information - Security Ownership of Certain Beneficial Owners and Management” and “Proposal One - Election of Directors - Certain Relationships and Related Transactions” for a discussion of the relationship between Taiwan Lite-On and the Company. Since 1989, Dr. Mao has been a director of Dyna Investment Co., Ltd. of Taiwan, a venture capital company. Dr. Mao was a director of LSC from 1989 to 2000. Before joining Taiwan Lite-On, Dr. Mao served in a variety of management positions with Raytheon Company for four years, with TI for 11 years, and with UTL Corporation (later acquired by Boeing Aircraft Company) for seven years. Dr. Mao earned his Ph.D. degree in electrical engineering at Stanford University in 1963. Dr. Mao is a member of the Company's Audit Committee and Nominating Committee.


(7) John M. Stich was appointed as the Honorary Consul General of Japan at Dallas in 2004. From 2000 to 2006, he was the President and Chief Executive Officer of The Asian Network, a consulting business that helped high-technology companies to establish and expand their business in Asia. Prior to this position, Mr. Stich was the Chief Marketing Officer for TI in Japan from 1994 to 1999, and Vice President - Semiconductors for TI Asia from 1991 to 1994. Mr. Stich joined TI in 1964, and has served in various management positions, including a total of 24 years leading TI's Asian business growth while living in Taipei, Hong Kong and Tokyo. Mr. Stich currently serves as a director of Spansion Inc., a Nasdaq listed company that designs, develops and manufactures flash memory products and systems, and of Stonestreet One, Inc., a leading provider of short distance wireless technologies. He serves numerous non-profit organizations, including Vice Dean of the Dallas/Fort Worth Consular Corps, Board Member of the Japan America Society of Dallas/Fort Worth, Member of the Advisory Council for Southern Methodist University's Asian Studies, Member of the Pastoral Council at Prince of Peace church, and Member of the Dallas-Taipei Sister City Committee. Mr. Stich is a member of the Company's Audit Committee, the Compensation and Stock Options Committee, the Nominating Committee and the Strategic Planning Committee.

(8) Joseph Liu was appointed as the Company's Senior Vice-President, Operations in 2000. Mr. Liu previously served as the Company's Vice President, Far East Operations from 1998 to 2000, Vice President, Operations from 1994 to 1998, Chief Financial Officer, Secretary and Treasurer from 1990 to 1998, and Vice-President, Administration from 1990 to 1994. Prior to joining the Company, Mr. Liu held various management positions with TI Dallas, since 1971, including Planning Manager, Financial Planning Manager, Treasury Manager, Cost Accounting Manager and General Accounting Manager with TI Taiwan in Taipei; from 1981 to 1986 as Controller with TI Asia in Singapore and Hong Kong; from 1986 to 1989 as Financial Planning Manager, TI Latin America Division (for TI Argentina, TI Brazil and TI Mexico) in Dallas; and from 1989 to 1990 as Chief Coordinator of Strategic Business Systems for TI Asia Pacific Division in Dallas. Mr. Liu is also President of Diodes-China, Diodes-Shanghai, and Diodes-FabTech. See “Proposal One - Election of Directors - Certain Relationships and Related Transactions” for a discussion of the relationship among Diodes-China, Diodes-Shanghai, Diodes-FabTech and the Company.

(9) Mark A. King was appointed the Company's Senior Vice President, Sales and Marketing in 2005. He previously served as the Company's Vice President, Sales and Marketing from 1998 to 2005, and Vice President, Sales from 1991 to 1998. Prior to joining the Company, Mr. King served for nine years in various sales management positions at Taiwan Lite-On.

(10) Carl C. Wertz was appointed the Company's Chief Financial Officer, Secretary and Treasurer in 1998. Mr. Wertz previously served as the Company's Controller from 1993 to 1998. Prior to joining the Company, Mr. Wertz served in various financial management and accounting positions. Mr. Wertz, a licensed CPA, has over 22 years of manufacturing and distribution experience, and began his accounting career with Deloitte & Touche LLP.

(11) Richard D. White was appointed the Company's Senior Vice President of Finance in 2006. Mr. White has 30 years of senior level finance experience, including 25 years at TI, where he served as Vice President of Finance and Production Planning for MOS memory, Controller for TI's Asia Pacific Division in Singapore, and various other financial positions in U.S., France and Germany. From 1999 to 2005, he served as CFO for Optisoft, Inc., and from 2005 to 2006, he served as a Partner for Tatum, LLC. Mr. White, a certified public accountant, holds a Bachelor of Science degree in electrical engineering from Oklahoma State University and an MBA from the University of Michigan.

(12) Steven Ho was appointed the Company's Vice President, Asia Sales in 2005. Mr. Ho previously served as the Company's General Manager, Diodes Taiwan from 1991 to 2005. From 1984 to 1991, Mr. Ho was the Production Manager of Discrete Products for the Lite-On Group and, prior to that, held several positions with TI Taiwan.

(13) Edmund Tang was appointed the Company's Vice President of Administration in 2006. He has 30 years of managerial and engineering experience, including 25 years at TI, where he served as Vice President and global memory quality manager of the world-wide MOS memory operation, and Vice President and General Manager of Asia memory operations. From 2002 to 2006, Mr. Tang served as the Asia President of FSI International Inc., a global supplier of wafer cleaning and processing technology, responsible for FSI's business in Taiwan, Singapore, South Korea, and China. Mr. Tang holds a Bachelor of Science degree in electrical engineering from the National Cheng Kung University in Taiwan and a master's degree in electrical engineering from Southern Methodist University.

(14) Francis Tang was appointed the Company's Vice President of Product Development in May 2006. He previously served as the Company's Global Product Manager from 2005 until 2006. Prior to joining the Company, Mr. Tang served as general manager of T2 Microelectronics in Shanghai, China where he managed complex mixed-signal SOC product development. From 1996 to 2001, Mr. Tang was the senior strategic marketing director for Acer Labs, Inc. USA, and prior to this, he was employed by National Semiconductor Corp. for 17 years, where he held various management positions in analog and mixed-signal circuit design, applications and strategic marketing. Mr. Tang holds a master's degree in electrical engineering from University of Missouri-Rolla.

MANAGEMENT DISCUSSION FROM LATEST 10K

he following discussion of the Company’s financial condition and results of operations should be read together with the consolidated financial statements and the notes to consolidated financial statements included elsewhere in this Form 10-K.

The following discussion contains forward-looking statements and information relating to our Company. We generally identify forward-looking statements by the use of terminology such as “may,” “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” or similar phrases or the negatives of such terms. We base these statements on our beliefs as well as assumptions we made using information currently available to us. Such statements are subject to risks, uncertainties and assumptions, including those identified in "Item 1A. Risk Factors,” as well as other matters not yet known to us or not currently considered material by us. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements do not guarantee future performance and should not be considered as statements of fact.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Annual Report on Form 10-K are made pursuant to the Act.

Overview

We are a global supplier of high-quality, application specific standard products within the broad discrete and analog semiconductor markets. These products include diodes, rectifiers, transistors, MOSFETs, protection devices, functional specific arrays, power management devices including DC-DC switching and linear voltage regulators, amplifiers and comparators, Hall effect sensors, and silicon wafers used to manufacture these products.

We design, manufacture and market these semiconductors focused on diverse end-use r applications in the consumer electronics, computing, industrial, communications and automotive sectors. Semiconductors, which provide electronic signal amplification and switching functions, are basic building-block electronic components that are incorporated into almost every electronic device. We believe that our focus on standard semiconductor products provides us with a meaningful competitive advantage relative to other semiconductor companies that provide a wider range of semiconductor products.

We are headquartered in Dallas, Texas. We have two manufacturing facilities located in Shanghai, China, an analog design center located in Hsinchu, Taiwan and a wafer fabrication facility in Kansas City, Missouri. Our sales and marketing and logistical centers are located in Westlake Village, California; Taipei, Taiwan; Shanghai and Shenzhen, China; and Hong Kong. We also have regional sales offices or representatives in: Derbyshire, England; Toulouse, France; Frankfurt, Germany; and various cities in the United States.

In 1998, we began to transform our business from the distribution of discrete semiconductors manufactured by others to the design, manufacture and marketing of discrete semiconductor products using our internal manufacturing capabilities. The key elements of our strategy of transforming our business from a distribution-based model to one primarily based on the design and manufacture of proprietary products are:

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expanding our manufacturing capacity, including establishing integrated state-of-the-art packaging and testing facilities in Asia, in 1998 and 2004, and acquiring a wafer foundry in the U.S. in 2000;

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expanding our sales and marketing organization in Asia in order to address the shift of manufacturing of electronics products from the United States to Asia;

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establishing our sales and marketing organization in Europe commencing in 2002; and

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expanding the number of our field application engineers to design our products into specific end-user applications;

In implementing this strategy, the following factors have affected, and, we believe, will continue to affect, our results of operations:

Since 1998, we have experienced increases in the demand for our products, and substantial pressure from our customers and competitors to reduce the selling price of our products. We expect future increases in net income to result primarily from increases in sales volume and improvements in product mix in order to offset reduced average selling prices of our products.

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In 2006 and 2007, 28.2% and 35.1%, respectively, of our net sales were derived from products introduced within the last three years, which we term “new products,” compared to 15.3% in 2005. New products generally have gross profit margins that are significantly higher than the margins of our standard products. We expect net sales derived from new products to increase in absolute terms, although our net sales of new products as a percentage of our net sales will depend on the demand for our standard products, as well as our product mix.

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Our gross profit margin was 32.5% in 2007, compared to 33.2% in 2006 and 34.6% in 2005. Our gross profit margin decrease in 2007 was due to the lower gross margin related to the acquisition of the analog product line. We recently completed the move of our analog product from Taiwan to our China manufacturing facilities to increase the gross margin on this product line. Future gross profit margins will depend primarily on our product mix, cost savings, and the demand for our products.

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As of December 31, 2007, we had invested approximately $167.3million in our Asian manufacturing facilities. During 2007, we invested approximately $41.2 million in our Asian manufacturing facilities and we expect to continue to invest in our manufacturing facilities, although the amount to be invested will depend on product demand and new product developments.

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During 2007, the percentage of our net sales derived from our Asian subsidiaries was 75.4%, compared to 71.9% in 2006 and 65.4% in 2005. We expect our net sales to the Asian market to continue to increase as a percentage of our total net sales for 2008 and beyond as a result of the continuing shift of the manufacture of electronic products from the U.S. to Asia.

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We have increased our investment in research and development from $8.3 million in 2006 to $13.5 million in 2007. We continue to seek to hire qualified engineers who fit our focus on proprietary semiconductor processes and packaging technologies. Our goal is to expand research and development expenses to approximately 3 to 4% of net sales, which will enable us to bring additional proprietary devices to the market.

On October 12, 2006, we issued and sold convertible senior notes with an aggregate principal amount of $230 million due 2026 (“Notes”), which pay 2.25% interest per annum on the principal amount of the Notes, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2007. The Notes will be convertible into cash or, at our option, cash and shares of our Common Stock based on an initial conversion rate, subject to adjustment, of 25.6419 shares (split adjusted) per $1,000 principal amount of Notes (which represents an initial conversion price of $39.00 per share, split adjusted), in certain circumstances. In addition, following a “make-whole fundamental change” that occurs prior to October 1, 2011, we will, at our option, increase the conversion rate for a holder who elects to convert its Notes in connection with such “make-whole fundamental change,” in certain circumstances. We intend to use the net proceeds for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments, or purchases of our own Common Stock.

During 2005, we sold 4.8 million shares (split adjusted) of our Common Stock in a follow-on public offering, raising approximately $71.7 million (net of commissions and expenses). We used approximately $40 million of the net proceeds in connection with the Anachip and APD acquisitions, and w e intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes, including additional acquisitions.

As part of our growth strategy, in December 2005, we announced the acquisition of Anachip, a fabless Taiwanese semiconductor company focused on analog ICs designed for specific applications. The $30.8 million acquisition, which was completed in January 2006, is in line with our long-term strategy. Anachip’s main product focus is power management ICs. The analog devices they produce are used in LCD monitor/TVs, wireless LAN 802.11 access points, brushless DC motor fans, portable DVD players, datacom devices, ADSL modems, TV/satellite set-top boxes, and power supplies. Anachip brings a design team with strong capabilities in a range of targeted analog and power management technologies.

On November 3, 2006, we completed the purchase of the assets of APD Semiconductor, a privately held U.S.-based fabless semiconductor company. APD's main product focus is its patented and trademarked Super Barrier Rectifier TM (SBR ® ) technology. The purchase price of the acquisition was $8.4 million in addition to a potential earn-out provision with respect to pre-defined covered products. The APD acquisition will further strengthen our technology leadership in the standard semiconductor market and expand our product capabilities across important segments of our end-markets.

Net sales

We generate a substantial portion of our net sales through the sale of semiconductor products that are designed and manufactured by third parties or us. We also generate a portion of our net sales from outsourcing our manufacturing capacity to third parties and from the sale of silicon wafers to manufacturers of discrete and analog semiconductor components. We serve customers across diversified industries, including the consumer electronics, computing, industrial, communications and automotive markets.

We recognize revenue from product sales when title to and risk of loss of the product have passed to the customer, there is persuasive evidence of an arrangement, the sale price is fixed or determinable and collection of the related receivable is reasonably assured. These criteria are generally met upon shipment to our customers. Net sales are stated net of reserves for pricing adjustments, discounts, rebates and returns.

The principal factors that have affected or could affect our net sales from period to period are:

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the condition of the economy in general and of the semiconductor industry in particular,
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our customers’ adjustments in their order levels,
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changes in our pricing policies or the pricing policies of our competitors or suppliers,
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the termination of key supplier relationships,
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the rate of introduction to, and acceptance of new products by, our customers,
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our ability to compete effectively with our current and future competitors,
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our ability to enter into and renew key corporate and strategic relationships with our customers, vendors and strategic alliances,
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changes in foreign currency exchange rates,
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a major disruption of our information technology infrastructure, and
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unforeseen catastrophic events, such as armed conflict, terrorism, fires, typhoons and earthquakes.

Cost of goods sold

Cost of goods sold includes manufacturing costs for our semiconductors and our wafers. These costs include raw materials used in our manufacturing processes as well as the labor costs and overhead expenses. In addition to costs of raw materials, cost of goods sold is also impacted by yield improvements, capacity utilization and manufacturing efficiencies. In addition, cost of goods sold includes the cost of products that we purchase from other manufacturers and sell to our customers. Cost of goods sold is also affected by inventory obsolescence if our inventory management is not efficient.

Selling, general and administrative expenses

Selling, general and administrative expenses relate primarily to compensation and associated expenses for personnel in general management, sales and marketing, information technology, engineering, human resources, procurement, planning and finance, and sales commissions, as well as outside legal, accounting and consulting expenses, and other operating expenses. We expect our selling, general and administrative expenses to increase in absolute dollars as we hire additional personnel and expand our sales, marketing and engineering efforts and information technology infrastructure.

Research and development expenses

Research and development expenses consist of compensation and associated costs of employees engaged in research and development projects, as well as materials and equipment used for these projects. Research and development expenses are primarily associated with our wafer facility in Kansas City, Missouri and our facilities in China and Taiwan, as well as with our engineers in the U.S. All research and development expenses are expensed as incurred, and we expect our research and development expenses to increase in absolute dollars as we invest in new technologies and product lines.

Interest income / expense

Interest income consists of interest earned on our cash and investment balances. Interest expense consists of interest payable on our outstanding credit facilities and other debt instruments including the convertible bonds.

Income tax provision

Income tax expenses of $6.7 million, $11.7 million and $9.4 million were recorded for the years ended December 31, 2005, 2006, and 2007, respectively, resulting in effective tax rates of 16.3%, 19.1% and 13.2% in the years ended December 31, 2005, 2006 and 2007, respectively. Our lower effective tax rate in 2007 compared with the prior year was the result of lower income in the U.S. and higher income in lower-taxed jurisdictions, as well as a decrease in the amount of estimated repatriation of earnings of our foreign subsidiaries, partially offset by the increased income tax rate at one of our China subsidiaries (Diodes-Shanghai is subject to a 7.5% preferential tax rate from 2007 through 2009 , compared to a 0% tax rate in 2006).

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 39.5% 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 of Diodes-Hong Kong are subject to a 17.5% tax for local sales or local source sales; all other Hong Kong sales are not subject to foreign income taxes. Earnings at Diodes-Taiwan and Diodes-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, earnings of Anachip 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 earnings will be subject to statutory Taiwan income tax.

Diodes-China is located in the Songjiang district, where the standard central government tax rate was 24.0% through 2007. However, as an incentive for establishing Diodes-China, the earnings of Diodes-China 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. In addition, due to a $15.0 million permanent re-investment of Diodes-China earnings in 2004, Diodes-China 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 $15.0 million investment.

In addition, the earnings of Diodes-China would ordinarily be subject to a standard local government tax rate of 3.0%. However, as an incentive for establishing Diodes-China, the local government waived this tax from 1996 through 2006. Management expects this tax to be waived for 2007 as well; however, the local government can re-impose this tax at its discretion at any time.

In 2004, we established our second Shanghai-based manufacturing facility, Diodes-Shanghai, 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 Diodes-Shanghai, the 2005 and 2006 earnings of Diodes-Shanghai were exempted from central government income tax, and for the years 2007 through 2009 its earnings will be subject to tax rates in the range of 7.5% to 10.0%.

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 will increase to 25.0% beginning in 2008; however we believe Diodes-China may qualify for a “high-technology” preferential tax treatment that could reduce the tax rate to 15.0%. It is unclear to what extent our China subsidiaries will continue to receive preferential tax treatment.

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 2004. 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 2001. 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 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 of FASB interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes" ( 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. Accordingly, as of January 1, 2007 and December 31, 2007, approximately $3.2 million and $4.1 million, respectively, of unrecognized tax benefits, if recognized, would affect the effective tax rate.

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 .

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Except for the historical information contained herein, the matters addressed in this Item 2 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by the Company’s management. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. The Company undertakes no obligation to publicly release the results of any revisions to their forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Unless the context otherwise requires, the words “Diodes,” the “Company,” “we,” “us” and “our” refer to Diodes Incorporated and its subsidiaries.
This management’s discussion should be read in conjunction with the management’s discussion included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, previously filed with Securities and Exchange Commission.
Highlights For the Three and Nine Months Ended September 30, 2008
• Revenue for the three months ended September 30, 2008 increased 27.3% over the prior year same period to $134.0 million, including complete quarter of Zetex results;

• Revenue for the nine months ended September 30, 2008 increased 17.7% over prior year same period to $345.6 million;

• Gross profit for the three months ended September 30, 2008 increased 11.6% over the prior year same period to $38.1 million;

• Gross profit for the nine months ended September 30, 2008 increased 16.2% over the prior year same period to $109.7 million;

• On June 9, 2008, we completed the acquisition of Zetex plc (“Zetex”), which is expected to result in revenue, operating and cost synergies;

• In connection with the acquisition of Zetex, we entered into a margin loan for $165 million; and

• Preliminary estimate of the allocation of the purchase price was performed during the third quarter of fiscal 2008;
Overview
We are a global supplier of application specific standard products within the broad discrete and analog semiconductor markets. These products include diodes, rectifiers, transistors, MOSFET’s, protection devices, functional specific arrays, power management devices including DC-DC switching and linear voltage regulators, amplifiers and comparators, Hall effect sensors and silicon wafers used to manufacture these products.
We design, manufacture and market the above semiconductors for diverse end-use applications in the consumer electronics, computing, industrial, communications and automotive sectors. Semiconductors, which provide electronic signal amplification and switching functions, are basic building-block electronic components that are incorporated into almost every electronic device. We believe that our focus on standard semiconductor products provides us with a meaningful competitive advantage relative to other semiconductor companies that provide a wider range of semiconductor products.
We were incorporated in 1959 in California and reincorporated in Delaware in 1969. We are headquartered in Dallas, Texas. We have two manufacturing facilities located in Shanghai, China, one in Neuhaus, Germany and a joint venture facility in Chengdu, China, and our wafer fabrication facilities are in Kansas City, Missouri and Manchester, England. Our sales, marketing, engineering and logistical centers are located in Westlake Village, California; Taipei, Taiwan; Shanghai and Shenzhen, China; Manchester, England; and Hong Kong. We have strengthened our product design centers in the U.S., China, England, Germany and Taiwan to position our design engineers to work more closely with our customers and enable us to deliver a stream of innovative solutions in our targeted product categories. We also have regional sales offices and/or representatives in: Derbyshire, England, Toulouse, France, Frankfurt, Germany, and in various cities in the U.S.
We generate a substantial portion of our net sales through the sale of discrete and analog semiconductor products designed and manufactured by third parties or us. We also generate a portion of our net sales from outsourcing manufacturing capacity to third parties and from the sale of silicon wafers to manufacturers of discrete semiconductor components. We serve customers across diversified industries, including the consumer electronics, computing, industrial, communications and automotive markets.
Our strategy is to continue to enhance our position as a global supplier of standard semiconductor products, and to continue to add other product lines, such as power management products, using our packaging technology capability.

As described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, the principal elements of our strategy include the following:
• Continue to rapidly introduce innovative discrete and analog semiconductor products;

• Expand our available market opportunities;

• Maintain intense customer focus;

• Enhance cost competitiveness; and

• Pursue selective strategic acquisitions .
In implementing these strategies, the following factors have affected, and, we believe, will continue to affect, our results of operations:
• Given the current economic conditions, we expect a global decrease in demand for our products until conditions improve. Please see “ cost reduction initiative” below and “Risk Factor – Global economic weakness and the current financial market uncertainty affect on our business.” in Part II, Item 1A of this report.

• Since 1998, we have experienced increases in the demand for our products, and substantial pressure from our customers and competitors to reduce the selling price of our products. We expect future increases in net income to result primarily from increases in sales volume and improvements in product mix in order to offset any reduced average selling prices (“ASP”) of our products.

• For the nine months ended September 30, 2008, our revenue reflects seasonality combined with the impact of the overall weakening economy, in particular on key targeted end-equipment in the consumer and computing markets, as well as our foundry and subcontracting business, which showed greater weakness than our core revenue drivers.

• The portion of net sales derived from new products introduced within the last three years was 27.8% and 35.1% for the nine months ended September 30, 2008 and 2007, respectively, compared to 28.2% in 2006. The significant increase in new products primarily resulted from the Anachip and Zetex acquisitions. We expect new products to generally have gross profit margins that are higher than the margins of our standard products. We expect net sales derived from new products to increase in absolute terms, although our net sales of new products as a percentage of our net sales will depend on the demand for our standard products, as well as our product mix.

• For the nine months ended September 30, 2008, the percentage of our net sales derived from our Asian subsidiaries was 74.5%, compared to 74.0% in the same period last year. We expect our net sales to the Asian market to increase as a percentage of our total net sales as a result of our customers’ continuing to shift their manufacturing of electronic products from the U.S. to Asia.

• As a result of the Zetex acquisition we will begin to add significant revenue in Europe. As such, Europe accounted for approximately 9.4% of our revenues for the three months ended September 30, 2008.

• Our gross profit margin was 31.7% for the nine months ended September 30, 2008, compared to 32.1% in the same period last year. Our gross margin percentage was lower than the same period last year even though average unit cost (“AUP”) increased for the nine months ended September 30, 2008. This lower margin was affected by the one time non-cash expense of $5.4 million incurred during the third quarter of 2008 for the step-up of inventory for reasonable profit allowance in accordance with SFAS No. 141, Business Combinations (“SFAS 141”) and depreciation expense of fixed assets in connection with the Zetex acquisition along with lower capacity utilization on our manufacturing operations mainly due to market conditions. In 2007, we completed the move of our analog product from Taiwan to our China manufacturing facilities to increase the gross margin on this product line. Future gross profit margins will depend primarily on our product mix, cost savings, and the demand for our products. We expect gross profit margins to continue to decrease until economic conditions improve.

• As of September 30, 2008, we had invested approximately $206.7 million in our Asian manufacturing facilities. For the nine months ended September 30, 2008, we invested approximately $38.7 million in capital expenditures, primarily in our Asian manufacturing facilities. For 2008, we anticipate total capital expenditures of approximately 10-12% of annual revenue. Given the current economic conditions and our efforts to reduce costs (see “ cost reduction initiative” below), we expect capital expenditures to be approximately 5% of revenue for fiscal year 2009 or until economic conditions improve and additional manufacturing capacity is needed.

• We have increased our investment in research and development from $9.7 million, or 3.3% of net sales, for the nine months ended September 30, 2007 to $16.1 million, or 4.7% of net sales, for the nine months ended September 30, 2008 primarily as a result of the Zetex acquisition. For 2008, we expect research and development expenses to be approximately 5% to 6% of

net sales. Although research and development as a percentage of net sales has increased in 2008, we expect the percentage to decrease for fiscal year 2009 as we are planning to restructure our product development organization and consolidate our design teams.
Business Outlook
For the fourth quarter of 2008, we expect to see a further slowdown in economic activity and a decrease in global demand for our products, in particular in the consumer and computer markets. We believe the long-term outlook for our business remains generally favorable despite the recent volatility in the equity and credit markets as we continue to execute on the strategy that has proven successful for us over the years. Although the economy creates a more challenging environment for all businesses, we believe that over the long-term we are in a good position for future growth. We are confident that our acquisition of Zetex will continue to add significant value to our business as we further capitalize on the cross-selling opportunities and diversification benefits that the transaction offers our Company. Please see “Risk Factor – Global economic weakness and the current financial market uncertainty affect on our business.” in Part II, Item 1A of this report.
Cost Reduction Initiative
Looking forward, we expect the weakness and uncertainty in the economy to continue into the coming quarters, and therefore we intend to take the necessary steps to manage through these difficult times. We have identified a number of opportunities to optimize our cost structure and plan to implement the following:
• Shut down Zetex 4 inch wafer fabrication facility in Oldham in early 2009;

• Consolidate our wafer output lines;

• Currently, our Shanghai facilities are approximately 80 to 85 percent loaded. This will allow for faster porting of Zetex products into our Shanghai packaging facilities sooner than originally planned and thereby reduce our dependence on subcontractor OEMs. We believe the majority of this conversion will be completed by the end of the first quarter of 2009;

• As part of our manufacturing strategy, we will continue to evaluate our raw material costs in order to reduce our gold consumption while protecting and maintaining product performance;

• Reduce capital expenditures going forward from our previous 10 to 12 percent model to an amount that is necessary to meet market and capacity demands, which we expect to be less than 5 percent of revenue until such time that the market recovers and additional manufacturing capacity is needed;

• Restructure our product development organization and consolidate the acquired Zetex design teams into our pre-acquisition teams;

• Headcount reductions at our wafer fabrication facility in Kansas City; and

• Implement a hiring freeze, and from an overall expense perspective, carefully manage costs in order to conserve cash.
Recent Acquisitions
Zetex Acquisition
On June 9, 2008 we acquired Zetex. See Note M – “Business Acquisitions” to Notes to Consolidated Condensed Financial Statements for detailed information regarding this acquisition.

Results of Operations for the Three Months Ended September 30, 2007 and 2008

The following table sets forth, for the periods indicated, the percentage that certain items in the statements of operations bear to net sales and the percentage dollar increase (decrease) of such items from period to period.
The following discussion explains in greater detail our consolidated operating results and financial condition for the three months ended September 30, 2008, compared to the three months ended September 30, 2007. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report (in thousands) .

CONF CALL

Leanne Sievers

Good morning and welcome to Diodes third quarter 2008 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, Diodes' Investor Relations firm.

With us today are Diodes President and CEO, Dr. Keh-Shew Lu, Chief Financial Officer, Carl Wertz, Senior Vice President of Sales and Marketing, Mark King, and Senior Vice President of Finance, Richard White.

Before I turn the call over to Dr. Lu, I would like to remind our listeners that management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statement in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the Securities and Exchange Commission.

In addition, any projections as to the Company's future performance represent management's estimates as of today, November 6, 2008. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change.

Additionally, in the Company's press release and during this teleconference, management will discuss certain measures and information in GAAP and non-GAAP terms. A reconciliation of GAAP to non-GAAP results is provided in the financial tables following the text of the press release.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days in the Investor Relation section of Diodes Web site at www.diodes.com.

I now will turn the call over to Diodes President and CEO, Dr. Keh-Shew Lu, who will be joining us today from Taiwan. Dr. Lu, please go ahead.

Keh-Shew Lu

Thank you, Leanne. Welcome everyone, and thank you for joining us today. In June, we closed the Zetex acquisition. The results released today include our preliminary purchase accounting for the acquisition.

I'm pleased to report another quarter of record revenue is reached. We achieved $134 million in total sales representing growth of 27% over the previous year and 15.5% sequentially.

Additionally, our GAAP earnings per share was a loss of $0.07 when excluding the $0.34 per share in non-cash purchase price accounting adjustments related to the acquisition of Zetex and $0.02 per share of stock option expense. Our adjusted non-GAAP earnings per share in the third quarter were $0.29. The integration of Zetex remain on track and has been progressing well throughout the quarter.

We continue to capitalize on the cross-selling opportunities, and as a result, in process design activity is the hardest it has ever been for the Company. However, as everyone knows, the current macroeconomic environment has made it very challenging for most businesses. We expect market uncertainty to continue with a decrease in global demand, in particular, in the consumer and computer market in Asia as well as general market softness in the United States and Europe.

As a result of current and future expectations for overall economy, we have identified a number of opportunities to optimize our cost structure across the operation. At the top of those efforts, we have been conducting a comprehensive review of our manufacturing operations to further identify additional expense reductions. Those initiatives include a shutdown of Zetex 4-inch wafer fab in Oldham by the end of this year and the consolidation of wafer output to the 6-inch line in Oldham and the 5 and the 6-inch line at the Diodes FabTech, a reduction of our UK fab headcount by approximately 10% by the end of November, immediate reduction in headcount at FabTech in Kansas City of approximately 25%.

Additionally, we will be putting the Zetex products into our packaging facility in Shanghai in the original operators in order to reduce our dependency on several contractors. We believe the majority of this conversion will be completed by the end of first quarter of 2009. Also, as part of our manufacturing strategy, we will be closely evaluating our raw material costs in order to reduce overall consumption while protecting and maintaining our record performance.

Next, we have taken immediate action to reduce CapEx authorization to the minimum from our previous amount of 10% to 12% with the current plan of less than 5% of the revenue until such time that the market recovers and additional manufacturing capacity is needed.

Currently, our China facility are 80% to 85% loaded which would allow for first reporting of Zetex products in conjunction with reduced CapEx.

Lastly, we have implemented a hiring freeze except for critical positions and initiated a fortification for employees during the fourth quarter as well as the first quarter of next year. From our overall expense perspective, we will continue to carefully manage costs in order to protect cash.

Look forward, we expect a weakness and the uncertainty in economic to continue into the coming quarter. And therefore, we want to take the necessary steps to manage through those difficult times. From an overall business perspective, we remain focused on executing the strategy that has proven successful for Diodes over the years.

We are confident that our acquisition of Zetex will continue to add significant value to our business as we further capitalize on the cross-selling opportunities and diversification benefits that the transition offer our Company.

We continue to focus on design wins in order to add new revenue source in the future. Although the current economic creates a more challenging environment for business, I believe that over the long-term, Diodes is in a better position for growth than ever before and we are taking all the right steps to better position our Company for growth when the economics improve.

With that, I will turn the call over to Carl to discuss our third quarter financial results in more detail.

Carl Wertz

Thanks, Dr. Lu. Good morning, everyone. As a reminder, our third quarter financials include a full quarter results from our acquisition of Zetex compared to only one month of Zetex results in the second quarter and reflect our preliminary purchase price accounting adjustments.

Revenue for the third quarter was $134 million, representing an increase of 15.5% sequentially and 27.3% over the prior year period. The third quarter revenue set another all time record for the Company.

Gross profit for the third quarter of 2008 which included a $5.2 million one-time, non-cash inventory purchase price adjustment related to Zetex acquisition or $38.1 million or 28.4% of revenue. Excluding the purchase price adjustments, adjusted gross margin was 32.5% as compared to 34.1% last quarter and 32.4% in the prior year period. The margin is primarily due to lower capacity utilization of our manufacturing operations as a result of market conditions as well as an effort to reduce finished goods inventory.

Selling, general, and administrative expenses for the quarter were approximately $21 million or 15.6% of revenue which was comparable to the second quarter on a percent of revenue basis and slightly above our expected range of 15% to 15.5% due to lower revenue. Absolute dollar increases were primarily due to the addition of Zetex's operations. Included in third quarter, SG&A was $800,000 of non-cash, FAS 123R share based compensation.

Looking forward, and as Dr. Lu mentioned, we remain focused on managing costs in order to keep expenses in line with our revenue. Research and development investments in the quarter were $7.4 million or 5.5% of revenue within our expected range.

Under US GAAP, acquired intangibles must be revalued and amortized over a useful life and acquired in-process R&D must be expensed immediately. Therefore, amortization of acquisition related intangibles and purchased in-process research and development for this quarter was $1.6 million and $7.9 million, respectively. The $7.9 million is a one-time charge. Both of these expenses are non-cash purchase price adjustments related to Zetex acquisition.

Other expense amounted to approximately $2.4 million for the quarter, consisting of $1.8 million of interest income primarily related to our auction rate securities, offset by $3 million of interest expense, primarily related to our convertible bonds and our loan for Zetex. In addition, we had foreign currency losses of $1 million related to existing hedges on the pre-acquisition of Zetex books, primarily related to the strengthening of the U.S. dollar versus the British pound.

For taxes, excluding purchase price accounting adjustments, our effective income tax rate in the third quarter was approximately 15%, which was within our guidance range and is an approximation for the fourth quarter.

Net loss on a GAAP basis was $2.9 million or $0.07 per share. When reporting a net loss, EPS is calculated using basic shares of 41 million. For the fourth quarter, we expect the GAAP EPS to be reported using a fully diluted share count of approximately 43 million shares.

The $2.9 million GAAP loss included $14.8 million or $0.34 in net purchase price charges. The purchase price charges consisted of one-time $5.2 million non-cash inventory write-off to cost of goods sold, one-time $7.9 million non-cash write-off required in-process research and development, and included in the GAAP loss was $200,000 for acquisition related fixed asset depreciation expense, book to cost of goods sold and $1.6 million in amortization of acquisition related intangible assets.

Going forward, we expect to correlate purchase price charges would be approximately $150,000 to cost of goods sold and $1.2 million for acquired intangible assets. Excluding the acquisition charges, adjusted net income was $11.9 million or $0.27 per share. Net income adjusted for the purchase price accounting and excluding $600,000 in after-tax non-cash stock option expense was $12.5 million or $0.29 per share.

One important note, as we mentioned in our earnings release, Diodes intends to change its reporting policy regarding FAS 123R stock option expense. Beginning in the fourth quarter, we will include the expense in our non-GAAP results. It is also important to remind everyone that our current analyst consensus excludes this figure from our pro forma results and therefore it may not provide an accurate comparison in future quarters.

Cash flow from operations for the quarter was $13.5 million and $36.7 million year-to-date.

Turning to the balance sheet, at quarter-end, with $82.7 million in cash and $285 million in long-term investment, which represents the $320 million par value auction rate securities. I will speak about our auction rate securities position in a moment.

Our working capital at quarter-end were $201 million. Long-term debt including convertible bond and the loan related to Zetex acquisition was $400 million. In terms of auction rate securities, as we announced earlier this week we have entered into a settlement with UBS. The major terms of the agreement are as follows: First, at our option, UBS will repurchase our $320 million auction rate security portfolio at 100% of par value beginning June 30, 2010.

Second, we will be permitted to borrow up to 75% of the market value of our ARS portfolio. Currently, we have borrowed $165 million from UBS and this agreement will currently provide an additional $48 million available to the Company.

Thirdly, UBS will provide a no net cost loan to Diodes where our borrowing rate will equal the interest rate earned on our ARS portfolio. In addition, UBS will refund to Diodes approximately $800,000 which is the difference between the interest we have paid on our $165 million acquisition loan and interest rate earned on our ARS portfolio. This settlement is a significant development towards the resolution of the ARS situation. It provides Diodes with additional liquidity and access to this cash without creating additional cost to the Company.

Inventory at quarter-end was $99 million, which was $2.6 million decrease from the second quarter with inventory days at 94. Accounts receivable was $110 million. Accounts receivable days improved from 77 days to 75 days this quarter. Capital expenditures were $13.4 million for the quarter, primarily due to non-cancelable equipment purchase orders.

We will continue to closely manage our capital investments as a result of the current economic environment. As Dr. Lu mentioned, CapEx will continue to remain significantly below our 10% to 12% model, at an amount necessary to meet market and capacity demands. Year-to-date, CapEx was $39 million or 11% of revenue. Depreciation for the third quarter was $11 million and $27 million year-to-date.

Turning to our outlook, as we look to the fourth quarter 2008, we expect market uncertainty to cause revenue decline sequentially between 12% and 20%. We expect GAAP earnings per share to range between $0.07 and $0.13 which includes approximately $0.03 of purchase price accounting adjustment. As such non-GAAP earnings per share is expected to range between $0.10 and $0.16 which includes approximately $0.02 of stock option expenses as I mentioned earlier.

With that said, I will now turn the call over to Mark King, Senior Vice President, Sales and Marketing. Mark?

Mark King

Thanks, Carl, and good morning. As Dr. Lu mentioned, the integration of Zetex has been progressing well in particular from a sales perspective which includes all reps and distributors in North America and Europe. The new organization is trained and moving forward to capitalize on customer traction and cross-selling opportunities.

In Asia, the integration of the direct sales organization is complete and we expect the consolidation of the distributor network to be finalized in the first quarter of 2009.

Let me begin the discussion with a segment breakout of the consolidated businesses. Computing represented 31% of revenue, consumer 29%, industrial 21%, communication 15%, and automotive 4%. The addition of Zetex business has contributed to increased diversification in our market segments which we believe will provide added benefit to the Company over the long-term.

Now, turning to new products, new product revenue was 23% of sales during the quarter. Zetex has traditionally focused on products that tend to operate with longer design cycles, but also longer life cycles which has resulted in a traditionally lower percentage of new product sales than Diodes. We believe this is an area of synergy as we expect to provide greater exposure and more rapid expansion in these new product initiatives.

During the third quarter, we released 54 new products including 15 Analog, 14 MOSFETs, 11 SBR devices, and 6 Bipolar Transistors. The Bipolar Transistors were customer-specific in the areas of power supply, adaptor and voice-over-IP. These transistors are good examples how we have begun to use the Zetex industry leading bipolar technology in Diodes competitive and expanded range of packaging.

In terms of product introduction, we announced a family of 12 new USB power switches that protect USB ports while providing a cost-effective and small form fit package in a wide range of consumer and computing applications. As many of you know, the USB port has become the de facto method of connection between many products and is increasingly used as a convenient way to charge or power these devices. We are very excited about this new family of products and the customer interest is high. We have already sampled these products with five of our major customers within notebook and set top box.

Also in the quarter, we expanded our Zetex LED driver series with the introduction of three new miniature LED drivers offering improved accuracy and thermal performance. These new products bring a smaller footprint and energy savings to lighting applications and are designed for a broad range of automotive, architectural, and industrial lighting applications.

With an output currency accuracy better than 1%, these LED drivers provide highly accurate current matching at working voltages up to 60 volts and will support up to 15 LEDs. We have sampled three customers and have generated significant additional interest from new and existing customers in the quarter. The introduction of these products extends our position as a market leader in the high brightness LED driver space.

In regards to geographic breakout, Asia represented 71.5% of total revenues. We continued to achieve growth in Asia during the quarter, but it was less than what we normally experience at this time of year. Data communications, mobile phones, notebook, and DC fans drove modest revenue growth whereas panels and LCD TV showed a sharp drop in demand.

Design activity for the territory was at its strongest level with 155 wins at 70 customers in the quarter. That included 45 Analogs, 10 Hall, 100 Discrete including 35 MOSFETs, 20 SBR products. 24 of the wins in the quarter were for Zetex products. Design activity was centered around notebooks, LCD TV and panel, mobile phone, and power supply.

Distributor point of purchase was down in the quarter due to lower than expected point of sales and expectations for the fourth quarter. Distributor inventory decreased within the quarter.

Now turning to North America, sales represented 16% of the total revenue. We saw pressure in our industrial accounts due to slowdown in our housing market. Gains in set top box were offset by continued movement of manufacturing to Asia. Distributor point of purchase was up slightly while inventory remained flat. Business moving into the fourth quarter remains soft and the distributor channel is cautious about the market and continues to reduce inventory in response.

In total, we achieved 95 design wins in North America during the quarter at 34 customers, 12 of these Analog, 78 Discrete and 5 in SBR. In terms of wafer sales, we were off 5% in the quarter.

Sales in Europe accounted for 12.5% of revenue. Overall, revenue was down in the region due to greater than normal seasonal slowdowns in the industrial and automotive markets. Distributor point of purchase decreased in the quarter as they continue to reduce inventory due to concerns in the overall global economy. Therefore, distributor inventory decreased 5% in the quarter.

Our design win momentum in Europe continued to expand in the third quarter with 58 wins at 31 accounts including 37 Discrete, 19 Analog, and two Hall sensor wins. In terms of global design wins, it was an exceptional quarter with wins at 135 accounts globally.

In process design activity is at an all-time high. We see this as evidence of our expanded sales and FAE organizations as well as the synergies of the combined lines.

With the addition of our Zetex product portfolio, we have a significant number of products and the interest from the customer base is high. Activity for the quarter featured our recently released USB switch where we have specific interest in our key set top box and notebook customers.

Design wins and in process design activity was also highlighted by SBR with key wins in a broad range of applications including voice-over-IP, power supply, and display module, LED lighting products, and a multiple auto application, white goods, and emergency lighting, current monitors in automotive, DC-to-DC converter, and a money control application, and MOSFET momentum continued with 40 Socket wins in the quarter.

In summary, for the fourth quarter and near-term, we expect market weakness to continue. But, as the economy improves, we believe we are in a better position to grow our business than ever before. We have a high level of new products with strong interest from key accounts as well as a broad portfolio of products that provide increased opportunities for cross-selling and customer expansion.

Additionally, our recent design activity is at the highest level in the history of the Company with wins at more than 135 accounts globally. Our expanded distribution channels as well as global sales and field application teams have further strengthened our organization.

With the progress that we have made to-date integrating Zetex business, we see a strong indication of the success and value that the combined businesses can achieve over the long-term. Diodes strategy for growth has consistently proven successful over the years and we remain focused on execution while carefully managing costs and benefiting from operational and manufacturing efficiencies where available.

With that, I'll open the floor to questions.

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